EDGAR 10-K Filing

Company CIK: 834285
Filing Year: 2022
Filename: 834285_10-K_2022_0001437749-22-024725.json

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ITEM 1. BUSINESS
Item 1: Business
Throughout this Annual Report on Form 10-K, the registrant, Republic First Bancorp, Inc., is referred to as the “Company” or as “we,” “our” or “us”. The Company’s website address is www.myrepublicbank.com. The information on this website is not and should not be considered part of this Form 10-K and is not incorporated by reference in this Form 10-K. This website is, and is only intended to be, for reference purposes only. The Company makes available free of charge on or through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the “SEC”). The Company’s SEC filings are also available through the SEC’s website at www.sec.gov.
Forward Looking Statements
This document contains “forward-looking statements,” as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are statements other than statements of historical fact, can be identified by words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “should,” “could,” “would,” “will,” “confident,” “may,” “can,” “potential,” “possible,” “proposed,” “target,” “pursue,” “outlook,” “maintain,” or similar expressions, or when we discuss our guidance, strategy, goals, vision, mission, opportunities, projections or intentions.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, and in addition to the “Risk Factors” discussed elsewhere in this Form 10-K or included in other documents that we file with the SEC from time to time, risks or uncertainties can arise with changes in or related to:
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deterioration in general economic conditions;
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the effects of inflation and changes in interest rates;
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changes in customer behavior, including consumer spending, borrowing and savings habits;
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changes in the adequacy of our allowance for credit losses and our methodology for determining such allowance;
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adverse changes in our loan portfolio and credit risk-related losses and expenses;
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changes in concentrations within our loan portfolio, including our exposure to commercial real estate loans, and to our primary service area;
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our ability to identify, negotiate, secure and develop new store locations and renew, modify, or terminate leases or dispose of properties for existing store locations effectively;
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business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items;
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changes in deposit flows and loan demand;
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the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;
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our securities portfolio and the valuation of our securities;
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changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;
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operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics;
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our ability to regain compliance with Nasdaq Listing Rule 5250(c)(1);
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the failure to maintain current technologies;
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difficult business and economic conditions that can adversely affect our industry and business, including competition, fraudulent activity and negative publicity;
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risks associated with Small Business Administration loans;
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failure to attract or retain key employees;
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our ability to access cost-effective funding;
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fluctuations in real estate values;
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the continuing impact of the COVID-19 pandemic on our business and results of operation;
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the ability of Republic Bank to make distributions to us, which is restricted by certain factors, including Republic Bank’s retained earnings, net income and prior distributions made;
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strategic transactions we may enter into;
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litigation liabilities, including costs, expenses, settlements and judgments;
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the effects of war or armed conflict in other countries, acts of terrorism, or other events that may affect general economic conditions; and
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other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s beliefs only as of the date hereof. Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future. Significant factors which could have an adverse effect on the operations and future prospects of the Company are detailed in the “Risk Factors” section included under Item 1A of Part I of this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K that we will file hereafter, which could cause actual results to differ from those projected. Readers should carefully review the risk factors included in this Annual Report on Form 10-K and in other documents the Company files from time to time with the SEC.
General
Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank, and is referred to as “Republic” or the “Bank” throughout this document. Republic offers a variety of credit and depository banking services. Such services are offered to individuals and businesses primarily in the Greater Philadelphia, Southern New Jersey, and the New York City areas through offices and branches in Philadelphia, Bucks, Delaware, and Montgomery Counties in Pennsylvania, Atlantic, Burlington, Camden, and Gloucester Counties in New Jersey, and New York County in New York.
Historically, our primary objective had been to position ourselves as an alternative to the large financial institutions for commercial banking services in the Greater Philadelphia and Southern New Jersey region. However, in 2008, we made a strategic shift in our business approach, redirecting our efforts toward the creation of a major retail bank that would meet an important need in our existing marketplace. Focused on delivering high levels of customer service and satisfaction, driving innovation, developing a bold brand and creating shareholder value, Republic Bank sought to offer a banking experience that would turn customers into Fans. As other banks began to turn toward automation for growth, Republic Bank took a different approach and chose not only to embrace advances in technology, but to also define itself by the personal touch.
An important part of that strategic shift toward creating a retail and customer focused bank was the decision in 2010 to rebrand our stores from Republic First Bank to Republic Bank, which had been the name under which we had initially incorporated and operated from 1988-1996. In support of that rebrand, we also renovated and remodeled the majority of our existing branches, which we refer to and operate as stores. Further, we embraced critical service changes that reframed the Republic Bank brand and experience in the eyes of the consumer to include expanded hours, absolutely free checking, free coin counting, no ATM surcharges, mobile banking and much more.
From a lending perspective, we also shifted away from our historic approach, which was primarily focused on business banking and isolated commercial lending transactions, in particular commercial real estate loans. While restructuring our loan portfolio and deemphasizing the origination of commercial real estate loans, we also undertook a detailed review of our more significant credit relationships. This review allowed us to reduce exposure, enhance our allowance for loan loss methodology and commit to originate fewer commercial real estate loans in an effort to reduce our credit concentrations in that particular category.
With these significant changes implemented, Republic Bank was then well-positioned to execute an aggressive expansion plan which was given the title, “The Power of Red is Back.” To support this growth strategy, we issued $45 million of common stock through a private placement offering in April 2014, which provided the necessary capital to begin our aggressive expansion plan.
During 2016, we expanded our product offerings through the addition of a residential mortgage lending team. We acquired Oak Mortgage Company in July 2016, which has been fully integrated and is now a division of the Bank. The acquisition of Oak Mortgage allows us to provide our customers with opportunities in the residential lending market.
To strengthen our capital position and prepare for the next stage of growth and expansion, we issued $100 million of our common stock through a registered direct offering in December 2016.
Republic has also become one of the top small business lenders in its market as proven by its performance during 2020 and 2021 in the Paycheck Protection Program (“PPP”) authorized by the CARES Act. Republic originated nearly $1 billion in PPP loans to 7,650 local businesses providing critical funding during an unprecedented economic crisis caused by the COVID-19 pandemic. This culminated in Republic Bank being named “America’s #1 Bank for Service” by Forbes based on a survey conducted during 2020.
In August 2020, we issued $50 million of convertible preferred stock to strengthen our capital position and support our aggressive growth plan. As we expand our footprint we take all steps required to ensure that we do not lose focus on our commitment to extraordinary levels of customer service and satisfaction. In 2020, we expanded our store network by building our signature glass building at new locations in Northfield, New Jersey and Bensalem, Pennsylvania and in 2021 in Deptford, New Jersey. It is our goal to deliver best in class service across all delivery channels including not only our physical store locations, but online and mobile options as well. We continue to make investments in digital and technology tools as we strive to maintain our position as “America’s #1 Bank for Service”.
As of December 31, 2021, we had total assets of approximately $5.6 billion, total shareholders’ equity of approximately $324.2 million, total deposits of approximately $5.2 billion, net loans receivable of approximately $2.5 billion, and net income of $25.2 million with net income of $21.7 million available to common shareholders for the year ended December 31, 2021. We have one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as residential mortgage and other consumer loan products in the area surrounding its stores. We provide banking services through the Bank, and do not presently engage in any activities other than traditional banking activities.
Republic Bank
Republic First Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania, and is subject to examination and comprehensive regulation by the Federal Deposit Insurance Corporation (the “FDIC”) and the Pennsylvania Department of Banking and Securities. Republic First Bank is a subsidiary of Republic First Bancorp, Inc. Republic First Bank does business under the name of Republic Bank. The deposits held by the Bank are insured, up to applicable limits, by the Deposit Insurance Fund of the FDIC.
Service Area / Market Overview
Our primary service area currently consists of Greater Philadelphia, Southern New Jersey, and New York City. We presently conduct our principal banking activities through 32 branch locations, which we refer to as “stores” throughout this document to reflect our retail-oriented approach to customer service and convenience. Thirteen of these stores are located in Philadelphia and the surrounding suburbs of Plymouth Meeting, Wynnewood, Abington, Media, Fairless Hills, Feasterville, and Bensalem in Pennsylvania. There are seventeen stores located in the Southern New Jersey market in Haddonfield, Voorhees, Glassboro, Marlton, Berlin, Washington Township, Moorestown, Sicklerville, Medford, Cherry Hill, Gloucester Township, Evesboro, Somers Point, Lumberton, Northfield, and Deptford. There are two stores located in New York City at 14th Street & 5th Avenue and 51st Street & 3rd Avenue. Our commercial lending activities extend beyond our primary service area, to include other counties in Pennsylvania, New Jersey, and New York as well as parts of Delaware, Maryland, and other out-of-market opportunities. Our residential lending activities also extend outside of our primary service area, to include other counties in Pennsylvania, New Jersey, and New York, in addition to other states such as Delaware and Florida.
As of June 30, 2021, the Corporation ranked 17th out of 105 financial institutions with a 0.70% deposit market share in Philadelphia-Camden-Wilmington, PA-NJ-DE-MD Metropolitan Statistical Area with 30 stores according to data provided by FDIC Market Share Data.
Competition
We face substantial competition from other financial institutions in our service area. Competitors include Wells Fargo, Capital One, Citizens, PNC, Santander, TD Bank, and Bank of America, as well as many regional and local community banks. In addition, we compete directly with savings banks, savings and loan associations, finance companies, credit unions, mortgage brokers, insurance companies, securities brokerage firms, mutual funds, money market funds, private lenders, non-bank lenders and other financial and non-financial institutions for deposits, commercial loans, mortgages and consumer loans, as well as other services. Competition is based upon a number of factors, including the quality of services rendered, interest rates offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the convenience of facilities, locations and hours of operation, the availability of mobile and internet resources and, in the case of loans to larger commercial borrowers, applicable lending limits. Many of the institutions with which we compete have greater financial resources than we do and offer a wider range of deposit and lending products.
Our legal lending limit to one borrower was approximately $51.2 million at December 31, 2021. Loans above this amount may be made if the excess over the lending limit is participated to other institutions. We are subject to potential intensified competition from new branches of established banks in the area as well as new banks that could open in our market area. There are banks and other financial institutions, which serve surrounding areas, and additional out-of-state financial institutions, which currently, or in the future, may compete in our market. We compete to attract deposits and loan applications both from customers of existing institutions and from customers new to our market and we anticipate a continued increase in competition in our service area.
We believe that an attractive niche exists serving small- to medium-sized business customers not adequately served by our larger competitors, and we will seek opportunities to build commercial relationships to complement our retail strategy. We believe small to medium-sized businesses will continue to respond in a positive manner to the attentive and highly personalized service we provide.
Products and Services
We offer a range of competitively priced banking products and services, including consumer and commercial deposit accounts, which include checking accounts, interest-bearing demand accounts, money market accounts, certificates of deposit, savings accounts, sweep accounts, and individual retirement accounts. We also offer other traditional banking services, such as secured and unsecured commercial loans, real estate loans, construction and land development loans, automobile loans, home improvement loans, mortgages, home equity and overdraft lines of credit, lockbox services, and other products. We attempt to offer a high level of personalized service to both our retail and commercial customers.
We also maintain a Small Business Lending team that specializes in the origination of loans guaranteed by the U.S. Small Business Administration (“SBA”) to provide credit to small businesses throughout our service area. This team has consistently been one of the top lenders under the SBA program in our region. For the last several years they have been ranked as one of the top SBA lenders in the tri-state market of Pennsylvania, New Jersey and Delaware based on the dollar volume of loan originations.
We are currently members of the STAR™ and PLUS™ automated teller (ATM) networks, and Allpoint - America’s Largest Surcharge Free ATM Network, which enable us to provide our customers with free access to more than 55,000 ATMs worldwide. We currently have 34 proprietary ATMs located in our store network.
Our lending activities generally are focused on small- and medium-sized businesses within the communities that we serve. Commercial real estate loans represent the largest category within our loan portfolio, amounting to approximately 31% of total loans outstanding at December 31, 2021. Repayment of these loans is, in part, dependent on general economic conditions affecting our customers and various businesses within the community. As a lender, we are subject to credit risk. Economic and financial conditions could have an adverse effect on the ability of our borrowers to repay their loans. To manage the challenges that the economic environment may present we have adopted a conservative loan classification system, continually review and enhance our allowance for credit loss methodology, and perform a comprehensive review of our loan portfolio on a regular basis.
As a result of the addition of Oak Mortgage Company in 2016, we are able to offer residential mortgage loan products to customers throughout our footprint. Our residential mortgage lending activities also extend to geographies outside of our primary service area. A majority of the residential loans originated are currently sold on the secondary market shortly after closing. Oak Mortgage follows the established underwriting policies and guidelines of third-party vendors with whom loans are being sold to maintain compliance, but credit risk still exists in the portfolio. Repayment of residential loans held in the portfolio is, in part, dependent on general economic conditions affecting our customers.
Although management follows established underwriting policies and closely monitors loans through Republic’s loan review officer, credit risk is still inherent in the portfolio. The majority of Republic’s loan portfolio is collateralized with real estate or other collateral; however, a portion of the commercial portfolio is unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing. Republic originates both fixed and variable rate commercial loans with terms typically ranging from one to five years. Variable rate loans are generally tied to the national prime rate of interest.
Store Expansion Plans and Growth Strategy
During 2021, we opened a new store in Deptford, New Jersey utilizing our distinctive glass prototype building. The Bank anticipates the continuation of its expansion strategy in 2022. However, as previously announced, the pace of new store openings has and will continue to slow as we deal with the challenging nature of the pandemic, other economic headwinds, including inflation, and the current interest rate environment which may result in compression of the net interest margin. Relocation of other existing store locations may also occur in the future as we continue to enhance our brand and focus on constantly improving the customer experience. The opening or relocation of any store is subject to regulatory approval.
Securities Portfolio
We maintain an investment securities portfolio. We purchase investment securities that are in compliance with our investment policies, which are approved annually by our Board of Directors. The investment policies address such issues as permissible investment categories, credit quality, maturities and concentrations. At December 31, 2021 and 2020, approximately 95% and 91%, respectively, of the aggregate dollar amount of the investment securities consisted of either U.S. government debt securities or U.S. government agency issued mortgage-backed securities and commercial mortgage obligations. Credit risk associated with these U.S. government debt securities and the U.S. government agency mortgage-backed securities and commercial mortgage obligations is minimal, with risk-based capital weighting factors of 0% and 20%, respectively. The remainder of the securities portfolio consists of municipal securities, corporate bonds, and preferred stock.
Supervision and Regulation
General
Republic, a Pennsylvania state-chartered bank, is not a member of the Federal Reserve System (“Federal Reserve”) and, consequently, is subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking and Securities. Our bank holding company is subject to supervision and regulation by the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). We are subject to extensive requirements and restrictions under federal and state law, including restrictions on the types and amounts of loans that may be originated and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various federal and state consumer laws and regulations also affect the operations of Republic. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve attempting to control the money supply and credit availability in order to influence market interest rates and the national economy.
The following discussion summarizes certain banking laws and regulations that affect us and Republic. The discussion is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank.
Regulation of Republic
Powers and Activities. The Pennsylvania Banking Code of 1965 (“Banking Code”) contains detailed provisions governing the organization, lending and deposit-taking activities, borrowings, investment authority, branching, payment of dividends, and rights and responsibilities of directors, officers, employees and depositors of Pennsylvania banks. The Banking Code delegates extensive rulemaking power and administrative discretion to the Pennsylvania Department of Banking and Securities in its supervision and regulation of state-chartered banks.
Under federal law, all state-chartered FDIC-insured banks are generally limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations.
The FDIC is also authorized to permit state banks to engage in state authorized activities and investments not permissible for national banks (other than non-subsidiary equity investments) if they meet applicable capital requirements and it is determined that such activities or investments do not pose a risk to the FDIC Deposit Insurance Fund.
Capital Adequacy. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%, and a 4% Tier 1 capital to total assets leverage ratio.
For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.
Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions, such as ours, that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income, up to 45% of net unrealized gains on available for sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In determining the amount of risk-weighted assets for calculating risk-based capital ratios, all assets, including certain off-balance sheet assets, are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.
In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.
In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.
Institutions that have less than $10 billion in total consolidated assets and meet other qualifying criteria may elect to use the optional community bank leverage ratio framework, which requires maintaining a leverage ratio of greater than 8.5% for calendar year 2021 and 9% thereafter, to satisfy the regulatory capital requirements, including the risk-based requirements. Eligible institutions may opt in and out of the community bank leverage ratio framework on their quarterly call reports. Republic did not elect to follow the community bank leverage ratio as of December 31, 2021.
Republic is also subject to capital requirements promulgated by the Pennsylvania Department of Banking and Securities, which generally incorporate federal leverage and risk-based capital requirements.
At December 31, 2021, Republic exceeded all regulatory capital requirements.
Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.
An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after such status is triggered.
Republic is considered “well capitalized” under the FDIC’s prompt corrective action rules.
Transactions with Related Parties. Transactions between a bank and its affiliates are limited by Sections 23A and 23B of the Federal Reserve Act, applicable to FDIC-insured state non-member banks by Section 18(j) of the Federal Deposit Insurance Act (“FDIA”), and its implementing regulations. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies that are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. In addition, loans or other extensions of credit by the institution to its affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.
Republic’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act, applicable to FDIC-insured state nonmember banks by Section 18(j) of the FDIA, and Regulation O of the Federal Reserve, generally applicable to FDIC-supervised institutions by Section 337.3 of the FDIC Rules and Regulations. Among other things, these provisions generally require that extensions of credit to insiders:
• be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
• not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by Republic’s Board of Directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Loans to One Borrower Limitations. In accordance with the Banking Code, a Pennsylvania bank, with certain limited exceptions, may not lend to a single borrower, on an unsecured basis, an amount that together with all other indebtedness to that borrower would exceed 15% of its capital accounts, which is defined in the Banking Code as the aggregate of capital, surplus, undivided profits, capital securities and reserve for loan losses of the institution.
Regulatory Restrictions on Dividends. Dividend payments by Republic to the Company are subject to the Banking Code and the FDIA. Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under the Banking Code, Republic would be limited to $83.5 million of dividends payable plus an additional amount equal to its net profit for 2022, up to the date of any such dividend declaration. However, dividends would be further limited to maintain capital ratios as discussed in “Capital Adequacy.”
Federal regulatory authorities have adopted standards for the maintenance of adequate levels of regulatory capital by banks. Adherence to such standards further limits the ability of Republic to pay dividends to us.
Federal Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the FDIC. The general maximum deposit insurance amount is $250,000 per depositor.
Assessments for most insured depository institutions are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. The assessment range (inclusive of possible adjustments) for institutions of Republic’s size is 1.5 basis points to 30 basis points of total assets less tangible equity.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Republic. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of the Bank’s deposit insurance.
Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), every insured depository institution, including Republic, has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and to merge with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance. Republic’s latest FDIC CRA rating, dated August 12, 2020, was “Outstanding.”
Federal Home Loan Bank System. Republic is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, which is one of eleven regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. As a member of the FHLB of Pittsburgh, Republic is required to acquire and hold a specified amount of shares of capital stock in the FHLB. As of December 31, 2021, Republic was in compliance with this requirement.
Holding Company Regulation
General. As a bank holding company, we are subject to examination, regulation, and periodic reporting under the BHC Act, as administered by the Federal Reserve. We are required to obtain the prior approval of the Federal Reserve to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve approval would be required for us to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.
Activities. A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve has determined by regulation to be closely related to banking are: (1) making or servicing loans; (2) performing certain data processing services; (3) providing securities brokerage services; (4) acting as fiduciary, investment or financial advisor; (5) leasing personal or real property under certain conditions; (6) making investments in corporations or projects designed primarily to promote community welfare; and (7) acquiring a savings association.
The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository institutions subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. We have not elected to become a “financial holding company.”
Consolidated Capital Requirements. Bank holding companies with consolidated assets of $3 billion or more are subject to consolidated regulatory capital requirements that are as stringent as those applicable to subsidiary depository institutions. We are in compliance with the bank holding company capital requirements, and the capital conservation buffer, as of December 31, 2021.
Source of Strength. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary.
Dividends. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.
Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. Federal Reserve guidance provides for consultation with and nonobjection by the Federal Reserve prior to the payment of dividends, and stock redemptions or repurchases, under certain circumstances. These regulatory policies could affect our ability to pay dividends, repurchase shares of our common stock or otherwise engage in capital distributions.
Dividend Policy. We have not paid any cash dividends on our common stock, and have no current plans to pay any cash dividends in the foreseeable future. We paid $3.5 million and $923,000 in preferred stock dividends during the years ended December 31, 2021 and 2020, respectively. See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for more information.
Pennsylvania Holding Company Regulation. In addition to the federal holding company regulation, as a Pennsylvania incorporated bank holding company, we are also subject to various restrictions on our activities as set forth in Pennsylvania law.
Federal Securities Laws
Our common stock is registered with the SEC under the Exchange Act. We are, therefore, subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporation information. We have policies, procedures and systems designed to ensure compliance with these regulations.
Legislative and Regulatory Changes
We are heavily regulated by regulatory agencies at the federal and state levels. We, like most of our competitors, have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us as well as the financial services industry in general.
Future Legislative and Regulatory Developments
It is conceivable that compliance with current or future legislative and regulatory initiatives could require us to change certain business practices, impose significant additional costs on us, limit the products that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value of assets that we hold or otherwise adversely affect our business, results of operations, or financial condition. The extent of changes imposed by any future regulatory initiatives could make it more difficult for us to comply in a timely manner, which could further limit our operations, increase compliance costs or divert management attention or other resources. The long-term impact of legislative and regulatory initiatives on our business practices and revenues will depend upon the successful implementation of our strategies, consumer behavior, and competitors’ responses to such initiatives, all of which are difficult to predict. Additionally, we may pursue, through appropriate avenues, legislative and regulatory advocacy to provide our input on possible legislative and regulatory developments.
Profitability, Monetary Policy and Economic Condition
In addition to being affected by general economic conditions, the earnings and growth of Republic will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking and Securities, the FDIC, and the Federal Reserve. An important function of the Federal Reserve is to regulate the supply of money and other credit conditions in order to manage interest rates. The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of Republic cannot be determined.
Employees
As of December 31, 2021, we had a total of 556 employees, including 525 full-time employees.

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ITEM 1A. RISK FACTORS
Item 1A: Risk Factors
In addition to the other information included elsewhere in this report and in “Management’s Discussion and Analysis of Results of Operations and Financial Condition,” the following factors could significantly affect our business, financial condition, results of operations, or future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial condition, results of operations, or future prospects. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may be materially adversely affected. There may be additional risks that we do not presently know or that we currently believe are immaterial which could also materially adversely affect our business, financial condition, results of operations, or future prospects.
Risks Related to the COVID-19 Pandemic
The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.
Given the ongoing and dynamic nature of the COVID-19 pandemic, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. As a result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:
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Demand for our products and services may decline;
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If the economy worsens, loan delinquencies, problem assets, and foreclosures may increase;
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Collateral for loans, especially real estate, may decline in value;
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Our allowance for credit losses may have to be increased if economic conditions worsen or if borrowers experience financial difficulties;
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The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
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Our cyber security risks are increased as a result of an increase in the number of employees working remotely; and
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Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.
Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
Any one or a combination of the factors identified above, or other factors, could materially and adversely affect our business, financial condition, results of operations and prospects.
Risks Related to our Lending Activities
We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively impacted by economic conditions and other factors that adversely affect our borrowers.
Our financial condition and results of operations are affected by the ability of our borrowers to repay their loans, and in a timely manner. Lending money is a significant part of our banking business. Borrowers, however, do not always repay their loans. The risk of non-payment is assessed through our underwriting and loan review procedures based on several factors including credit risks of a particular borrower, changes in economic conditions, the duration of the loan, and in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors. Despite our efforts, we do and will experience loan losses, and our financial condition and results of operations will be adversely affected. Our non-performing assets were approximately $12.5 million at December 31, 2021. Our allowance for loan losses was approximately $19.0 million at December 31, 2021. Our loans between 30-89 days delinquent totaled $9.6 million at December 31, 2021.
Our concentration of commercial real estate loans could result in increased loan losses and costs of compliance.
At December 31, 2021, commercial real estate loans totaled $780.3 million, or 31.0% of our loan portfolio. Given their larger balances and the complexity of the underlying collateral, commercial real estate loans generally have more risk than the single-family residential loans that we originate. Because the repayment of commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. If we foreclose on these loans, our holding period for the collateral typically is longer than for a single-family residential property because there are fewer potential purchasers of the collateral. In addition, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to single-family residential loans. Accordingly, charge-offs on commercial real estate loans may be larger on a per loan basis than those incurred by our single-family residential real estate or consumer loan portfolios.
The commercial real estate market is cyclical and poses risks of loss to us because of the concentration of commercial real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a concentration. Banking regulators have been giving and continue to give commercial real estate lending greater scrutiny, and banks with larger commercial real estate loan portfolios are expected by their regulators to implement improved underwriting, internal controls, risk management policies and portfolio stress-testing practices to manage risks associated with commercial real estate lending. In addition, commercial real estate lenders are making greater provisions for credit losses and accumulating higher capital levels as a result of commercial real estate lending exposures. Additional losses or regulatory requirements related to our commercial real estate loan concentration could materially adversely affect our business, financial condition and results of operations.
Our allowance for credit losses may not be adequate to absorb actual loan losses, and we may be required to make further provisions for credit losses and charge off additional loans in the future, which could materially and adversely affect our business.
We maintain an allowance for credit losses, established through a provision for credit losses accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio. If our allowance for credit losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.
The determination of the allowance for credit losses involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for credit losses. Increases in nonperforming loans have a significant impact on our allowance for credit losses. Our allowance for credit losses may not be adequate to absorb actual loan losses. If trends in the real estate markets were to deteriorate, we could experience increased delinquencies and credit losses, particularly with respect to real estate construction and land acquisition and development loans and one-to four-family residential mortgage loans. As a result, we may have to make provisions for credit losses and charge off loans in the future, which could materially adversely affect our financial condition and results of operations.
In addition to our internal processes for determining loss allowances, bank regulatory agencies periodically review our allowance for credit losses and may require us to increase the provision for credit losses or recognize further loan charge-offs, based on judgments that differ from those of our management. Any increases in our allowance for credit losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition, results of operations and cash flows.
Our mortgage banking revenue and the value of our mortgage servicing rights can be volatile.
In 2021, we originated $579.8 million residential mortgage loans and sold $398.7 million of those loans to investors in the secondary market. The residential mortgage business is highly competitive, and highly susceptible to changes in market interest rates, consumer confidence levels, employment statistics, the capacity and willingness of secondary market purchasers to acquire and hold or securitize loans, and other factors beyond our control.
Because we sell a substantial number of the mortgage loans we originate, the profitability of our mortgage banking business also depends in large part on our ability to originate a high volume of loans and sell them in the secondary market at a gain. In fact, as rates rise, we expect (1) the demand for mortgage loans to fall thereby reducing loan origination volume and (2) increasing industry-wide competitive pressures reducing our pricing margins, both of which would reduce our mortgage revenues. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (1) the existence of an active secondary market and (2) our ability to profitably sell loans or securities into that market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations.
Our ability to originate and sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by government-sponsored entities (“GSEs”) and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. We are highly dependent on these purchasers continuing their mortgage purchasing programs. Additionally, because the largest participants in the secondary market are Ginnie Mae, Fannie Mae and Freddie Mac, GSEs whose activities are governed by federal law, any future changes in laws that significantly affect the activity of these GSEs could, in turn, adversely affect our operations. In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. government. The federal government has for many years considered proposals to reform Fannie Mae and Freddie Mac, but the results of any such reform, and their impact on us, are difficult to predict. To date, no reform proposal has been enacted.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition.
We sell a large portion of the mortgage loans that we originate. When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to purchasers, guarantors and insurers, including the GSEs, about the mortgage loans and the manner in which they were originated. Whole loan sale agreements require that we repurchase or substitute mortgage loans or indemnify buyers against losses in the event we breach these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan, resulting in these mortgage loans being placed on our books and subjecting us to the risk of a potential default. A subsequent sale of a repurchased mortgage loan could be at a significant discount to the unpaid principal balance. The Company maintains a reserve for repurchased loans. If repurchase and indemnity demands increase and such demands are valid claims and are in excess of our provision for potential losses, our liquidity, results of operations and financial condition may be adversely affected.
We may be exposed to environmental liabilities with respect to real estate that we have or had title to in the past.
A significant portion of our loan portfolio is secured by real property. In the course of our business, we may foreclose, accept deeds in lieu of foreclosure, or otherwise acquire real estate in connection with our lending activities. We also acquire real estate in connection with our store expansion plans and growth strategy. As a result, we could become subject to environmental liabilities with respect to these properties. We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Although we have policies and procedures to perform an environmental review before acquiring title to any real property, these may not be sufficient to detect all potential environmental hazards. If we were to become subject to significant environmental liabilities, it could materially and adversely affect us.
Risks Related to Accounting and Disclosure Matters
We are required to make significant estimates and assumptions in the preparation of our financial statements, including our allowance for loan losses, and our estimates and assumptions may not be accurate.
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or “GAAP,” require our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods. These estimates and assumptions are subject to substantial risk and uncertainty. Materially different results may occur as circumstances change and additional information becomes known. The critical estimates are made by management in determining, among other things, the allowance for loan losses and the realization of deferred income taxes. If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely affected.
Our assets as of December 31, 2021 included a deferred tax asset and we may not be able to realize the full amount of such asset.
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 2021, the net deferred tax asset was $14.2 million, compared to a balance of $12.0 million at December 31, 2020.
We regularly review our deferred tax assets for recoverability to determine whether it is more likely than not (i.e. 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.
Based on the analysis of the available positive and negative evidence, we determined that a valuation allowance should not be recorded as of December 31, 2021. We used projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor to project recoverability of the deferred tax asset balance. There can be no assurance as to when or whether we will be in a position to fully recapture the benefits of our deferred tax asset. Further discussion on the analysis of our deferred tax asset can be found in the “Provision (Benefit) for Income Taxes” section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Our failure to maintain an effective system of internal control over financial reporting and disclosure controls and procedures related to the structure and operations of our corporate governance may result in current and potential shareholders losing confidence in our financial reporting and disclosures and could subject us to regulatory scrutiny.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial reporting.
As part of our ongoing monitoring of internal and disclosure controls for the year ended December 31, 2021, we discovered material weaknesses in our internal and disclosure controls that required remediation. See “Item 9A. Controls and Procedures.” Effective internal controls and disclosure controls and procedures are necessary for us to provide reliable financial reports and disclosures to shareholders, to prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports and disclosures or prevent fraud, our business may be adversely affected, our reputation and operating results could be harmed could and our current and potential shareholders and customers could lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.
Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper management override. Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis. If our controls are not effective, it could have a material adverse effect on our financial condition, results of operations, and market for our common stock, and could subject us to regulatory scrutiny.
Management concluded there were deficiencies in the Company’s internal control over financial reporting that represented material weaknesses in the Company’s internal control over financial reporting as of December 31, 2021, including from a failure to maintain an effective control environment, which resulted in deficiencies in the communication of certain relevant information to the Board of Directors of the Company, including information related to branch expenditures. While the material weaknesses did not result in a misstatement of the Company’s financial statements, effective internal controls and disclosure controls and procedures are necessary for us to provide reliable financial reports and disclosures to shareholders, to prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports and disclosures or prevent fraud, our business may be adversely affected, our reputation and operating results could be harmed and our current and potential shareholders and customers could lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business. For more information, see “Item 9A: Disclosure Controls and Procedures.”
Continued delays in the filing of our periodic reports with the SEC could impact our listing on Nasdaq, which would materially and adversely affect our stock price, financial condition and/or results of operations.
As a result of an independent review concerning related party transactions, the Company’s internal controls, and the associated financial statement and disclosure implications, and the evaluation of such independent review by the Company’s Audit Committee and management and by the Company’s independent registered public accounting firm in connection with the audit of the Company’s financial statements as of an for the year ended December 31, 2021, we were unable to file this Annual Report on Form 10-K with the SEC on a timely basis. We have not filed our Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2022 and June 30, 2022, which were due in May 2022 and August 2022, respectively. Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports with the SEC. If we are not able to file our delinquent Quarterly Reports on Form 10-Q, our common stock may be subject to delisting by Nasdaq.
Risks Related to our Business
Our results of operations may be materially and adversely affected by other-than-temporary impairment charges relating to our investment portfolio.
In prior years we recorded other-than-temporary impairment charges for certain bank pooled trust preferred securities, and we may be required to record future impairment charges on our investment securities if they suffer declines in value that we determine are other-than-temporary. Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the Bank’s ability to pay dividends, which could materially adversely affect us. Significant impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized” for regulatory purposes.
A significant percentage of our assets is invested in securities, which typically have a lower yield than our loan portfolio.
Our results of operations depend substantially on our net interest income. At December 31, 2021, 50.7% of our assets were invested in investment securities and cash and cash equivalents. These investments yield substantially less than the loans we hold in our portfolio. While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we may not be able to increase originations of loans that are acceptable to us. Further, at December 31, 2021, $1.7 billion, or 60.7%, of our securities portfolio was designated as held to maturity. As a result, we are unable to sell these securities to respond to changes in interest rates that may occur in the future.
Unfavorable economic and financial market conditions may adversely affect our financial position and results of operations.
Economic pressure on consumers and businesses, the impact of inflation, any resulting lack of confidence in the financial markets, the ongoing impact of COVID-19 and the responses thereto, risks related to the conflict between Ukraine and Russia, including, but not limited to, the impact from, and compliance with, economic sanctions, and concerns surrounding the long term fiscal position of the United States may adversely affect our business, financial condition, results of operations and stock price. A worsening of current economic conditions would likely exacerbate the adverse effects of market conditions on us and others in the industry. In particular, we may face the following risks in connection with these events:
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increased regulation of our industry and increased compliance costs;
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hampering our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure, as such assessments are made more complex by these difficult market and economic conditions;
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increasing our credit risk, by increasing the likelihood that our customers are unable to satisfy their obligations to us;
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impairing our ability to originate loans, by making our customers and prospective customers less willing to borrow, and making loans that meet our underwriting criteria difficult to find; and
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limiting our interest income, by depressing the yields we are able to earn on our investment portfolio.
Our business is concentrated in and dependent upon the continued growth and welfare of our primary market area.
Our primary service area consists of Greater Philadelphia, Southern New Jersey, and New York City. Our success depends upon the business activity, population, income levels, deposits and real estate activity in this area. Although our customers’ businesses and financial interests may extend well beyond this area, adverse economic conditions that affect our primary service area could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally adversely affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
A transition away from the London Interbank Offered Rate ("LIBOR") as a reference rate for financial instruments could negatively affect our income and expenses and the value of various financial instruments.
LIBOR is used extensively in the United States and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. On July 27, 2017, the United Kingdom's Financial Conduct Authority ("FCA") announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, to facilitate an orderly LIBOR transition, the OCC, the FDIC, and the Federal Reserve Board jointly announced that entering into new contracts using LIBOR as a reference rate after December 31, 2021 would create a safety and soundness risk. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month LIBOR, and immediately after June 30, 2023, in the case of the remaining LIBOR settings. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee ("ARRC") has recommended the use of a Secured Overnight Funding Rate ("SOFR"). SOFR is different from LIBOR in that it is a backward-looking secured rate rather than a forward-looking unsecured rate.
There are operational issues, which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry. These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, derivatives over loans and other financial obligations or extensions of credit.
Risks Related to Market Interest Rates
Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates.
Our net income depends on the net income of Republic, and Republic is dependent primarily upon its net interest income, which is the difference between the interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings.
Our results of operations will be affected by changes in market interest rates and other economic factors beyond our control. If our interest-earning assets have longer effective maturities than our interest-bearing liabilities, the yield on our interest-earning assets generally will adjust more slowly than the cost of our interest-bearing liabilities, and, as a result, our net interest income generally will be adversely affected by material and prolonged increases in interest rates, and positively affected by comparable declines in interest rates. Conversely, if liabilities re-price more slowly than assets, net interest income would be adversely affected by declining interest rates, and positively affected by increasing interest rates. At any time, our assets and liabilities will reflect interest rate risk of some degree.
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates generally results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans.
In addition to affecting interest income and expense, changes in interest rates also can affect the value of our interest-earning assets, comprising fixed and adjustable-rate instruments, as well as the ability to realize gains from the sale of such assets. Generally, the value of fixed-rate instruments fluctuates inversely with changes in interest rates, and changes in interest rates may therefore have a material adverse effect on our results of operations.
Risks Related to our Business Strategy
Potential acquisitions may disrupt our business and dilute shareholder value.
We regularly evaluate opportunities to acquire and invest in banks and in other complementary businesses. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could involve a number of additional risks, including the risks of:
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incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions;
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using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or its assets;
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diluting our tangible book value and earnings per share in the short- and long-term by payment of a premium over book and market values;
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incurring potential exposure to unknown or contingent liabilities of the target company;
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exposing ourselves to potential asset quality problems of the target company;
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diluting current shareholders’ ownership interest by issuing additional shares of common stock;
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recording goodwill, which if impaired would be required to recognize a charge against our earnings;
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failing to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits of the acquisition;
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potential disrupting our business;
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the time and expense required to integrate the operations and personnel of the combined businesses;
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creating an adverse short-term effect on our results of operations; and
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losing key employees and customers as a result of an acquisition that is poorly conceived.
We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value.
We may not be able to manage our growth, which may adversely impact our financial results.
As part of our retail growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new stores and acquiring existing branches of other financial institutions. To the extent that we undertake additional stores openings and acquisitions, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business.
As part of our retail strategy, we plan to open new stores in our primary service area, including Southern New Jersey, the Greater Philadelphia area, and New York City. We may not, however, be able to identify attractive locations on terms favorable to us, obtain regulatory approvals, or hire qualified management to operate new stores. In addition, the organizational and overhead costs may be greater than we anticipate. New stores may take longer than expected to reach profitability, or may not become profitable. The additional costs of starting new stores may adversely impact our financial results.
Our ability to manage growth successfully will depend on whether we can continue to fund our growth while maintaining cost controls, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends. If we are not able to control costs, such growth could adversely impact our earnings and financial condition.
Our retail strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
In recent years, we have been successful in attracting new and talented employees to our management team. We believe that our ability to successfully execute our growth strategy will require us to retain and attract additional management experienced in banking and financial services, and familiar with the communities in our market. Our ability to retain executive officers, the current management team, branch managers and loan officers of Republic will continue to be important to the successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain additional members of the management team and qualified loan officers with the appropriate level of experience and knowledge about our market areas to implement the community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.
If we want to, or are compelled to, raise additional capital in the future, that capital may not be available to us when it is needed or on terms that are favorable to us or current shareholders.
Federal banking regulators require us, and Republic, to maintain capital to support our operations. Regulatory capital ratios are defined and required ratios are established by laws and regulations promulgated by banking regulatory agencies. At December 31, 2021, our regulatory capital ratios were above “well capitalized” levels under current bank regulatory guidelines. To be “well capitalized,” banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Common Equity Tier 1 ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, and a total risk-based capital ratio of at least 10%. Regulators, however, may require us, or Republic, to maintain higher regulatory capital ratios.
We may need to raise additional capital in the future to provide us with sufficient capital resources to meet our commitments and business needs. We may also at some point need to raise additional capital to support our continued growth. Our ability to raise additional capital in the future will depend on conditions in the capital markets at that time, which are outside of our control, on our financial performance and on other factors. Accordingly, we may not be able to raise additional capital on terms and time frames acceptable to us, or at all. If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations. Our ability to raise capital could also be impaired by factors that are nonspecific to us, such as disruption of the financial markets or negative news and expectations about the prospects for the financial services industry. If we raise capital through the issuance of additional shares of our common stock or other securities, we would dilute the ownership interests of existing shareholders, and could dilute the per share book value and earnings per share of our common stock. Furthermore, a capital raise through issuance of additional shares may have an adverse impact on our stock price.
Risks Related to Laws and Regulations
We are subject to numerous governmental regulations and to comprehensive examination and supervision by regulators, which could have an adverse impact on our operations and could restrict the scope of our operations.
Both the Company and Republic operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the FDIC and the Pennsylvania Department of Banking and Securities (“PDB”). We are subject to federal and state regulations governing virtually all aspects of our activities, including lines of business, capital, liquidity, investments, payment of dividends, and others. Regulations that apply to us are generally intended to provide protection for depositors and customers rather than investors.
We are subject to extensive regulation and supervision under federal and state laws and regulations. See Item 1. Business - Supervision and Regulation. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control. Compliance with these rules could impose additional costs on banking entities and their holding companies. Management has reviewed the new standards and will continue to evaluate all options and strategies to ensure ongoing compliance with the new standards, notwithstanding Republic’s current status as well-capitalized.
New programs and proposals may subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. We cannot predict the substance or impact of future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.
Any change in regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.
Risks Related to Competition
We face significant competition in our market from other banks and financial institutions.
The banking and financial services industry in our market area is highly competitive. Many of our competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. We may not be able to compete effectively in our markets, which could adversely affect our results of operations. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and consolidation among financial service providers. Larger institutions have greater access to capital markets, with higher lending limits and a broader array of services. Competition may require increases in deposit rates and decreases in loan rates, and adversely impact our net interest margin. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market area.
The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks, such as financial technology companies, securities companies and specialty finance companies to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
Risks Related to Operational Matters
We may not have the resources to effectively implement new technologies, which could adversely affect our competitive position and results of operations.
The financial services industry is constantly undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand in our market. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers. If we are unable to do so, our competitive position and results of operations could be adversely affected.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee or customer errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee or customer errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors, and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, these security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
Risks Related to our Common Stock
There may be future sales of our common stock, which may materially and adversely affect the market price of our common stock.
We are not restricted from issuing additional shares of our common or preferred stock, including securities that are convertible into or exchangeable or exercisable for shares of our common stock. Our issuance of shares of common stock, preferred stock or securities convertible into or exchangeable or exercisable for our common stock in the future will dilute the ownership interests of our existing shareholders.
Additionally, the sale of substantial amounts of our common stock, whether directly by us or by existing common shareholders in the secondary market, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock could, in turn, materially and adversely affect the market price of our common stock.
Risks Related to Governance Matters
Our governing documents, Pennsylvania law, and current policies of our Board of Directors contain provisions, which may reduce the likelihood of a change in control transaction, which may otherwise be available and attractive to shareholders.
Our articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more difficult or expensive or may discourage a tender offer, change in control or takeover attempt that is opposed by our Board of Directors. In particular, the articles of incorporation and bylaws: classify our Board of Directors into three groups, so that shareholders elect only approximately one-third of the Board each year; permit shareholders to remove directors only for cause and only upon the vote of the holders of at least 75% of the voting shares; require our shareholders to give us advance notice to nominate candidates for election to the Board of Directors or to make shareholder proposals at a shareholders’ meeting; require the vote of the holders of at least 75% of our voting shares for shareholder amendments to our bylaws; require the vote of the holders of at least 75% of our voting shares to approve certain business combinations; and restrict the holdings and voting rights of shareholders who would acquire more than 10% of our outstanding common stock without the approval of two-thirds of our Board of Directors. These provisions of our articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of our shareholders may consider such proposals desirable. Such provisions could also make it more difficult for third parties to remove and replace the members of our Board of Directors. Moreover, these provisions could diminish the opportunities for shareholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also prevent increases in the trading price of our common stock that could result from takeover attempts or speculation.
In addition, anti-takeover provisions in Pennsylvania and federal law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold. For example, Pennsylvania and federal law may restrict a third party’s ability to obtain control of us and may prevent shareholders from receiving a premium for their shares of our common stock.
Our business could be impacted by a potential proxy contest for the election of directors at our 2022 Annual Meeting of Shareholders.
In December 2021, Driver Management Company LLC (together with its affiliates, the "Activist Investor"), announced the nomination of three candidates for election to our Board of Directors at our 2022 Annual Meeting of Shareholders. A proxy contest with the Activist Investor for the election of directors could result in us incurring substantial costs, including proxy solicitation, public relations, and legal fees. Further, such a proxy contest could divert the attention of our Board of Directors, management, and employees, and may disrupt the momentum in our business and operations, as well as our ability to execute our strategic plan. The actions of the Activist Investor may also create perceived uncertainties as to the future direction of our business or strategy, which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel, and may impact our relationship with investors, vendors, and other third parties. A proxy contest could also impact the market price and the volatility of our common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B: Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2: Description of Properties
We currently have thirty-nine locations that we utilize to conduct business. Seven of these locations are utilized for loan production offices, storage facilities, operations and back office support, and our corporate headquarters. Thirty-two properties are store locations that are open and operating as of December 31, 2021. We have another four locations under our control for future store locations. Of the forty-three total locations, seventeen are owned by Republic. The remaining twenty-six locations are subject to land and building leases. The spaces covered by these leases range in size from 1,700 to 10,590 square feet with the exception of our corporate headquarters which consists of approximately 53,000 square feet. Please see Note 25 “Leases” in the Consolidated Financial Statements for further information regarding the leases. Management believes these properties and facilities are adequate to meet our present and immediately foreseeable needs from a real estate perspective.

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ITEM 3. LEGAL PROCEEDINGS
Item 3: Legal Proceedings
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.
On March 8, 2022, George E. Norcross, III, Gregory B. Braca, and Philip Norcross filed a complaint in the Court of Common Pleas of Philadelphia County (Commerce Program) against the Company and Company directors Vernon W. Hill II, Theodore J. Flocco, Jr., Brian Tierney, and Barry Spevak. The complaint seeks, among other things, declaratory and injunctive relief enjoining the Company and the individual defendants from implementing any amendments to the Company’s executive employment agreements until after the Company’s 2022 annual meeting of shareholders or taking any other actions outside the ordinary course of business, including executing or extending any related party agreements or any agreements obligating the incurrence of expenses related to the opening of new branches and the renovation of existing branches, without the affirmative vote of a majority of independent directors.
On March 29, 2022, George E. Norcross, III filed suit in the Philadelphia Court of Common Pleas to compel the Company to make available for inspection the books and records as is required under Pennsylvania law.
As of the date of this filing, Mr. Norcross has filed papers with the Court dismissing the actions without prejudice.
On September 19, 2022, a complaint was filed in the Court of Common Pleas in Philadelphia, Pennsylvania against the Company and its current Interim Chief Executive Officer and director and two other current directors. The plaintiffs, the former Chairman of the Board and Chief Executive Officer of the Company and a former director of the Company, allege defamation, defamation per se and false light against the three individual defendants and a breach of the plaintiff’s employment agreement by the Company. The complaint seeks certain reimbursement payments and compensatory and punitive damages. The matter is in its early stages and, accordingly, the Company is still assessing the potential outcomes and materiality of the matter. The Company plans to defend itself vigorously in this matter.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4: Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Shares of the Company’s class of common stock are listed on the Nasdaq Global Market under the symbol “FRBK.” As of October 18, 2022, there were approximately 100 registered shareholders of Republic First Bancorp, Inc. common stock. Most shares are held in “nominee” or “street name” and accordingly, the number of beneficial owners of those shares is not known or included in the previous number.
Dividend Policy
The Company has not paid any cash dividends on its common stock and has no plans to pay cash dividends on its common stock during 2022. The Company paid $3.5 million during 2021 and $923,000 in non-cumulative preferred stock dividends during 2020. The Company’s ability to pay dividends depends primarily on receipt of dividends from the Company’s subsidiary, Republic. Dividend payments from Republic are subject to legal and regulatory limitations. The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6: [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with 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.
For the Years Ended December 31,
(dollars in thousands, except per share data)
INCOME STATEMENT DATA
Total interest income
$ 147,803
$ 114,950
$ 104,864
$ 92,074
$ 70,849
Total interest expense
18,591
23,118
27,057
16,170
8,784
Net interest income
129,212
91,832
77,807
75,904
62,065
Provision for loan losses
5,750
4,200
1,905
2,300
Non-interest income
32,745
36,235
23,738
20,322
20,097
Non-interest expenses
122,505
117,423
104,490
83,721
75,276
Income (loss) before provision (benefit) for income taxes
33,702
6,444
(4,850 )
10,205
5,986
Provision (benefit) for income taxes
8,526
1,390
(1,350 )
1,578
(2,919 )
Net income (loss)
$ 25,176
$ 5,054
$ (3,500 )
$ 8,627
$ 8,905
Preferred stock dividends
3,500
-
-
-
Net income available to common stockholders
$ 21,676
$ 4,131
$ (3,500 )
$ 8,627
$ 8,905
PER SHARE DATA
Basic earnings (loss) per share
$ 0.37
$ 0.07
$ (0.06 )
$ 0.15
$ 0.16
Diluted earnings (loss) per share
$ 0.33
$ 0.07
$ (0.06 )
$ 0.15
$ 0.15
Book value per share
$ 4.68
$ 4.41
$ 4.23
$ 4.17
$ 3.97
Tangible book value per share (1)
$ 4.68
$ 4.41
$ 4.15
$ 4.09
$ 3.89
BALANCE SHEET DATA
Total assets
$ 5,626,656
$ 5,065,735
$ 3,341,290
$ 2,753,297
$ 2,322,347
Total loans, net
2,488,401
2,632,367
1,738,929
1,427,983
1,153,679
Total investment securities
2,748,341
1,364,160
1,186,630
1,088,331
938,561
Total deposits
5,191,180
4,013,751
2,999,163
2,392,867
2,063,295
Other borrowings
-
633,866
-
-
-
Short-term borrowings
-
-
-
91,422
-
Subordinated debt
11,278
11,271
11,265
11,259
21,681
Total shareholders’ equity
324,242
308,113
249,168
245,189
226,460
PERFORMANCE RATIOS
Return on average assets
0.50 %
0.13 %
(0.12 %)
0.34 %
0.43 %
Return on average shareholders’ equity
7.92 %
1.86 %
(1.41 %)
3.69 %
4.02 %
Net interest margin
2.69 %
2.51 %
2.85 %
3.16 %
3.23 %
Total non-interest expenses as a percentage of average assets
2.41 %
2.97 %
3.51 %
3.28 %
3.64 %
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of loans
0.76 %
0.49 %
0.53 %
0.60 %
0.74 %
Allowance for loan losses as a percentage of non-performing loans
147.42 %
100.91 %
74.65 %
83.31 %
57.93 %
Non-performing loans as a percentage of total loans
0.51 %
0.49 %
0.71 %
0.72 %
1.28 %
Non-performing assets as a percentage of total assets
0.24 %
0.28 %
0.42 %
0.60 %
0.94 %
Net (recoveries) charge-offs as a percentage of average loans, net
(0.01 %)
0.02 %
0.08 %
0.17 %
0.13 %
LIQUIDITY AND CAPITAL RATIOS
Average equity to average assets
6.27 %
6.86 %
8.36 %
9.16 %
10.72 %
Leverage ratio
6.08 %
8.17 %
7.83 %
9.35 %
10.64 %
CET 1 capital to risk-weighted assets
9.26 %
10.51 %
11.41 %
13.90 %
14.75 %
Tier 1 capital to risk-weighted assets
11.21 %
12.96 %
11.93 %
14.53 %
16.13 %
Total capital to risk-weighted assets
11.83 %
13.50 %
12.37 %
15.03 %
16.70 %
(1)
A Non-GAAP Disclosure
Executive Summary
2021 was an incredibly successful year for Republic Bank and the “Power of Red is Back” expansion campaign. We grew assets, loans, and deposits resulting in dramatic improvement in profitability during the year. Earnings improved by nearly 400% year over year as a result of our ongoing effort to drive revenue growth at a greater rate than expense growth.
Financial Highlights
●
Net income increased by 398% to $25.2 million, or $0.33 per share for the year ended December 31, 2021, compared to $5.1 million, or $0.07 per share for the year ended December 31, 2020.
●
Earnings before tax increased to $33.7 million for the year ended December 31, 2021, compared to $6.4 million during the year ended December 31, 2020. This represents an increase of $27.3 million, or 426%, year over year.
●
The improvement in earnings was driven by strong growth in revenue while our focus on cost control initiatives continues to limit expense growth. During the twelve-month period ended December 31, 2021, total revenue increased 26% and non-interest expense increased by 4% compared to the twelve-month period ended December 31, 2020.
●
Total deposits increased by $1.2 billion, or 29%, to $5.2 billion as of December 31, 2021, compared to $4.0 billion as of December 31, 2020. New stores opened since the beginning of the “Power of Red is Back” expansion campaign are currently growing deposits at an average rate of $41 million per year, while the average deposit growth for all stores over the last twelve months was approximately $37 million per store.
●
We achieved this significant growth in deposits while driving down the overall cost of funds. The cost of funds decreased to 0.40% for the twelve months ended December 31, 2021 compared to 0.64% for the twelve months ended December 31, 2020.
●
Total assets increased by $561 million, or 11%, to $5.6 billion as of December 31, 2021 compared to $5.1 billion as of December 31, 2020. Excluding PPP loans, which were $636.6 million and $119.0 million at December 31, 2021 and 2020, respectively, total assets increased by $1.1 billion, or 24%, year over year.
●
Excluding PPP loans, total loans grew $371 million, or 18%, to $2.4 billion as of December 31, 2021 compared to $2.0 billion at December 31, 2020.
●
Asset quality remains strong as the ratio of non-performing assets to total assets declined to 0.24% as of December 31, 2021 compared to 0.28% as of December 31, 2020. There were no customers deferring loan payments at the end of the year. All customers that were granted deferrals during the height of the COVID pandemic have resumed contractual payments.
●
The net interest margin increased by 18 basis points to 2.69% for the twelve months ended December 31, 2021 compared to 2.51% for the twelve months ended December 31, 2020. This increase was primarily driven by a decline in the cost of funds during 2021.
●
We had 32 convenient store locations open at year end. We opened a new store in Ocean City in January 2022 and Wayne in April 2022. Construction is ongoing at an additional site in Broomall, Pennsylvania, which is expected to opening in late 2022.
●
Our residential mortgage division, Oak Mortgage, is serving the home financing needs of customers throughout our footprint. The Oak Mortgage team originated more than $579 million in mortgage loans during 2021.
●
Book value per common share increased to $4.68 as of December 31, 2021 compared to $4.41 as of December 31, 2020.
PPP Loan Program
The Paycheck Protection Program (“PPP”) included in the CARES Act authorized financial institutions to make loans to companies impacted by 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.
●
During 2020, we originated more than $680 million in the first round of the PPP loan program for more than 5,000 businesses. Republic was one of the top PPP lenders in the country as of March 31, 2020, as the percentage of PPP loans originated compared to our existing loan portfolio balances reached 36%.
●
We originated more than 2,500 PPP loans totaling $272 million during the second round of the PPP loan program.
●
More than 50% of the PPP loan applications received were from businesses that were not existing customers of Republic Bank, many of which have switched their primary banking relationship with Republic.
●
Net origination fees received by Republic for both rounds of the PPP loan program totaled $32 million. As of December 31, 2021 $4 million in fees remain deferred and will be recognized as income in future periods.
●
We continue to assist our PPP loan customers with the application process for loan forgiveness with fewer than 800 loan forgiveness applications remaining to be processed.
Non-GAAP Based Financial Measures
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. 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, 2021 and December 31, 2020.
(dollars in thousands)
December 31, 2021
December 31, 2020
Total shareholders’ equity
$ 324,242
$ 308,113
Reconciling items:
Preferred stock
(48,325 )
(48,325 )
Goodwill
-
-
Tangible common equity
$ 275,917
$ 259,788
Common shares outstanding
58,943,153
58,859,778
Book value per common share
$ 4.68
$ 4.41
Tangible book value per common share
$ 4.68
$ 4.41
Critical Accounting Policies, Judgments and Estimates
In reviewing and understanding our financial information, you are encouraged to read 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 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 and deferred income taxes as being critical.
Allowance for Loan Losses - The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments would represent management’s estimate of losses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary. The allowance for credit losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
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 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, composition of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. 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)
Size and composition 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 the Company’s loan review system, and the degree of oversight by the Company’s 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.
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 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.
As a result of the changes in economic conditions related to the COVID-19 pandemic, we 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, relatively low loan-to-value ratios 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 continues to unfold.
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.
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 declared 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 declared a termination of the national emergency related to the COVID-19 pandemic. As of December 31, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the COVID pandemic have resumed contractual payments. At December 31, 2020, twenty-one customers with outstanding balance of $16 million, were deferring loan payments. At December 31, 2020, deferrals were comprised of the following categories: 90 day deferrals amounted to eight customers with outstanding balances of $3 million and second deferrals amounted to thirteen customers with outstanding balances of $13 million.
The general component of the allowance calculation 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. Management believes the level of the allowance for loan losses at December 31, 2021 was adequate.
The Company adopted CECL effective January 1, 2022. Our implementation process included, among other things, assessment and documentation of governance and reporting processes and related internal controls; model development, documentation and validation; and the incorporation of qualitative adjustments for model limitations. ASU 2016-13 lists several credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (“PD/LGD”). We contracted with a third-party vendor to assist us in the application of ASU 2016-13 and utilize various methodologies such as Vintage, Cohort, and Weighted Average Remaining Maturity to estimate the allowance for credit losses. CECL and the resulting impact are discussed in more detail throughout the document.
Income Taxes - Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of various deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, management’s estimates and judgments to calculate the deferred tax accounts have not required significant revision.
In evaluating our ability to recover deferred tax assets, management considers 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, 2021 as compared to the year ended December 31, 2020
We reported net income of $25.2 million, or $0.33 per diluted share, for the twelve months ended December 31, 2021 compared to net income of $5.1 million, or $0.07 per diluted share, for the twelve months ended December 31, 2020. Earnings in 2021 were positively impacted by the Company’s focus on driving revenue growth and limiting expense growth through cost control initiatives.
Net interest income for the twelve months ended December 31, 2021 increased $37.4 million to $129.2 million as compared to $91.8 million for the twelve months ended December 31, 2020. Growth in net interest income was a result of an increase in interest income of $32.9 million and a reduction in interest expense of $4.5 million. The increase in interest income of $32.9 million, or 29%, was driven by an increase in average interest-earning assets, primarily investment securities and loans receivable. Interest expense decreased $4.5 million, or 20%, primarily due to a decrease in the rate on average interest-bearing liabilities. The net interest margin increased by 18 basis points to 2.69% during the twelve months ended December 31, 2021 compared to 2.51% during the twelve months ended December 31, 2020.
We recorded a loan loss provision of $5.8 million, an increase of $1.6 million for the twelve months ended December 31, 2021 compared to a provision of $4.2 million during the twelve months ended December 31, 2020. The increase was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment, the nature of and concentration in certain credit types within the loan portfolio and loan growth for the period.
Non-interest income decreased $3.5 million to $32.7 million during the twelve months ended December 31, 2021 as compared to $36.2 million during the twelve months ended December 31, 2020. The decrease was primarily driven by a decrease in mortgage banking income and gains on the sale of investment securities partially offset by an increase in service fees on deposit accounts and gains on the sale of SBA loans during the twelve months ended December 31, 2021.
Non-interest expenses increased $5.1 million to $122.5 million during the twelve months ended December 31, 2021 as compared to $117.4 million during the twelve months ended December 31, 2020. The increase was primarily driven by higher salaries, employee benefits, occupancy, and equipment expenses associated with our expansion strategy, offset by a goodwill impairment charge of $5.0 million in 2020.
Return on average assets and average equity were 0.50% and 7.92%, respectively, during the twelve months ended December 31, 2021 compared to 0.13% and 1.86%, respectively, for the twelve months ended December 31, 2020.
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 2021, 21% in 2020, and 21% in 2019.
Average Balances and Net Interest Income
For the Year Ended
December 31, 2021
For the Year Ended
December 31, 2020
For the Year Ended
December 31, 2019
(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
$ 352,417
$
0.13 %
$ 242,132
$
0.21 %
$ 129,528
$ 2,571
1.98 %
Investment securities and restricted stock
1,890,629
32,542
1.72 %
1,086,386
21,166
1.95 %
1,074,706
27,886
2.59 %
Loans receivable
2,577,498
115,340
4.47 %
2,359,169
93,854
3.98 %
1,544,904
74,946
4.85 %
Total interest-earning assets
4,820,544
148,335
3.08 %
3,687,687
115,534
3.13 %
2,749,138
105,403
3.83 %
Other assets
255,721
265,893
229,767
Total assets
$ 5,076,265
$ 3,953,580
$ 2,978,905
Interest bearing liabilities:
Demand - non-interest bearing
$ 1,256,043
$ 926,692
$ 555,385
Demand - interest bearing
2,025,420
13,107
0.65 %
1,509,826
12,645
0.84 %
1,184,530
15,621
1.32 %
Money market & savings
1,162,032
3,720
0.32 %
916,607
6,247
0.68 %
705,445
6,796
0.96 %
Time deposits
190,960
1,511
0.79 %
211,636
3,859
1.82 %
190,567
3,850
2.02 %
Total deposits
4,634,455
18,338
0.40 %
3,564,761
22,751
0.64 %
2,635,927
26,267
1.00 %
Total interest bearing deposits
3,378,412
18,338
0.54 %
2,638,069
22,751
0.86 %
2,080,542
26,267
1.26 %
Other borrowings
22,303
1.11 %
30,413
1.21 %
22,911
3.45 %
Total interest-bearing liabilities
3,400,715
18,591
0.55 %
2,668,482
23,118
0.87 %
2,103,453
27,057
1.29 %
Total deposits and other borrowings
4,656,758
18,591
0.40 %
3,595,174
23,118
0.64 %
2,658,838
27,057
1.02 %
Non-interest bearing other liabilities
101,473
87,200
71,131
Shareholders’ equity
318,034
271,206
248,936
Total liabilities and shareholders’ equity
$ 5,076,265
$ 3,953,580
$ 2,978,905
Net interest income(2)
$ 129,744
$ 92,416
$ 78,346
Net interest spread
2.52 %
2.26 %
2.54 %
Net interest margin(2)
2.69 %
2.51 %
2.85 %
(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 $532, $585, and $539 in 2021, 2020, and 2019, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates. Net interest income and net interest margin are presented on a tax equivalent basis.
Year ended
December 31, 2021 vs. 2020
Year ended
December 31, 2020 vs. 2019
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
$
$ (203 )
$ (61 )
$
$ (2,296 )
$ (2,057 )
Securities
13,843
(2,467 )
11,376
(6,947 )
(6,720 )
Loans
8,244
13,242
21,486
32,296
(13,388 )
18,908
Total interest-earning assets
22,229
10,572
32,801
32,762
(22,631 )
10,131
Interest expense:
Deposits
Interest-bearing demand deposits
$
$ (275 )
$
$ 2,725
$ (5,701 )
$ (2,976 )
Money market and savings
3,337
(5,864 )
(2,527 )
1,462
(2,011 )
(549 )
Time deposits
(164 )
(2,184 )
(2,348 )
(375 )
Total deposit interest expense
3,910
(8,323 )
(4,413 )
4,571
(8,087 )
(3,516 )
Other borrowings
(28 )
(86 )
(114 )
(450 )
(423 )
Total interest expense
3,882
(8,409 )
(4,527 )
4,598
(8,537 )
(3,939 )
Net interest income
$ 18,347
$ 18,981
$ 37,328
$ 28,164
$ (14,094 )
$ 14,070
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 was the result of an increase in average interest-earning balances, primarily loans receivable during 2020, offset by a decrease in the average yield on interest-earning assets. 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. Origination fees paid by the SBA on PPP loans 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, 2021 decreased $4.5 million, or 20%, to $18.6 million from $23.1 million for the twelve months ended December 31, 2020. Interest expense on deposits decreased by $4.4 million, or 19%, for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 due to lower interest rates, which was partially offset by an increase in deposit balances during 2021. Interest expense on other borrowings decreased by $114,000 for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 due to a 10 basis point decrease in the average rate on other borrowings and an $8.1 million decrease in the average balance.
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 2.52% during the twelve months ended December 31, 2021 versus 2.26% during the twelve months ended December 31, 2020. 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, 2021 and 2020, the fully tax-equivalent net interest margin was 2.69% and 2.51%, respectively. The improvement in the net interest margin was primarily the result of the increase in interest income and a decline in the cost of funds.
Provision for Loan Losses
We recorded a provision for loan losses of $5.8 million, an increase of $1.6 million, for the twelve months ended December 31, 2021 compared to a $4.2 million provision for the twelve months ended December 31, 2020. The provision recorded for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment, the nature of and concentration in certain credit types within the loan portfolio and loan growth for the period.
Non-performing assets as a percentage of total assets declined to 0.24% as of December 31, 2021 compared to 0.28% as of December 31, 2020. This is the seventh consecutive year that this ratio has declined. Net (recoveries) charge-offs as a percentage of average loans also declined during 2021.
Non-Interest Income
Total non-interest income for the twelve months ended December 31, 2021 decreased by $3.5 million, or 10%, compared to the twelve months ended December 31, 2020. Mortgage banking income totaled $12.0 million for the twelve months ended December 31, 2021, a decrease of $5.6 million, compared to $17.6 million for the twelve months ended 2020. A decrease in the volume of residential mortgage loans originated, which was primarily due to higher market interest rates, which led to a decline in refinancing activity, which drove the decrease in mortgage banking income. We recognized gains of $2,000 on the sale or call of securities during the twelve months ended December 31, 2021, a decrease of $2.8 million, compared to gains of $2.8 million on the sales or calls of securities for the twelve months ended December 31, 2020. For the twelve months ended December 31, 2021, service fees on deposit accounts totaled $14.0 million, which represents an increase of $2.9 million compared to the twelve months ended December 31, 2020. This increase was driven by growth in customer deposit accounts and transaction volume as we continue with our growth and expansion strategy. Gains on the sale of SBA loans totaled $3.2 million for the twelve months ended December 31, 2021, an increase of $1.5 million, compared to $1.7 million for the twelve months ended December 31, 2020. Loan and servicing fees totaled $3.0 million for the twelve months ended December 31, 2021, which represents an increase of $39,000 compared to the twelve months ended December 31, 2020.
Non-Interest Expenses
Non-interest expenses increased by $5.1 million, or 4%, for the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020. 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, 2021 increased by $3.0 million, or 5%, compared to the twelve months ended December 31, 2020. The increase was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores. There were 32 stores open as of December 31, 2021 compared to 31 stores open at December 31, 2020.
Occupancy expense, including depreciation and amortization expense, increased by $1.3 million, or 6%, for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020, also as a result of our continuing growth and expansion strategy.
Other real estate owned expenses totaled $844,000 during the twelve months ended December 31, 2021, an increase of $385,000, when compared to the twelve months ended December 31, 2020. This increase was a result of higher costs to carry foreclosed assets during the twelve months ended December 31, 2020.
No goodwill impairment was booked during the twelve months ended December 31, 2021. Goodwill impairment totaled $5.0 million during the twelve months ended December 31, 2020 related to the purchase of Oak Mortgage Company in 2016. 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.
All other non-interest expenses for the twelve months ended December 31, 2021 increased $5.4 million compared to the twelve months ended December 31, 2020. Increases in expenses related to data processing, professional fees, regulatory assessments and costs, other taxes, and legal were mainly associated with our growth strategy.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of non-interest expenses to average assets. For purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the twelve months ended December 31, 2021, the ratio was 2.41% compared to 2.97% for the twelve months ended December 31, 2020, respectively. The decrease in this ratio was mainly due to the increase in average assets and the goodwill impairment charge recognized in 2020, which did not recur in 2021.
Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio was 76% for the twelve months ended December 31, 2021, compared to 92% for the twelve months ended December 31, 2020. The decrease for the twelve months ended December 31, 2021 versus the twelve months ended December 31, 2020 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 $8.5 million for the twelve months ended December 31, 2021 compared to a provision for income taxes of $1.4 million for the twelve months ended December 31, 2020. The effective tax rates for both the twelve-month period ended December 31, 2021 and 2020 was 25% and 22%.
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 four-year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets has occurred over the last several years and is expected to continue. The Company has added fourteen store locations in the past five years and since the inception of the growth and expansion strategy in 2014, almost every new store location has met or exceeded growth 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. As of December 31, 2021, the Company has no federal NOLs to carry forward, which would have potentially been at risk of expiring in the future.
Conversely, 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 and have a negative impact on asset quality.
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, 2021 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, 2021.
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 $3.5 million and $923,000 were declared and paid on preferred stock during the twelve months ended December 31, 2021 and 2020.
Net Income and Net Income per Common Share
The net income available to shareholders for the twelve months ended December 31, 2021 was $21.7 million, compared to net income of $4.1 million for the twelve months ended December 31, 2020. For the twelve months ended December 31, 2021 and 2020, basic net income per common share was $0.37 and $0.07, respectively, and diluted net income per common share was $0.33 and $0.07, respectively.
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, 2021 was 0.50% compared to 0.13%, for the twelve months ended December 31, 2020. 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 net income by average stockholders’ equity. The ROE for the twelve months ended December 31, 2021 was 7.92%, compared to 1.86% for the twelve months ended December 31, 2020.
Results of Operations
For the year ended December 31, 2020 as compared to the year ended December 31, 2019
We reported net income of $5.1 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 and 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. 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, offset by a decrease in the rate of average interest-earning assets. 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 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 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 and higher salaries, employee benefits, occupancy, and equipment expenses associated with the addition of new stores related to our expansion strategy.
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.
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis 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 was the result of an increase in average interest-earning balances, primarily loans receivable during 2020, offset by a decrease in the average yield on interest-earning assets. 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. Origination fees paid by the SBA on PPP loans 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.
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. 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 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 recorded for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 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. There were 31 stores open as of December 31, 2020 compared to 29 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, which was related to the acquisition of Oak Mortgage Company in 2016, 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.
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.
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, 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. 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
The ROA for the twelve months ended December 31, 2020 and 2019 was 0.13% and (0.12%), respectively. Return on average 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.
Financial Condition
December 31, 2021 compared to December 31, 2020
Total assets increased by $560.9 million, or 11%, to $5.6 billion at December 31, 2021, compared to $5.1 billion at December 31, 2020. 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, which resulted in a significant increase in new business relationships and account openings in 2021. 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 decreased by $656.4 million to $118.9 million at December 31, 2021, from $775.3 million at December 31, 2020. The decrease as of December 31, 2021 was caused by repayment of short-term borrowings in the amount of $633.9 million related to the PPP loan program in 2020.
Loans Held for Sale
Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration (“SBA”) and residential mortgage loans, both of which we intend to sell in the future. Total SBA loans held for sale were $5.2 million and $3.0 million at both December 31, 2021 and December 31, 2020. Residential mortgage loans held for sale amounted to $8.5 million at December 31, 2021, a decrease of $41.8 million, compared to $50.4 million at December 31, 2020. A decrease in the volume of residential mortgage loans during 2021 drove the decrease in residential mortgage loans held for sale as of December 31, 2021. Loans held for sale, as a percentage of our total assets, were less than 1% at December 31, 2021.
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, 2021 and December 31, 2020. 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, 2021 and December 31, 2020, the investment in FHLB stock totaled $3.4 million and $2.9 million, respectively. The $471,000 increase was due to a higher required investment in FHLB stock during 2021. At both December 31, 2021 and December 31, 2020, ACBB stock totaled $143,000.
Premises and Equipment
The balance of premises and equipment increased to $127.4 million at December 31, 2021 from $123.2 million at December 31, 2020. The increase was primarily due to premises and equipment expenditures of $12.7 million reduced by depreciation and amortization expense of $8.4 million during 2021. The expenditures made during 2021 primarily relate to the construction of new store locations in addition to normal investments in hardware, software and other operating equipment. A new store was opened in Deptford, New Jersey bringing the total store count to thirty-two at December 31, 2021.
Other Real Estate Owned
The balance of other real estate owned decreased to $360,000 at December 31, 2021 from $1.2 million at December 31, 2020. The decrease was primarily the result of valuation adjustments and dispositions totaling $1.2 million offset by additions of $360,000 during 2021.
Operating Leases - Right of Use Asset
Under ASC 842, 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, 2021 and 2020, the balance of the operating lease right-of-use asset was $75.6 million and $72.9 million, respectively.
Goodwill
In connection with the review of our financial condition in light of the COVID-19 pandemic, we evaluated our assets, including goodwill and other intangibles for potential impairment on an interim basis at the end of each quarter during 2020. Goodwill was written off as a result of an interim test completed as of September 30, 2020. This was a complete write-off of all goodwill on the balance sheet. There was no goodwill on the balance sheet at December 31, 2021 and 2020.
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 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 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 $1.1 billion at December 31, 2021 as compared to $529 million at December 31, 2020. The $547 million increase was primarily due to the purchase of securities totaling $706 million partially offset by the paydowns, maturities, and calls of securities totaling $142 million during 2021. At December 31, 2021, the portfolio had a net unrealized loss of $12 million compared to a net unrealized gain of $1 million at December 31, 2020. The $12.9 million decrease in the unrealized gain/(loss) of the investment portfolio was driven by an increase in market interest rates, which drove a decrease in value of the securities held in our portfolio during 2021.
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 SBA bonds, CMOs and MBSs. The fair value of securities held-to-maturity totaled $1.6 billion and $837.0 million at December 31, 2021 and December 31, 2020, respectively. The $810.4 million increase was primarily due to the purchase of securities held to maturity totaling $1.1 billion partially offset by the paydowns, maturities, and calls of securities held in the portfolio totaling $269.8 million during the year ended December 31, 2021.
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 at December 31, 2021 totaled $9.2 million compared to $9.0 million at December 31, 2020.
A summary of investment securities available for sale at fair value, investment securities held-to-maturity, and equity securities at December 31, 2021, 2020, and 2019 is as follows:
At December 31,
(dollars in thousands)
Investment securities available for sale
U.S. Government agencies
$ 25,671
$ 32,312
$ 38,743
Collateralized mortgage obligations
375,570
218,232
329,492
Agency mortgage-backed securities
446,740
149,325
98,953
Municipal securities
6,596
8,201
4,064
Corporate bonds
232,395
119,118
69,499
Amortized cost of investment securities available for sale
$ 1,086,972
$ 527,188
$ 540,751
Fair value of investment securities available for sale
$ 1,075,366
$ 528,508
$ 539,042
Investment securities held to maturity
U.S. Government agencies
$ 66,438
$ 82,093
$ 94,913
Collateralized mortgage obligations
400,424
363,363
416,177
Agency mortgage-backed securities
1,193,430
369,480
133,752
Amortized cost of investment securities held to maturity
$ 1,660,292
$ 814,936
$ 644,842
Fair value of investment securities held to maturity
$ 1,647,360
$ 836,972
$ 653,109
Equity Securities
$ 9,173
$ 9,039
$ -
The total amortized cost of the investment securities portfolio has grown to $2.7 billion at December 31, 2021 compared to $1.3 billion at December 31, 2020, and $1.2 billion at December 31, 2019. Investment securities represented 49% of total assets at December 31, 2021 and 27% of total assets at December 31, 2020. We evaluate our investment securities portfolio 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, 2021, 95% 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.
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 losses in the investment securities portfolio were $24.5 million at December 31, 2021 compared to net unrealized gains of $23.4 million at December 31, 2020. The decrease was a result of an increase in market interest rates in 2021. The available for sale portfolio had unrealized losses of $11.6 million at December 31, 2021 and unrealized gains of $1.3 million at December 31, 2020. The held to maturity portfolio had unrealized losses of $12.9 million at December 31, 2021 and unrealized gains of $22.0 million at December 31, 2020.
We held four U.S. Government agency securities, 27 collateralized mortgage obligations and sixty-one agency mortgage-backed securities that were in an unrealized loss position at December 31, 2021. Principal and interest payments of the underlying collateral for each of these securities carry minimal credit risk. Management found no evidence of other than temporary impairment (“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, 2021.
At December 31, 2021, the investment portfolio included eight municipal securities with a total market value of $6.9 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 New Jersey where six municipal securities had a market value of $6.2 million. As of December 31, 2021, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.
At December 31, 2021, the investment portfolio included fifteen 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. Seven of the fifteen corporate bonds are issued by four of the largest U.S. financial institutions. Each financial institution is well capitalized.
There were no proceeds from the sale of securities during the twelve-month period ended December 31, 2021. A gain of $2,000 was realized on the call of securities. The tax provision applicable to the gain of $2,000 for the year ended December 31, 2021 amounted to $1,000.
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.
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, 2021. 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, 2021
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
$ -
-
$ 24,928
0.93 %
$ -
-
$ -
-
$ -
-
$ 24,928
$ 25,671
0.93 %
Collateralized mortgage obligations
-
-
-
-
-
-
-
-
371,549
1.66 %
371,549
375,570
1.66 %
Agency mortgage-backed securities
-
-
-
-
-
-
-
-
441,483
1.68 %
441,483
446,740
1.68 %
Municipal securities
4.14 %
4.10 %
5,857
2.97 %
-
-
-
-
6,940
6,596
3.16 %
Corporate bonds
33,420
2.59 %
76,733
2.89 %
26,242
2.22 %
94,071
2.08 %
-
-
230,466
232,395
2.44 %
Total AFS securities
$ 34,157
2.63 %
$ 102,007
2.42 %
$ 32,099
2.36 %
$ 94,071
2.08 %
$ 813,032
1.67 %
$ 1,075,366
$ 1,086,972
1.73 %
Held to Maturity
U.S. Government Agencies
$
2.58 %
$ 67,983
2.47 %
$ -
-
$ -
-
$ -
-
$ 67,987
$ 66,438
2.47 %
Collateralized mortgage obligations
-
-
-
-
-
-
-
-
396,228
1.77 %
396,228
400,424
1.77 %
Agency mortgage-backed securities
-
-
-
-
-
-
-
-
1,183,145
1.78 %
1,183,145
1,193,430
1.78 %
Total HTM securities
$
2.58 %
$ 67,983
2.47 %
$ -
-
$ -
-
$ 1,579,373
1.78 %
$ 1,647,360
$ 1,660,292
1.81 %
Equity Securities
$ -
-
$ -
-
$ -
-
$ -
-
$ 9,173
-
$ 9,173
$ -
-
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, 2021. This security is a corporate bond.
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, 2021, 2020, and 2019:
(dollars in thousands)
Level 3 Investments Only
Corporate
Bonds
Corporate
Bonds
Corporate
Bonds
Balance, January 1st
$ 2,631
$ 2,820
$ 3,069
Unrealized gains (losses)
(6 )
(189 )
(249 )
Proceeds from sales
-
-
-
Realized losses
-
-
-
Balance, December 31st
$ 2,625
$ 2,631
$ 2,820
The 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
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, PPP loans and others. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans typically range between $250,000 and $5 million, but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $51.2 million at December 31, 2021. 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, 2021. A $34 million threshold, which amounts to approximately 10% of total regulatory capital, reflects an additional internal monitoring guideline. We had one loan relationship in excess of $34 million at December 31, 2021. The internal monitoring guideline in place as of December 31, 2020 was $30 million. We had no loan relationships in excess of that guideline at December 31, 2020.
The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and the surrounding suburbs, Southern New Jersey, and New York City. 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, 2021, we had loan concentrations exceeding 10% of total loans for credits extended to lessors of nonresidential real estate in the aggregate amount of $509.2 million, which represented 20% 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, 2021, we had no foreign loans outstanding.
Loans decreased $143.9 million, or 5%, to $2.5 billion at December 31, 2021, versus $2.6 billion at December 31, 2020. Loans originated through the PPP loan program continue to be repaid or forgiven by the SBA, which offsets the growth experienced in other categories in the portfolio. Excluding the impact of the PPP loans, which decreased by $517.6 million in 2021, gross loans increased by $374 million, or 18%, to $2.4 billion at December 31, 2021 compared to $2.0 billion at December 31, 2020. We continue to see results from the continued success with our relationship banking model which has driven a steady flow in quality loan demand. We experienced strongest growth in the commercial and industrial, construction and land development, owner-occupied real estate, commercial real estate and residential mortgage categories during 2021.
The following table sets forth gross loans by major categories for the periods indicated:
At December 31,
(dollars in thousands)
Commercial real estate
$ 780,311
$ 705,748
$ 613,631
$ 515,738
$ 433,304
Construction and land development
216,008
142,821
121,395
121,042
104,617
Commercial and industrial
252,376
200,188
223,906
200,423
173,343
Owner occupied real estate
526,570
475,206
424,400
367,895
309,838
Consumer and other
83,487
102,368
101,320
91,152
76,183
Residential mortgage
536,332
395,174
263,444
140,364
64,764
Paycheck protection program
119,039
636,637
-
-
-
Total loans
$ 2,514,123
$ 2,658,142
$ 1,748,096
$ 1,436,614
$ 1,162,049
Deferred loan costs (fees)
(6,758 )
(12,800 )
(16 )
Total loans, net of deferred loan fees
$ 2,507,365
$ 2,645,342
$ 1,748,195
$ 1,436,598
$ 1,162,278
Total loans, net of deferred loan costs, decreased $138 million, or 5%, to $2.5 billion at December 31, 2021, versus $2.6 billion at December 31, 2020. This decrease was due to a $517.6 million reduction in PPP loans. Excluding the impact of the PPP loan program, loans grew $374 million, or 18%, 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
$ 72,142
$ 2,649
$ 10,950
$ 35,433
$ 1,458
$ -
$ 10,006
$ 132,638
1-5 years
426,409
91,595
93,131
236,098
1,503
109,033
957,915
5-15 years
239,941
39,771
28,174
142,022
9,492
29,804
-
489,204
15 years or more
1,981
12,304
29,978
-
504,335
-
548,886
Total fixed rate
$ 740,473
$ 134,303
$ 144,559
$ 443,531
$ 12,453
$ 534,285
$ 119,039
$ 2,128,643
Adjustable rate:
1 year or less
$ 21,099
$ 33,488
$ 51,709
$ 9,568
$ 2,899
$ -
$ -
$ 118,763
1-5 years
15,480
47,372
48,821
11,332
-
-
123,891
5-15 years
3,149
6,770
3,472
18,643
-
-
32,825
15 years or more
58,667
48,606
2,047
-
110,001
Total adjustable rate
39,838
81,705
107,817
83,039
71,034
2,047
-
385,480
Total
$ 780,311
$ 216,008
$ 252,376
$ 526,570
$ 83,487
$ 536,332
$ 119,039
$ 2,514,123
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, 2021, 85% of total loans were fixed rate compared to 89% at December 31, 2020.
Loss Mitigation and Loan Portfolio Analysis
We took a proactive approach to analyze and prepare for the potential challenges to be faced as the effects of the COVID-19 pandemic began to impact our customers. A detailed analysis of loan concentrations and segments that present the areas of highest risk was prepared and was closely monitored. Our commercial lending team initiated contact with a majority of our loan customers to discuss the impact that the pandemic crisis had on their businesses and the expected ramifications that could be felt in the future. We executed loan modifications and initiated payment deferrals for all customers that had an immediate need for assistance.
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 declared a termination of the COVID-19 national emergency were 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. As of December 31, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the height of the COVID pandemic have resumed contractual payments. At December 31, 2020, 21 customers with outstanding balances of $16 million, were deferring loan payments. At December 31, 2020, deferrals were comprised of the following categories: 90 day deferrals amounted to eight customers with outstanding balances of $3 million and second deferrals amounted to thirteen customers with outstanding balances of $13 million.
As a result of the changes in economic conditions driven by the COVID pandemic, we increased the qualitative factors for certain components of our allowance for loan loss calculation. We also took into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, could have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, relatively loan-to-value ratios on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP, successfully mitigated potential losses. While economic conditions have improved, we will continue to closely monitor key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic may still impact our customer base if new variants of the virus arise. The provision for loan losses and charge-offs may be impacted in future periods.
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)
Loans accruing, but past due 90 days or more
$
$
$ -
$ -
$ -
Non-accrual loans:
Commercial real estate
4,493
4,421
4,159
4,631
8,963
Construction and land development
-
-
-
-
-
Commercial and industrial
2,558
2,963
3,087
3,661
2,895
Owner occupied real estate
3,714
2,859
3,337
1,188
2,136
Consumer and other
1,075
1,302
1,062
Residential mortgage
-
-
Paycheck Protection Program
-
-
-
-
-
Total non-accrual loans
12,541
12,246
12,413
10,341
14,845
Total non-performing loans
12,864
12,858
12,413
10,341
14,845
Other real estate owned
1,188
1,730
6,223
6,966
Total non-performing assets
$ 13,224
$ 14,046
$ 14,143
$ 16,564
$ 21,811
Non-performing loans as a percentage of total loans, net of unearned income
0.51 %
0.49 %
0.71 %
0.72 %
1.28 %
Non-performing assets as a percentage of total assets
0.24 %
0.28 %
0.42 %
0.60 %
0.94 %
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, 2021, 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 $822 thousand, or 6%, to $13.2 million at December 31, 2021, compared to $14.0 million at December 31, 2020. Non-performing loans of $12.9 million at December 31,2021 were equivalent to non-performing loans at December 31, 2020. The reduction in other real estate owned was the result of the disposition of four OREO properties for a total of $1.2 million offset by the addition of two properties for a total of $360,000.
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)
Interest income that would have been recorded had the loans been in accordance with their original terms
$
$
$
$
$
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 entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio. 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 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.
A detailed analysis of our allowance for loan losses for the years indicated is as follows:
For the Year Ended December 31,
(dollars in thousands)
Balance at beginning of period
$ 12,975
$ 9,266
$ 8,615
$ 8,599
$ 9,155
Charge-offs:
Commercial real estate
-
-
1,603
-
Construction and land development
-
-
-
-
-
Commercial and industrial
1,356
1,366
Owner occupied real estate
-
-
Consumer and other
Residential mortgage
-
-
-
-
Paycheck Protection Program
-
-
-
-
-
Total charge-offs
1,482
2,438
1,576
Recoveries:
Commercial real estate
-
-
Construction and land development
-
-
-
-
Commercial and industrial
Owner occupied real estate
-
Consumer and other
Residential mortgage
-
-
-
-
-
Paycheck Protection Program
-
-
-
-
-
Total recoveries
Net (recoveries) charge-offs
(239 )
1,254
2,284
1,456
Provision for loan losses
5,750
4,200
1,905
2,300
Balance at end of period
$ 18,964
$ 12,975
$ 9,266
$ 8,615
$ 8,599
Average loans outstanding(1)
$ 2,577,498
$ 2,359,169
$ 1,544,904
$ 1,340,117
$ 1,090,851
As a percent of average loans:(1)
Net charge-offs
(0.01% )
0.02 %
0.08 %
0.17 %
0.13 %
Provision for loan losses
0.22 %
0.18 %
0.12 %
0.17 %
0.08 %
Allowance for loan losses
0.74 %
0.55 %
0.60 %
0.64 %
0.79 %
Allowance for loan losses to:
Total loans, net of unearned income
0.79 %
0.49 %
0.53 %
0.60 %
0.74 %
Total non-performing loans
147.42 %
100.91 %
74.65 %
83.31 %
57.93 %
(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 of $5.8 million in 2021 compared to a $4.2 million provision in 2020. The increase 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 0.24% as of December 31, 2021 compared to 0.28% as of December 31, 2020. Net (recoveries) charge-offs as a percentage of average loans outstanding declined to (0.01%) for the year ended December 31, 2021 from 0.02% for the year ended December 31, 2020.
The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 147% at December 31, 2021 as compared to 101% at December 31, 2020 and 75% at December 31, 2019. 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, 2021.
Management makes at least a quarterly determination as to the adequacy of the allowance for loan losses. 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 $403,000 at December 31, 2021 compared to $1.1 million at December 31, 2020. Our charge-off policy is reviewed on an annual basis and updated as necessary. During the twelve months ended December 31, 2021, 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, 2021. 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.
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,
(dollars in thousands)
Amount
% of Loans
Amount
% of Loans
Amount
% of Loans
Amount
% of Loans
Amount
% of Loans
Commercial real estate
$ 5,802
31.0 %
$ 4,394
26.6 %
$ 3,043
35.1 %
$ 2,462
35.9 %
$ 3,774
37.3 %
Construction and land development
1,544
8.6 %
5.4 %
6.9 %
8.4 %
9.0 %
Commercial and industrial
2,856
10.1 %
1,367
7.5 %
12.8 %
1,754
14.0 %
1,317
14.9 %
Owner occupied real estate
3,158
21.0 %
2,374
17.9 %
2,292
24.3 %
2,033
25.6 %
1,737
26.7 %
Consumer and other
3.3 %
3.9 %
5.8 %
6.3 %
6.5 %
Residential mortgage
4,922
21.3 %
3,025
14.9 %
1,705
15.1 %
9.8 %
5.6 %
Paycheck Protection Program
-
4.7 %
-
24.0 %
-
- %
-
- %
-
- %
Unallocated
-
-
-
-
-
Total allowance for loan losses
$ 18,964
%
$ 12,975
%
$ 9,266
%
$ 8,615
%
$ 8,599
%
We 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. Our portfolio of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. For PPP loans, the SBA 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, 2021, management identified no troubled debt restructurings in the loan portfolio. One troubled debt restructuring in the amount of $4.5 million was identified as of December 31, 2020.
The following table presents our impaired loans at December 31, 2021, 2020, and 2019:
(dollars in thousands)
December 31,
Impaired loans without a valuation allowance
$ 4,415
$ 12,842
$ 12,862
Impaired loans with a valuation allowance
14,005
5,127
6,020
Total impaired loans
$ 18,420
$ 17,969
$ 18,882
Valuation allowance related to impaired loans
$ 2,743
$
$
Total nonaccrual loans
12,541
12,246
12,413
Total nonaccrual loans as a percentage of total loans
0.49 %
0.46 %
0.71 %
Allowance for credit losses as a percentage of nonaccrual loans
151.22 %
105.95 %
74.65 %
Total loans past-due ninety days or more and still accruing
-
For the years ended December 31, 2021, 2020, and 2019, the average recorded investment in impaired loans was approximately $15.1 million, $19.6 million, and $18.1 million, respectively. Republic earned $113,000, $478,000, and $386,000 of interest income on impaired loans (internally classified accruing loans) in 2021, 2020, and 2019, 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 increased by $451,000, or 3%, during the year ended December 31, 2021. The valuation allowance related to impaired loans increased to $2.7 million at December 31, 2021 compared to $591,000 at December 31, 2020. At December 31, 2021 and 2020, internally classified accruing loans totaled approximately $6.1 million and $1.8 million, respectively.
The following table presents our 30 to 89 days past due loans at December 31, 2021, 2020, and 2019:
(dollars in thousands)
December 31,
30 to 59 days past due
$ 4,851
$ 2,321
$
60 to 89 days past due
4,706
1,823
Total loans 30 to 89 days past due
$ 9,557
$ 3,259
$ 1,935
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. Total loans 30 to 89 days past due increased to $9.6 million at December 31, 2021 compared to $3.3 million at December 31, 2020 due primarily to the addition of one loan in the fourth quarter of 2021 totaling $4.1 million. PPP loans 30 to 89 days past due totaled $2.1 million at December 31, 2021.
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 $1.2 billion to $5.2 billion at December 31, 2021, from $4.0 billion at December 31, 2020. This increase can be attributed to our strategy to expand the reach of our banking model which focuses on enhancing the total customer experience including in-store, on-line and mobile banking options. High levels of customer service and convenience across all delivery channels drives the gathering of low-cost, core deposits. We recognized strong growth in demand deposit balances, including an increase in non-interest bearing demand deposits of 39%, year over year as a result of the successful execution of our strategy. The increase in demand deposits over the last twelve months is also a result of our participation in the PPP loan program. Many of the PPP loans originated were for small businesses that were previously not customers of Republic Bank. Many of these small businesses have chosen to move their primary banking relationship to Republic as a result of the outstanding level of service and cooperation they experienced during the PPP loan process. Commercial deposits were 44% of total deposits as of December 31, 2021.
Total deposits by account type at December 31, 2021, 2020, and 2019 are as follows:
(dollars in thousands)
At December 31,
Demand deposits, non-interest bearing
$ 1,404,360
$ 1,006,876
$ 661,431
Demand deposits, interest bearing
2,283,779
1,776,995
1,352,360
Money market & savings deposits
1,305,096
1,043,519
761,793
Time deposits
197,945
186,361
223,579
Total deposits
$ 5,191,180
$ 4,013,751
$ 2,999,163
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,
(dollars in thousands)
Average
Balance
Rate
Average
Balance
Rate
Average
Balance
Rate
Interest bearing demand deposits
$ 2,025,420
0.65 %
$ 1,509,826
0.84 %
$ 1,184,530
1.32 %
Money market & savings deposits
1,162,032
0.32 %
916,607
0.68 %
705,445
0.98 %
Time deposits
190,960
0.79 %
211,636
1.82 %
190,567
2.02 %
Total interest bearing deposits
$ 3,378,412
0.54 %
$ 2,638,069
0.86 %
$ 2,080,542
1.26 %
Time deposits in excess of the FDIC insurance limit, by maturity, as of December 31, 2021 are as follows:
(dollars in thousands)
Maturity:
3 months or less
$ 9,758
3 to 6 months
27,828
6 to 12 months
10,342
Over 12 months
7,229
Total
$ 55,157
Other Borrowings
As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowings to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. The Company did not pledge any PPP loans or borrow any funds as part of the PPPLF program at December 31, 2021 since the PPPLF program was discontinued on July 30, 2021. At December 31, 2020, we borrowed $633.9 million through the Paycheck Protection Program Liquidity Facility 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.
Operating Lease Liability Obligation
Under ASC 842, 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, 2021 and 2020, the balance of the operating lease liability obligation was $81.8 million and $77.6 million, respectively.
Shareholders’ Equity
Total shareholders’ equity increased $16.1 million to $324.2 million at December 31, 2021 compared to $308.1 million at December 31, 2020. The increase was primarily due to earnings of $21.7 million partially offset by a decrease in accumulated other comprehensive income of $7.8 million associated with a decrease in the market value of the investment securities portfolio. The shift in market value of the securities portfolio was primarily driven by a increase in market interest rates, which decreased the market value of the securities held in our portfolio.
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 $549.8 million and $428.9 million and standby letters of credit of approximately $18.0 million and $16.6 million at December 31, 2021 and 2020, respectively. Commitments often expire without being drawn upon. Of the $549.8 million of commitments to extend credit at December 31, 2021, 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, 2021:
(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
$ 115,883
$ 8,134
$ 15,062
$ 13,820
$ 78,867
Branch construction commitments
7,606
7,606
-
-
-
Remaining contractual maturities of time deposits
197,945
166,031
27,273
4,641
-
Subordinated debt
11,341
-
-
11,324
Director and Officer retirement plan obligations
1,072
Loan commitments
549,765
228,262
95,111
99,330
127,062
Standby letters of credit
17,975
16,374
1,545
-
Total
$ 901,587
$ 427,171
$ 139,118
$ 117,963
$ 217,335
As of December 31, 2021, 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 seventeen equipment leases expiring on various dates through August 31, 2059. The leases are accounted for as operating leases. The minimum rental payments required under these leases are $115.9 million through the year 2059.
We have retirement plan agreements with certain directors and officers. At December 31, 2021, 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, 2021. 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, 2021
(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
$ 276,925
$ 116,927
$ 169,875
$ 294,886
$ 293,449
$ 461,205
$ 1,242,319
$ 2,855,586
$ 2,831,048
Loans receivable
490,543
109,678
198,110
363,088
327,698
517,135
482,149
2,488,401
2,475,944
Total
$ 767,468
$ 226,605
$ 367,985
$ 657,974
$ 621,147
$ 978,340
$ 1,724,468
$ 5,343,987
$ 5,306,992
Cumulative totals
$ 767,468
$ 994,073
$ 1,362,058
$ 2,020,032
$ 2,641,179
$ 3,619,519
$ 5,343,987
Interest sensitive liabilities:
Demand interest bearing(1)
$ 2,283,779
$ -
$ -
$ -
$ -
$ -
-
$ 2,283,779
$ 2,283,779
Savings accounts(1)
529,155
-
-
-
-
-
-
529,155
529,155
Money market accounts(1)
775,941
-
-
-
-
-
-
775,941
775,941
Time deposits
31,987
66,461
67,582
24,591
2,682
4,642
-
197,945
197,764
Subordinated debt
11,278
-
-
-
-
-
-
11,278
8,644
Total
$ 3,632,140
$ 66,461
$ 67,582
$ 24,591
$ 2,682
$ 4,642
-
$ 3,798,098
$ 3,795,283
Cumulative totals
$ 3,632,140
$ 3,698,601
$ 3,766,183
$ 3,790,774
$ 3,793,456
$ 3,798,098
3,798,098
Interest rate sensitivity GAP
$ (2,864,672 )
$ 160,144
$ 300,403
$ 633,383
$ 618,465
$ 973,698
1,724,468
Cumulative GAP
$ (2,864,672 )
$ (2,704,528 )
$ (2,404,125 )
$ (1,770,742 )
$ (1,152,277 )
$ (178,579 )
1,585,889
Interest sensitive assets/Interest sensitive liabilities
21.13 %
26.88 %
36.17 %
53.29 %
69.62 %
95.30 %
140,70 %
Cumulative GAP/ Total earning assets
(53.61 )%
(50.61 )%
(44.99 )%
(33.14 )%
(21.56 )%
(3.34% )
28.93 %
(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 subjective and could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based.
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, 2021 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated (dollars in thousands):
Change in
NPV as a % of Portfolio
Interest Rates
Net Portfolio Value
Value of Assets
in Basis Points
$
%
NPV
Change
(Rate Shock)
Amount
Change
Change
Ratio
(in Basis Points)
+400
$ 613,466
$ (247,864 )
(28.78 )%
13.24 %
(171 )
+300
729,994
(131,336 )
(15.25 )%
14.95 %
(105 )
+200
821,199
(40,131 )
(4.66 )%
16.00 %
(25 )
+100
873,457
12,127
1.41 %
16.25 %
Static
861,330
-
0.00 %
15.40 %
-
726,337
(134,993 )
(15.67 )%
12.63 %
(277 )
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, 2021 and December 31, 2020:
(dollars in thousands)
December 31, 2021
Change in Interest Rates
in Basis Points(1)
Net Interest
Income
$
Change
%
Change
+400
$ 132,228
(1,165 )
(0.9 )%
+300
133,136
(257 )
(0.2 )%
+200
133,693
0.2 %
+100
134,169
0.6 %
Static
133,393
-
0.0 %
120,133
(13,260 )
(9.9 )%
(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 %
95,041
(9,133 )
(8.76 )%
(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 subjective. 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 two outstanding issues of 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 rate. The Company may call the securities on any interest payment date after five years without a prepayment penalty.
On June 28, 2007, Republic Capital Trust III (“Trust III”) issued $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 rate. The Company has the ability to call the securities on any interest payment date without a prepayment penalty.
Deferred issuance costs included in subordinated debt were $63,000 and $70,000 at December 31, 2021 and December 31, 2020, respectively. Amortization of deferred issuance costs was $7,000, $6,000, and $6,000 in each of the years ended December 31, 2021, 2020, and 2019, respectively.
Shareholders’ equity as of December 31, 2021 was $324.2 million compared to $308.1 million as of December 31, 2020. The book value per share of our common stock increased to $4.68 as of December 31, 2021, based upon 58,943,153 shares outstanding, from $4.41 as of December 31, 2020, based upon 58,859,778 shares outstanding at December 31, 2020.
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, 2021 and 2020, 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, 2021 and 2020:
(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, 2021:
Total risk based capital
Republic
$ 347,030
11.43 %
$ 242,787
8.00 %
$ 318,658
10.50 %
$ 303,484
10.00 %
Company
360,175
11.83 %
243,591
8.00 %
319,713
10.50 %
-
- %
Tier one risk based capital
Republic
328,066
10.81 %
182,091
6.00 %
257,962
8.50 %
242,787
8.00 %
Company
341,211
11.21 %
182,693
6.00 %
258,816
8.50 %
-
- %
CET 1 risk based capital
Republic
328,066
10.81 %
136,568
4.50 %
212,439
7.00 %
197,265
6.50 %
Company
281,886
9.26 %
137,020
4.50 %
213,142
7.00 %
-
- %
Tier one leveraged capital
Republic
322,097
5.85 %
224,247
4.00 %
224,247
4.00 %
280,309
5.00 %
Company
324,242
6.08 %
224,656
4.00 %
224,656
4.00 %
-
- %
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 %
-
- %
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 and securities available for sale.
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 our 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 quarterly 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 $118.9 million at December 31, 2021, compared to $775.3 million at December 31, 2020. Loan maturities and repayments are another source of asset liquidity. At December 31, 2021, Republic estimated that more than $115 million of loans would mature or repay in the six-month period ending June 30, 2022. 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, 2021, we had outstanding commitments (including unused lines of credit and letters of credit) of $567.8 million. Certificates of deposit scheduled to mature in one year totaled $166.0 million at December 31, 2021. 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 Federal Home Loan Bank (“FHLB”) of Pittsburgh. We maintain a line of credit with the FHLB of Pittsburgh. Our maximum borrowing capacity with the FHLB was $1.3 billion at December 31, 2021. As of December 31, 2021, we had no outstanding overnight borrowings. At December 31, 2021, FHLB had issued a letter on Republic’s behalf, totaling $100.0 million against our available credit. 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. We also maintain a contingency line of credit of $10.0 million with Atlantic Community Bankers Bank (“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, 2021 and December 31, 2020. 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. The Company did not pledge any PPP loans or borrow any funds as part of the PPPLF program at December 31, 2021 since the PPPLF program was discontinued on July 30, 2021. 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.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
See “Management Discussion and Analysis of Results of Operations and Financial Condition - Interest Rate Risk Management”.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8: Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm begins on page 72:
Crowe LLP (Firm ID 173) Livingston, NJ
BDO USA, LLP (Firm ID 243) Philadelphia, PA
The Consolidated Financial Statements of the Company begin on page 77.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Republic First Bancorp, Inc. (the "Company") as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated October 25, 2022, expressed an adverse opinion.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses -Qualitative risk factors
As more fully described in Note 2 and Note 5 to the consolidated financial statements, the Company estimates and records an allowance for loan losses, which represents management’s estimate of known and inherent losses related to the loan portfolio. The general component of the allowance covers the non-classified loans and is based on historical loss experience adjusted for several qualitative risk factors. The qualitative risk factors include 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. Each qualitative risk 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. The application of the qualitative risk factors to the historical loss rate calculation is subjective.
The principal considerations for our determination that auditing the qualitative risk factors is a critical audit matter is the high degree of subjectivity and judgment involved in the assessment of the risk of loss associated with each risk factor. The primary audit procedures to address the critical audit matter included both control and substantive testing related to the qualitative risk factors. Procedures included, among others:
●
Testing the operating effectiveness of the following controls:
o
Management’s review of the appropriateness and adequacy of the qualitative risk factors
o
Management’s approval of the allowance for loan losses for loans collectively evaluated for impairment, including qualitative risk factors
o
Management’s review of the completeness and accuracy of data inputs used to develop the qualitative risk factors
●
Substantive tests included:
o
Agreeing the data inputs used to develop the qualitative risk factors to internal or external source documentation, including evaluating the relevance and reliability of source documents
o
Evaluating the reasonableness of assumptions and judgments used in developing the qualitative risk factors
o
Evaluating the reasonableness and appropriateness of qualitative risk factors and resulting allowance, including directional consistency
o
Performing analytical procedures for the allowance for loan losses for loans collectively evaluated
Transactions with Affiliates and Related Parties
As more fully described in Note 18 to the consolidated financial statements, the Company routinely enters into transactions with affiliates and related parties in the normal course of business for marketing, graphic design, architectural and project management services, as well as public relations services.
The principal considerations for our determination that auditing transactions with affiliates and related parties is a critical audit matter is the nature and extent of audit procedures related to the identification of affiliates and related parties, the approval and monitoring of transactions by the audit committee and board of directors and the completeness and accuracy of disclosures of transactions with affiliates and related parties due to the material weakness in internal controls over related party transactions. The primary procedures performed to address the critical audit matter included substantive testing of transactions with affiliates and related parties. Procedures included, among others:
●
Substantive tests included:
o
Reading the minutes of meetings of the audit committee and board of directors for evidence of monitoring and approval of transactions with affiliates and related parties
o
Obtaining an understanding of the terms and the business purpose of transactions with affiliates and related parties
o
Evaluating the results from the third-party independent investigation
o
Evaluating the completeness of the identification of affiliates and related parties
o
Evaluating the completeness of transactions with affiliates and related parties
o
Testing the completeness and accuracy of data inputs used in approving, monitoring and reporting such transactions
o
Testing the completeness and accuracy of the disclosures of transactions with affiliates and related parties
Disclosure of the expected transition effect from the adoption of ASC Topic 326 on the allowance for credit losses
As described in Note 1 of the consolidated financial statements, the Company disclosed the expected increase to the allowance for loan losses resulting from the adoption of ASU No. 2016-13, Financial instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The Company adopted the standard on January 1, 2022. Upon adoption, the impact the Company incurred a $2.2 million after-tax reduction to stockholders’ equity balance. The standard replaces the existing Allowance for Loan Loss (incurred loss) guidance with a Current Expected Credit Loss (CECL) model which is based on expected credit losses.
The principal considerations for our determination the disclosure of the expected transition effect from the adoption of ASU No. 2016-13 on the allowance for credit losses is a critical audit matter is the high degree of subjectivity and judgment involved in auditing the expected transition effect for loans receivable due to the subjective nature of estimating the losses under ASU No. 2016-13 for purposes of the disclosure and the material weakness in internal controls related to the implementation of ASU No. 2016-13. Our audit procedures related to the disclosure requirements over the expected transition effect included the following:
●
Substantive tests of the disclosure of the expected transition effect included:
o
Evaluating the reasonableness of the Company’s methodology and certain assumptions and inputs, involved in the adoption of the CECL model
o
Testing the mathematical accuracy of select calculations
We have served as the Company's auditor since 2021.
/s/ Crowe LLP
Livingston, New Jersey
October 25, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on Internal Control over Financial Reporting
We have audited Republic First Bancorp, Inc. (the “Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effects of the material weaknesses discussed in the following paragraph, the Company has not maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.”
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's report:
●
Material weakness in the control environment, which resulted in deficiencies in the communication of certain relevant information to the Board of Directors of the Company, including information related to branch expenditures.
●
Material weakness in controls over the review, analysis and approval of related party transactions.
●
Material weakness in controls over the implementation of FASB’s accounting standard, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of the Company as of December 31, 2021, the related consolidated statements of operation, comprehensive income, changes in shareholders’ equity, and cash flow for the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements") and our report dated October, 25, 2022 expressed an unqualified opinion. We considered the material weaknesses identified above in determining the nature, timing, and extent of audit procedures applied in our audit of the 2021 financial statements, and this report on Internal Control over Financial Reporting does not affect such report on the financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Crowe LLP
Livingston, New Jersey
October 25, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Republic First Bancorp, Inc. (the “Company”) and subsidiaries as of December 31, 2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2020, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor from 2013 to 2021.
Philadelphia, Pennsylvania
March 11, 2021
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2021 and 2020
(Dollars in thousands, except per share data)
December 31,
December 31,
ASSETS
Cash and due from banks
$ 14,072 $ 29,746
Interest bearing deposits with banks
104,812 745,554
Cash and cash equivalents
118,884 775,300
Investment securities available for sale, at fair value
1,075,366 528,508
Investment securities held to maturity, at amortized cost (fair value of $1,647,360 and $836,972, respectively)
1,660,292 814,936
Equity securities
9,173 9,039
Restricted stock, at cost
3,510 3,039
Mortgage loans held for sale, at fair value
8,538 50,387
Other loans held for sale
5,224 2,983
Loans receivable (net of allowance for loan losses of $18,964 and $12,975, respectively)
2,488,401 2,632,367
Premises and equipment, net
127,440 123,170
Other real estate owned, net
360 1,188
Accrued interest receivable
15,073 16,120
Operating lease right-of-use asset
75,627 72,946
Other assets
38,768 35,752
Total Assets
$ 5,626,656 $ 5,065,735
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Demand - non-interest bearing
$ 1,404,360 $ 1,006,876
Demand - interest bearing
2,283,779 1,776,995
Money market and savings
1,305,096 1,043,519
Time deposits
197,945 186,361
Total Deposits
5,191,180 4,013,751
Other borrowings
- 633,866
Accrued interest payable
550 926
Other liabilities
17,636 20,232
Operating lease liability
81,770 77,576
Subordinated debt
11,278 11,271
Total Liabilities
5,302,414 4,757,622
Commitments and contingencies (see note 12)
- -
Shareholders’ Equity
Preferred stock, par value $0.01 per share; liquidation preference $25.00 per share; 10,000,000 shares authorized; share issued 2,000,000 as of December 31, 2021 and December 31, 2020; shares outstanding 2,000,000 as of December 31, 2021 and December 31, 2020
20 20
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,471,998 as of December 31, 2021 and 59,388,623 as of December 31, 2020; shares outstanding 58,943,153 as of December 31, 2021 and 58,859,778 as of December 31, 2020
595 594
Additional paid in capital
324,618 322,321
Retained earnings / accumulated deficit
13,591 (8,085 )
Treasury stock at cost (503,408 shares as of December 31, 2021 and December 31, 2020)
(3,725 ) (3,725 )
Stock held by deferred compensation plan (25,437 shares as of December 31, 2021 and December 31, 2020)
(183 ) (183 )
Accumulated other comprehensive loss
(10,674 ) (2,829 )
Total Shareholders’ Equity
324,242 308,113
Total Liabilities and Shareholders’ Equity
$ 5,626,656 $ 5,065,735
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands, except per share data)
Years Ended December 31,
Interest income
Interest and fees on taxable loans
$ 113,217
$ 91,177
$ 72,808
Interest and fees on tax-exempt loans
1,677
2,115
1,689
Interest and dividends on taxable investment securities
32,131
21,059
27,459
Interest and dividends on tax-exempt investment securities
Interest on federal funds sold and other interest-earning assets
2,571
Total interest income
147,803
114,950
104,864
Interest expense
Demand - interest bearing
13,107
12,645
15,621
Money market and savings
3,720
6,247
6,796
Time deposits
1,511
3,859
3,850
Other borrowings
Total interest expense
18,591
23,118
27,057
Net interest income
129,212
91,832
77,807
Provision for loan losses
5,750
4,200
1,905
Net interest income after provision for loan losses
123,462
87,632
75,902
Non-interest income
Loan and servicing fees
2,959
2,920
1,568
Mortgage banking income
12,014
17,588
10,125
Gain on sales of SBA loans
3,214
1,741
3,187
Service fees on deposit accounts
13,953
11,058
7,541
Gain on sale or call of investment securities
2,760
1,103
Other non-interest income
Total non-interest income
32,745
36,235
23,738
Non-interest expenses
Salaries and employee benefits
59,255
56,277
53,888
Occupancy
15,105
14,033
11,565
Depreciation and amortization
8,416
8,177
6,482
Legal
1,667
1,164
1,335
Other real estate owned
2,109
Appraisal and other loan expenses
2,076
2,368
1,829
Advertising
1,240
1,930
Data processing
7,758
6,471
5,220
Insurance
1,165
1,172
1,070
Professional fees
3,790
3,058
2,589
Debit card processing
3,326
3,587
2,467
Regulatory assessments and costs
3,478
2,549
1,228
Taxes, other
2,716
Goodwill impairment
-
5,011
-
Other operating expenses
12,236
10,941
11,941
Total non-interest expense
122,505
117,423
104,490
Income (loss) before provision (benefit) for income taxes
33,702
6,444
(4,850 )
Provision (benefit) for income taxes
8,526
1,390
(1,350 )
Net income (loss)
$ 25,176
$ 5,054
$ (3,500 )
Preferred stock dividends
3,500
-
Net income (loss) available to common stockholders
$ 21,676
$ 4,131
$ (3,500 )
Net income (loss) per share
Basic earnings per common share
$ 0.37
$ 0.07
$ (0.06 )
Diluted earnings per common share
$ 0.33
$ 0.07
$ (0.06 )
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands)
Years Ended December 31,
Net income (loss)
$ 25,176 $ 5,054 $ (3,500 )
Other comprehensive income (loss), net of tax
Unrealized gain/(loss) on securities (pre-tax $(12,924), $5,789, and $5,120, respectively)
(9,646 ) 4,320 4,284
Reclassification adjustment for securities losses (gains) (pre-tax $(2), $(2,760) and $(1,103), respectively)
(1 ) (2,060 ) (823 )
Net unrealized gains/(losses) on securities
(9,647 ) 2,260 3,461
Amortization of net unrealized holding losses during the period (pre-tax $2,414, $3,018, and $1,658, respectively)
1,802 2,252 1,125
Total other comprehensive (loss) income
(7,845 ) 4,512 4,586
Total comprehensive income
$ 17,331 $ 9,566 $ 1,086
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands)
Cash flows from operating activities
Net income (loss)
$ 25,176
$ 5,054
$ (3,500 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Goodwill impairment
-
5,011
-
Provision for loan losses
5,750
4,200
1,905
Write down of other real estate owned
Depreciation and amortization
8,416
8,177
6,482
Deferred income taxes
(452 )
1,744
Stock based compensation
2,093
1,918
2,632
Gain on sale or call of investment securities
(2 )
(2,760 )
(1,103 )
Fair value adjustments on equity securities
-
-
Amortization of premiums on investment securities
8,494
7,480
3,730
Accretion of discounts on retained SBA loans
(937 )
(880 )
(1,411 )
Fair value adjustments on SBA servicing assets
1,364
Proceeds from sales of SBA loans originated for sale
29,121
25,470
46,951
SBA loans originated for sale
(28,148 )
(23,708 )
(41,364 )
Gains on sales of SBA loans originated for sale
(3,214 )
(1,741 )
(3,187 )
Proceeds from sales of mortgage loans originated for sale
409,224
479,324
335,991
Mortgage loans originated for sale
(363,762 )
(504,488 )
(317,881 )
Fair value adjustment for mortgage loans originated for sale
1,981
(1,915 )
Gains on mortgage loans originated for sale
(11,612 )
(12,981 )
(8,117 )
Amortization of debt issuance costs
Non-cash expense related to leases
1,128
Repayment of operating lease liabilities
(5,586 )
(4,935 )
(3,727 )
Net decrease (increase) in accrued interest receivable and other assets
(7,845 )
(8,464 )
Net increase in accrued interest payable and other liabilities
3,886
12,053
5,414
Net cash provided by (used in) operating activities
82,626 )
(10,729 )
19,333
Cash flows from investing activities
Purchase of investment securities available for sale
(705,751 )
(284,015 )
(338,500 )
Purchase of equity securities
-
(9,039 )
-
Purchase of investment securities held to maturity
(1,117,256 )
(402,554 )
-
Proceeds from the sale of securities available for sale
-
125,222
54,742
Proceeds from the paydown, maturity, or call of securities available for sale
141,894
170,874
69,012
Proceeds from the paydown, maturity, or call of securities held to maturity
269,761
232,238
116,486
Net (purchase) redemption of restricted stock
(471 )
(293 )
3,008
Net decrease (increase) in loans
144,733
(896,991 )
(312,665 )
Net proceeds from sale of other real estate owned
5,072
Premises and equipment expenditures
(12,686 )
(14,391 )
(35,777 )
Net cash used in investing activities
(1,279,310 )
(1,078,205 )
(438,622 )
Cash flows from financing activities
Net proceeds from issuance of preferred stock
-
48,325
-
Net proceeds from exercise of stock options
Net increase in demand, money market and savings deposits
1,165,845
1,051,806
536,974
Net increase (decrease) in time deposits
11,584
(37,218 )
69,322
Repayment of short-term borrowings
-
-
(91,422 )
Net (repayment) increase in other borrowings
(633,866 )
633,866
-
Preferred stock dividends paid
(3,500 )
(923 )
-
Return of short swing profit
-
-
Net cash provided by financing activities
540,268
1,695,915
515,135
Net (decrease) increase in cash and cash equivalents
(656,416 )
606,981
95,846
Cash and cash equivalents, beginning of year
775,300
168,319
72,473
Cash and cash equivalents, end of year
$ 118,884
$ 775,300
$ 168,319
Supplemental disclosures
Interest paid
$ 18,967
$ 23,822
$ 25,985
Income taxes paid
$ 10,540
$ -
$ -
Non-cash transfers from loans receivable to other real estate owned
$
$
$ 1,225
Non-cash transfers from loans held for sale to loans receivable
$ 5,940
$ -
$ -
Lease liabilities arising from obtaining right-of-use assets
$ 9,915
$ 11,194
$ 74,382
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2021, 2020, and 2019
(Dollars in thousands)
Preferred Stock
Common Stock
Additional Paid in Capital
Retained Earnings /
Accumulated Deficit
Treasury Stock
Stock Held by Deferred Compensation Plan
Accumulated Other Comprehensive Loss
Total Shareholders’ Equity
Balance January 1, 2019
$ - $ 593 $ 269,147 $ (8,716 ) $ (3,725 ) $ (183 ) $ (11,927 ) $ 245,189
Net loss
(3,500 ) (3,500 )
Other comprehensive income, net of tax
4,586 4,586
Stock based compensation
2,632 2,632
Options exercised (53,550 shares)
1 260 261
Balance December 31, 2019
- 594 272,039 (12,216 ) (3,725 ) (183 ) (7,341 ) 249,168
Net income
5,054 5,054
Other comprehensive income, net of tax
4,512 4,512
Preferred stock dividends (1)
(923 ) (923 )
Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675
20 48,305 48,325
Stock based compensation
1,918 1,918
Return of short swing profit
18 18
Options exercised (17,000 shares)
41 41
Balance December 31, 2020
20 594 322,321 (8,085 ) (3,725 ) (183 ) (2,829 ) 308,113
Net income
25,176 25,176
Other comprehensive loss, net of tax
(7,845 ) (7,845 )
Preferred stock dividends (2)
(3,500 ) (3,500 )
Stock based compensation
2,093 2,093
Options exercised (83,375 shares)
1 204 205
Balance December 31, 2021
$ 20 $ 595 $ 324,618 $ 13,591 $ (3,725 ) $ (183 ) $ (10,674 ) $ 324,242
(1)
Dividends per share of $0.46 were declared on preferred stock for the twelve months ended December 31, 2020
(2)
Dividends per share of $1.76 were declared on preferred stock for the twelve months ended December 31, 2021
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1.
Nature of Operations
Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state-chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia, Southern New Jersey, and New York City markets through its offices and store locations in Philadelphia, Montgomery, Delaware and Bucks Counties in Pennsylvania, Camden, Burlington, Atlantic and Gloucester Counties in New Jersey, and New York County. In 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, New Jersey. In 2018, Oak Mortgage was merged into Republic and restructured as a division of Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its two separate issuances of trust preferred securities.
The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.
The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.
2.
Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB sets accounting principles generally accepted in the United States of America (“US GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.
The coronavirus (“COVID-19”) outbreak and the public health response to contain it resulted in unprecedented economic and financial market conditions. In response to these conditions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. The Federal Reserve has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.
The economic downturn that began in the U.S. as a result of the government-mandated business closures and stay-at-home orders significantly impacted the labor market, consumer spending, business investment and profitability. As a result, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) in March 2020 to lessen the impact of COVID-19 on consumers and businesses. Among other measures, the CARES Act authorized funding for the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to provide loans to small businesses to keep employees on their payroll and to make other eligible payments to sustain their operation in the near term. In December 2020, the Economic Aid Act was signed into law, which extended certain provisions of the CARES Act and provides additional support and financial assistance for small businesses, non-profit organizations, and other entities. These actions, along with other stimulus programs, enacted by federal, state and local government agencies provided stability as vaccines continued to become more widely available and governmental restrictions were slowly lifted.
In a period of economic contraction, elevated levels of loan losses and lost interest income may occur. The extent to which the COVID-19 pandemic has a further impact the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.
The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance for loan losses and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within the Greater Philadelphia region. Note 3 - Investment Securities discusses the types of investment securities the Company invests in. Note 4 - Loans Receivable discusses the types of lending the Company engages in, as well as loan concentrations. The Company does not have a significant concentration of credit risk with any one customer.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold, maturing in 90 days or less, to be cash and cash equivalents.
Restrictions on Cash and Due from Banks
Republic is required to maintain certain average reserve balances as established by the Federal Reserve Board. Effective March 26, 2020, the Federal Reserve announced they were reducing the reserve requirement ratio to zero percent across all deposit tiers. This comes as the COVID-19 pandemic continues to impact much of the way financial institutions both operate and serve their customers. As a result of this rule, there were no reserve balance requirements as of December 31, 2021 and 2020.
Investment Securities
Held to Maturity - Certain debt securities that management has the positive intent and ability to hold until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances, net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted using the interest method over the estimated remaining term of the underlying security.
Available for Sale - Debt securities that will be held for indefinite periods of time, including securities that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and changes in the availability of and in the yield of alternative investments, are classified as available for sale. These assets are carried at fair value. Unrealized gains and losses are excluded from operations and are reported net of tax as a separate component of other comprehensive income until realized. Realized gains and losses on the sale of investment securities are reported in the consolidated statements of operations and determined using the adjusted cost of the specific security sold on the trade date.
Equity Securities - Equity securities are carried at their fair value. Changes in the fair value of equity securities are reported in other non-interest income.
Investment securities are evaluated on at least a quarterly basis, and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security until maturity and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of December 31, 2021 and 2020. As of those dates, restricted stock consisted of investments in the capital stock of the FHLB of Pittsburgh and Atlantic Community Bankers Bank (“ACBB”). The required investment in the capital stock of the FHLB is calculated based on outstanding loan balances and open credit facilities with the FHLB. Excess investments are returned to Republic on a quarterly basis.
At December 31, 2021 and December 31, 2020, the investment in FHLB stock totaled $3.4 million and $2.9 million, respectively. The increase was due primarily to a higher membership stock requirement by FHLB at December 31, 2021 which resulted in a higher required investment as of that date. At both December 31, 2021 and December 31, 2020, ACBB stock totaled $143,000.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. Management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of operations. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of operations.
Interest Rate Lock Commitments
Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance in FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of operations. Outstanding interest rate lock commitments (“IRLCs”) are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 23 Derivatives and Risk Management Activities for further detail of IRLCs.
Best Efforts Forward Loan Sale Commitments
Best efforts forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. Best efforts forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of operations.
Mandatory Forward Loan Sales Commitments
Mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Mandatory forward loan sale commitments are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded as other assets and other liabilities with changes in fair value during the period recorded as mortgage banking income and included in non-interest income in the statements of operations. There were no mandatory forward loan sales in 2021.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value.
The Company has one reportable segment: Community Banking. The community banking segment primarily encompasses the commercial loan and deposit activities of the Bank, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Oak Mortgage was acquired by the Bank in 2016 and organized as a wholly owned subsidiary of the Bank. Oak Mortgage was maintained as a separate legal entity through December 31, 2017 in order to preserve certain secondary market contracts and regulatory licensing requirements.
On January 1, 2018, Oak Mortgage operations were restructured as a division of Republic and all assets, liabilities, contracts, employees and activity were merged into the Republic. As a result of this restructuring, the Company re-evaluated its reporting unit structure and determined that as of July 31, 2018 there were no longer two reporting units but rather a sole reporting unit in Republic Bank. As of July 31, 2019, the Company elected to perform a Step One Test for goodwill impairment. The fair value of the reporting unit was higher than the book value and, therefore, no Step Two analysis was required. Goodwill totaled $5.0 million as of December 31, 2019.
At March 31, 2020, June 30, 2020, and September 30, 2020, the Company performed a quantitative analysis to determine if goodwill had been impaired due to the impact of COVID-19 on the economy and the sustained decline in the Company’s stock price. At both March 31, 2020 and June 30, 2020, the quantitative analysis determined goodwill was not impaired. At September 30, 2020, the quantitative analysis determined goodwill was impaired. The Company concluded that all of its goodwill was impaired and recorded a $5.0 million non-cash charge for the amount of the impairment against earnings based on the quantitative analysis. The charge had no impact on tangible capital and a minimal impact on regulatory capital.
Loans Receivable
The loans receivable portfolio is segmented into commercial and industrial loans, commercial real estate loans, owner occupied real estate loans, construction and land development loans, consumer and other loans, residential mortgages, and PPP loans. Consumer loans consist of home equity loans and other consumer loans.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flows to determine the borrower’s ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based on the identified cash flows 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, created through the Small Business Administration (“SBA”) and Treasury Department from 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.
Allowance for Loan Losses
The allowance for loan losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments would represent management’s estimate of losses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary. The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
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 Republic’s 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 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 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 the Company’s loan review system, and the degree of oversight by the Company’s 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.
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 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. The option to defer principal payments only or both principal and interest payments was offered to loan customers that expressed a need to defer loan payments as a result of the financial impact of the COVID pandemic on their business. The ability to defer loan payments was initially limited to 90 days. An extension for an additional 90 days was granted if conditions warranted such an extension based on an evaluation performed by management. 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.
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.
Transfers of Financial Assets
The Company accounts for the transfers and servicing financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. ASC 860 revises the standards for accounting for the securitizations and other transfers of financial assets and collateral.
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. An updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis and any necessary adjustments are included in loan and servicing fees on the statement of operations. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, our market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses various assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market.
For more information on the SBA servicing asset including the sensitivity of the current fair value of the SBA loan servicing rights to adverse changes in key assumptions, see Note 15 - Fair Value Measurements and Fair Values of Financial Instruments.
Other Loans Held for Sale
Other loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. When the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a Gain on the Sale of SBA loans, which is categorized as non-interest income. Subsequent fees collected for servicing of the sold portion of a loan are combined with fair value adjustments to the SBA servicing asset and recorded as a net amount in Loan and Servicing Fees, which is also categorized as non-interest income.
Guarantees
The Company accounts for guarantees in accordance with ASC 815 Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. ASC 815 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company has financial and performance letters of credit. Financial letters of credit require the Company to make payment if the customer’s financial condition deteriorates, as defined in the agreements. Performance letters of credit require the Company to make payments if the customer fails to perform certain non-financial contractual obligations. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2021 was $18.0 million and they expire as follows: $16.4 million in 2022, $1.4 million in 2023, $127,000 in 2024, and $56,000 in 2026. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. There was no liability for guarantees under standby letters of credit as of December 31, 2021 and December 31, 2020.
Premises and Equipment
Premises and equipment (including land) are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method for financial reporting purposes, and accelerated methods for income tax purposes. The estimated useful lives are 40 years for buildings and 3 to 13 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, which range from 1 to 30 years. Repairs and maintenance are charged to current operations as incurred, and renewals and major improvements are capitalized.
Operating Leases
The Company enters into lease agreements to obtain the right to use assets (“ROU”) for its business operations, substantially all of which are real estate. Lease liabilities and ROU assets are recognized when the Company enters into operating leases and represent its obligations and rights to use these assets over the period of the leases and may be re-measured for certain modifications, resolution of certain contingencies involving variable consideration, or its exercise of options (renewal, extension, or termination) under the lease.
Operating lease liabilities include fixed and in-substance fixed payments for the contractual duration of the lease, adjusted for renewals or terminations which were considered probable of exercise when measured. During 2021, one lease term for real property was extended, for which the extension was considered probable at the time of measurement. The lease payments are discounted using a rate determined when the lease is recognized. As the Company typically does not know the discount rate implicit in the lease, the Company estimates a discount rate that it believes approximates a collateralized borrowing rate for the estimated duration of the lease. The discount rate is updated when re-measurement events occur. The related operating lease ROU assets may differ from operating lease liabilities due to initial direct costs, deferred or prepaid lease payments and lease incentives.
The amortization of operating lease ROU assets and the accretion of operating lease liabilities are reported together as fixed lease expense and are included in net occupancy expense within noninterest expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease.
The Company has elected to exclude leases with original terms of less than one year from the operating lease ROU assets and lease liabilities. The Company has no agreements that qualified as a short-term lease. The related short-term lease expense would be included in net occupancy expense.
Other Real Estate Owned
Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure. They are held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from other real estate owned.
Advertising Costs
It is the Company’s policy to expense advertising costs in the period in which they are incurred.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent. The terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes, if any, as a component of the provision for income taxes.
Stock Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of December 31, 2021, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014, the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At December 31, 2021, the maximum number of common shares issuable under the 2014 Plan was 6.5 million shares. During the twelve months ended December 31, 2021, 551,179 stock units were granted under the 2014 Plan with a fair value of $1.8 million.
On April 27, 2021, the Company’s shareholders approved the 2021 Equity Incentive Plan of Republic First Bancorp, Inc. (the “2021 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2021 Plan, the maximum number of shares which may be issued or awarded is 7.5 million shares of common stock. As of December 31, 2021, no shares have been granted under the 2021 Plan.
Earnings Per Share
Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consisted of dilutive stock options granted through the Company’s stock option plans and convertible preferred stock for the twelve months ended December 31, 2021 and 2020 and consisted of dilutive stock options granted through the Company’s stock options for the twelve months ended December 31, 2019. The effects of stock options or payment of dividends on the Company’s Preferred Stock are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive. Antidilutive options are those options with weighted average exercise prices in excess of the weighted average market value for the periods presented.
The calculation of EPS for the years ended December 31, 2021, 2020, and 2019 was as follows:
(dollars in thousands, except per share amounts)
Net income (loss) attributable to basic common shareholders
$ 21,676 $ 4,131 $ (3,500 )
Weighted average shares outstanding
58,891 58,853 58,833
Net income (loss) per share - basic
$ 0.37 $ 0.07 $ (0.06 )
Preferred stock dividends
$ 3,500 $ 923 $ -
Net income (loss) attributable to diluted common shareholders
$ 25,176 $ 4,131 $ (3,500 )
Weighted average shares outstanding (including dilutive CSEs)
75,952 58,904 58,833
Net income (loss) per share - diluted
$ 0.33 $ 0.07 $ (0.06 )
The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.
(in thousands)
Anti-dilutive securities
Share based compensation awards
5,492 5,848 4,979
Convertible preferred stock
- 5,556 -
Total anti-dilutive securities
5,492 11,404 4,979
Comprehensive Income
The Company presents as a component of comprehensive income the amounts from transactions and other events, which currently are excluded from the consolidated statements of operations and are recorded directly to shareholders’ equity. These amounts consist of unrealized holding gains (losses) on available for sale securities and amortization of unrealized holding losses on available-for-sale securities transferred to held-to-maturity.
Trust Preferred Securities
The Company has sponsored two outstanding issues of trust preferred securities. The subsidiary trusts are not consolidated with the Company 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. See Note 8 “Borrowings” for further information regarding the issuances.
Variable Interest Entities
The Company follows 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.
The Company does not consolidate its subsidiary trusts. ASC 810 precludes consideration of the call option embedded in the preferred securities when determining if the Company has 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 the Company’s investment in the common securities of the trusts is included in other income.
Treasury Stock
Common stock purchased for treasury is recorded at cost.
Recent Accounting Pronouncements
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts, and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company was initially required to adopt ASU 2016-13 on January 1, 2020, however the Company was permitted to and elected to defer the adoption of this ASU 2016-13 until January 1, 2022. Upon adoption in the first quarter of 2022, a cumulative effect adjustment for the change in the allowance for credit losses was recognized in retained earnings. The cumulative-effect adjustment to retained earnings, net of taxes, was comprised of the impact to the allowance for credit losses on outstanding loans and leases and the impact to the liability for off-balance sheet commitments.
The Company approved an accounting policy for credit losses in compliance with CECL and established a CECL governance and approval process. The Company contracted with a third-party vendor to assist in the application of ASU 2016-13 and is utilizing various methodologies such as Vintage, Cohort, and Weighted Average Remaining Maturity to estimate the allowance for credit losses. The Company will utilize multiple economic forecasts over a four-quarter reasonable and a supportable forecast period followed by a cliff reversion to historical losses.
The Company incurred a $2.2 million after-tax reduction to stockholders’ equity balance, in connection with the adoption of ASU 2016-13 on January 1, 2022, inclusive of the estimate for off-balance sheet exposures. The Company also completed its final review of the most recent model run including evaluation of model back-testing and sensitivity analysis results, and finalized certain assumptions primarily related to qualitative adjustments. The Company did not incur a material adjustment to the stockholders’ equity balance as of January 1, 2022, for the adoption of CECL related to HTM securities. Additionally, the Company has evaluated the composition of its AFS securities and determined that the changes in ASU 2016-13 will not have a significant effect on the current portfolio. However, in connection with the Company’s efforts to establish a control framework in connection with the adoption of CECL management determined that there was a material weakness related to the failure to maintain effective controls over the quantification and review of the transition adjustment from the incurred loss model to the CECL model for purposes of disclosing such transition in the audited footnotes to the consolidated financial statements. This material weakness resulted in an adjustment to the Company’s disclosures related to the adoption of Topic 326. For more information, see “Item 9A: Disclosure Controls and Procedures.”
ASU 2020-04
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU became effective March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.
ASU 2021-01
In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition, including derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.
3.
Investment Securities
A summary of the amortized cost and market value of securities available for sale, securities held to maturity, and equity securities at December 31, 2021 and 2020 is as follows:
At December 31, 2021
(dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available for sale
U.S. Government agencies
$ 25,671 $ - $ (743 ) $ 24,928
Collateralized mortgage obligations
375,570 989 (5,010 ) 371,549
Agency mortgage-backed securities
446,740 254 (5,511 ) 441,483
Municipal securities
6,596 344 - 6,940
Corporate bonds
232,395 1,480 (3,409 ) 230,466
Investment securities available for sale
$ 1,086,972 $ 3,067 $ (14,673 ) $ 1,075,366
Held to maturity
U.S. Government agencies
$ 66,438 $ 1,549 $ - $ 67,987
Collateralized mortgage obligations
400,424 4,607 (8,803 ) 396,228
Agency mortgage-backed securities
1,193,430 2,295 (12,580 ) 1,183,145
Investment securities held to maturity
$ 1,660,292 $ 8,451 $ (21,383 ) $ 1,647,360
Equity securities (1)
$ 9,173
(1)
Equity securities consist of investments in non-cumulative preferred stock.
At December 31, 2020
(dollars in thousands)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Available for sale
U.S. Government agencies
$ 32,312 $ - $ (426 ) $ 31,886
Collateralized mortgage obligations
218,232 3,584 (270 ) 221,546
Agency mortgage-backed securities
149,325 1,204 (1 ) 150,528
Municipal securities
8,201 24 - 8,225
Corporate bonds
119,118 595 (3,390 ) 116,323
Investment securities available for sale
$ 527,188 $ 5,407 $ (4,087 ) $ 528,508
Held to maturity
U.S. Government agencies
$ 82,093 $ 4,185 $ - $ 86,278
Collateralized mortgage obligations
363,363 12,687 (231 ) 375,819
Agency mortgage-backed securities
369,480 5,640 (245 ) 374,875
Investment securities held to maturity
$ 814,936 $ 22,512 $ (476 ) $ 836,972
Equity securities
$ 9,039
(1)
Equity securities consist of investments in non-cumulative preferred stock.
The following table presents investment securities by stated maturity at December 31, 2021. 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.
Available for Sale
Held to Maturity
(dollars in thousands)
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Due in 1 year or less
$ 34,335 $ 34,157 $ 4 $ 4
After 1 year to 5 years
102,194 102,007 66,434 67,983
After 5 years to 10 years
32,017 32,099 - -
After 10 years
96,116 94,071 - -
Collateralized mortgage obligations
375,570 371,549 400,424 396,228
Agency mortgage-backed securities
446,740 441,483 1,193,430 1,183,145
Total investment securities
$ 1,086,972 $ 1,075,366 $ 1,660,292 $ 1,647,360
The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities, and certain corporate entities. Equity securities consist of investments in non-cumulative preferred stock. At December 31, 2021, fair value gains on the equity securities were immaterial. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of December 31, 2021 or December 31, 2020. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.
The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no impairment charges (credit losses) recorded during the years ended December 31, 2021, 2020 or 2019.
At December 31, 2021 and 2020, investment securities with a fair value of approximately $1.2 billion were pledged as collateral for public deposits and certain other deposits as required by law.
The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2021 and 2020:
At December 31, 2021
Less than 12 months
12 months or more
Total
(dollars in thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government agencies
$ - $ - $ 24,928 $ 743 $ 24,928 $ 743
Collateralized mortgage obligations
188,416 2,982 57,708 2,028 246,124 5,010
Agency mortgage-backed securities
365,859 4,896 39,928 615 405,787 5,511
Municipal securities
- - - - - -
Corporate bonds
154,436 2,281 33,351 1.128 187,787 3,409
Investment Securities Available for Sale
$ 708,711 $ 10,159 $ 155,915 $ 4,514 $ 864,626 $ 14,673
At December 31, 2021
Less than 12 months
12 months or more
Total
(dollars in thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government agencies
$ - $ - $ - $ - $ - $ -
Collateralized mortgage obligations
183,376 6,719 81,994 2,084 265,370 8,803
Agency mortgage-backed securities
899,231 10,815 61,756 1,765 960,987 12,580
Investment Securities Held to Maturity
$ 1,082,607 $ 17,534 $ 143,750 $ 3,849 $ 1,226,357 $ 21,383
At December 31, 2020
Less than 12 months
12 months or more
Total
(dollars in thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government agencies
$ - $ - $ 31,886 $ 426 $ 31,886 $ 426
Collateralized mortgage obligations
99,497 270 - - 99,497 270
Agency mortgage-backed securities
20,934 1 - - 20,934 1
Municipal securities
- - - - - -
Corporate bonds
4,559 39 54,649 3,351 59,208 3,390
Investment Securities Available for Sale
$ 124,990 $ 310 $ 86,535 $ 3,777 $ 211,525 $ 4,087
At December 31, 2020
Less than 12 months
12 months or more
Total
(dollars in thousands)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
U.S. Government agencies
$ - $ - $ - $ - $ - $ -
Collateralized mortgage obligations
62,603 231 - - 62,603 231
Agency mortgage-backed securities
54,537 245 - - 54,537 245
Investment Securities Held to Maturity
$ 117,140 $ 476 $ - $ - $ 117,140 $ 476
Unrealized losses on securities in the investment portfolio amounted to $36.1 million with a total fair value of $2.1 billion as of December 31, 2021 compared to unrealized losses of $4.6 million with a total fair value of $328.7 million as of December 31, 2020. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.
The Company held four U.S. Government agency securities, 27 collateralized mortgage obligations and 61 agency mortgage-backed securities that were in an unrealized loss position at December 31, 2021. 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, 2021.
All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its 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 and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At December 31, 2021, the investment portfolio had no municipal securities that were in an unrealized loss position.
At December 31, 2021, the investment portfolio included fifteen 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. Seven of the fifteen corporate bonds are issued by four of the largest U.S. financial institutions. Each financial institution is well capitalized.
There were no proceeds from the sale of securities during the twelve month period ended December 31, 2021. A gain of $2,000 was realized on the call of securities. The tax provision applicable to the gain of $2,000 for the year ended December 31, 2021 amounted to $1,000.
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.
In December 2018, twenty-three CMOs and two MBSs with a fair value of $230.1 million that were previously classified as available-for-sale were transferred to the held-to-maturity category. The securities were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining life of the securities. At December 31, 2021, the total approximated unrealized loss of $2.7 million remaining to be amortized includes ten securities previously transferred in July 2014.
4.
Loans Receivable
The following table sets forth the Company’s gross loans by major categories as of December 31, 2021 and 2020:
(dollars in thousands)
December 31,
December 31,
Commercial real estate
$ 780,311 $ 705,748
Construction and land development
216,008 142,821
Commercial and industrial
252,376 200,188
Owner occupied real estate
526,570 475,206
Consumer and other
83,487 102,368
Residential mortgage
536,332 395,174
Paycheck protection program
119,039 636,637
Total loans receivable
2,514,123 2,658,142
Deferred costs (fees)
(6,758 ) (12,800 )
Allowance for loan losses
(18,964 ) (12,975 )
Net loans receivable
$ 2,488,401 $ 2,632,367
The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses. The Company’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, residential mortgages, and PPP loans. PPP loans are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.
Included in loans are loans due from directors and other related parties of $18.9 million at December 31, 2021, an increase of $2.2 million, compared to $16.7 million at December 31, 2020, resulting from $4.2 million in additions and ($2.0) in repayments. The December 31, 2020 disclosure has been updated to include business affiliates of directors resulting in an increase to the previously reported $14.9 million balance of related party loans at December 31, 2020. The Board of Directors approves loans to individual directors and other related parties to conform to our underwriting policies.
5.
Allowances for Loan Losses
The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the years ended December 31, 2021, 2020, and 2019:
(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
Unallocated
Total
Year ended December, 2021
Allowance for loan losses:
Beginning balance:
$ 4,394 $ 948 $ 1,367 $ 2,374 $ 723 $ 3,025 $ - $ 144 $ 12,975
Charge-offs
(311 ) - (61 ) - (117 ) - - - (489 )
Recoveries
33 - 462 64 169 - - - 728
Provisions
1,686 596 1,088 720 (146 ) 1,897 - (91 ) 5,750
Ending balance
$ 5,802 $ 1,544 $ 2,856 $ 3,158 $ 629 $ 4,922 $ - $ 53 $ 18,964
Year ended December, 2020
Allowance for loan losses:
Beginning Balance:
$ 3,043 $ 688 $ 931 $ 2,292 $ 590 $ 1,705 $ - $ 17 $ 9,266
Charge-offs
- - (333 ) (48 ) (107 ) (67 ) - - (555 )
Recoveries
- 3 48 1 12 - - - 64
Provisions (credits)
1,351 257 721 129 228 1,387 - 127 4,200
Ending balance
$ 4,394 $ 948 $ 1,367 $ 2,374 $ 723 $ 3,025 $ - $ 144 $ 12,975
Year ended December, 2019
Allowance for loan losses:
Beginning Balance:
$ 2,462 $ 777 $ 1,754 $ 2,033 $ 577 $ 894 $ - $ 118 $ 8,615
Charge-offs
- - (1,356 ) - (126 ) - - - (1,482 )
Recoveries
- - 217 2 9 - - - 228
Provisions (credits)
581 (89 ) 316 257 130 811 - (101 ) 1,905
Ending balance
$ 3,043 $ 688 $ 931 $ 2,292 $ 590 $ 1,705 $ - $ 17 $ 9,266
The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of December 31, 2021 and 2020:
(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
Unallocated
Total
December 31, 2021
Allowance for loan losses:
Individually evaluated for impairment
$ 992 $ - $ 1,169 $ 582 $ - $ - $ - $ - $ 2,743
Collectively evaluated for impairment
4,810 1,544 1,687 2,576 629 4,922 - 53 16,221
Total allowance for loan losses
$ 5,802 $ 1,544 $ 2,856 $ 3,158 $ 629 $ 4,922 $ - $ 53 $ 18,964
Loans receivable:
Loans evaluated individually
$ 4,493 $ - $ 2,558 $ 9,593 $ 1,075 $ 701 $ - $ - $ 18,420
Loans evaluated collectively
775,818 216,008 249,818 516,977 82,412 535,631 119,039 - 2,495,703
Total loans receivable
$ 780,311 $ 216,008 $ 252,376 $ 526,570 $ 83,487 $ 536,332 $ 119,039 $ - $ 2,514,123
(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
Unallocated
Total
December 31, 2020
Allowance for loan losses:
Individually evaluated for impairment
$ 418 $ - $ 51 $ 122 $ - $ - $ - $ - $ 591
Collectively evaluated for impairment
3,976 948 1,316 2,252 723 3,025 - 144 12,384
Total allowance for loan losses
$ 4,394 $ 948 $ 1,367 $ 2,374 $ 723 $ 3,025 $ - $ 144 $ 12,975
Loans receivable:
Loans evaluated individually
$ 9,048 $ 2,963 $ 3,955 $ 1,302 $ 701 $ - $ - $ 17,969
Loans evaluated collectively
696,700 142,821 197,225 471,251 101,066 394,473 636,637 - 2,640,173
Total loans receivable
$ 705,748 $ 142,821 $ 200,188 $ 475,206 $ 102,368 $ 395,174 $ 636,637 $ - $ 2,658,142
A loan is considered impaired, when based on current information and events, it is probable that the Company 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. The following table summarizes information with regard to impaired loans by loan portfolio class as of December 31, 2021 and 2020:
December 31, 2021 December 31, 2020
(dollars in thousands) Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:
Commercial real estate
$ 479 $ 691 $ - $ 5,033 $ 5,040 $ -
Construction and land development
- - - - - -
Commercial and industrial
80 81 - 2,608 2,794 -
Owner occupied real estate
2,080 2,080 - 3,198 3,407 -
Consumer and other
1,075 1,422 - 1,302 1,556 -
Residential mortgage
701 768 - 701 768 -
Paycheck protection program - - - - - -
Total 4,415 $ 5,042 $ - $ 12,842 $ 13,565 $ -
With an allowance recorded:
Commercial real estate
$ 4,014 $ 4,536 $ 992 $ 4,015 $ 4,536 $ 418
Construction and land development
- - - - - -
Commercial and industrial
2,478 2,616 1,169 355 371 51
Owner occupied real estate
7,513 7,532 582 757 775 122
Consumer and other
- - - - - -
Residential mortgage
- - - - - -
Paycheck protection program
- - - - - -
Total
$ 14,005 $ 14,684 $ 2,743 $ 5,127 $ 5,682 $ 591
Total:
Commercial real estate
$ 4,493 $ 5,227 $ 992 $ 9,048 $ 9,576 $ 418
Construction and land development
- - - - - -
Commercial and industrial
2,558 2,697 1,169 2,963 3,165 51
Owner occupied real estate
9,593 9,612 582 3,955 4,182 122
Consumer and other
1,075 1,422 - 1,302 1,556 -
Residential mortgage
701 768 - 701 768 -
Paycheck protection program
- - - - - -
Total
$ 18,420 $ 19,726 $ 2,743 $ 17,969 $ 19,247 $ 591
The following table presents additional information regarding the Company’s impaired loans for the years ended December 31, 2021, 2020, and 2019:
Years Ended December 31,
(dollars in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial real estate
$ 403 $ 1 $ 6,279 $ 288 $ 6,463 $ 289
Construction and land development
- - - - - -
Commercial and industrial
1,853 - 2,645 3 2,144 5
Owner occupied real estate
3,530 48 2,964 93 1,908 38
Consumer and other
1,197 17 1,224 47 909 20
Residential mortgage
897 - 755 4 461 2
Paycheck protection program
2 - - - - -
Total
$ 7,882 $ 66 $ 13,867 $ 435 $ 11,885 $ 354
With an allowance recorded:
Commercial real estate
$ 4,129 $ 1 $ 4,015 $ - $ 4,281 $ 1
Construction and land development
- - - - - -
Commercial and industrial
706 - 454 - 838 -
Owner occupied real estate
2,415 46 1,287 39 1,071 31
Consumer and other
- - - - 30 -
Residential mortgage
- - 24 4 - -
Paycheck protection program
- - - - - -
Total
$ 7,250 $ 47 $ 5,780 $ 43 $ 6,220 $ 32
Total:
Commercial real estate
$ 4,532 $ 2 $ 10,294 $ 288 $ 10,744 $ 290
Construction and land development
- - - - - -
Commercial and industrial
2,559 - 3,099 3 2,982 5
Owner occupied real estate
5,945 94 4,251 132 2,979 69
Consumer and other
1,197 17 1,224 47 939 20
Residential mortgage
897 - 779 8 461 2
Paycheck protection program
2 - - - - -
Total
$ 15,132 $ 113 $ 19,647 $ 478 $ 18,105 $ 386
The total average recorded investment on the Company’s impaired loans for the years ended December 31, 2021, 2020, and 2019 were $15.1 million, $19.6 million, and $18.1 million, respectively, and the related interest income recognized for those dates was $113,000, $478,000, and $386,000, respectively.
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2021 and 2020:
(dollars in thousands)
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Loans
Receivable
> 90 Days
and
Accruing
At December 31, 2021
Commercial real estate
$ - $ - $ 4,493 $ 4,493 $ 775,818 $ 780,311 $ -
Construction and land development
- - - - 216,008 216,008 -
Commercial and industrial
- - 2,558 2,558 249,818 252,376 -
Owner occupied real estate
- 4,139 3,714 7,853 518,717 526,570 -
Consumer and other
92 20 1,080 1,192 82,295 83,487 5
Residential mortgage
3,165 - 701 3,866 532,466 536,332 -
Paycheck protection program
1,594 547 318 2,459 116,580 119,039 318
Total
$ 4,851 $ 4,706 $ 12,864 $ 22,421 $ 2,491,702 $ 2,514,123 $ 323
(dollars in thousands)
30-59
Days Past
Due
60-89
Days Past
Due
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Loans
Receivable
> 90 Days
and
Accruing
At December 31, 2020
Commercial real estate
$ - $ 97 $ 4,421 $ 4,518 $ 701,230 $ 705,748 $ -
Construction and land development
- - - - 142,821 142,821 -
Commercial and industrial
1,648 - 2,963 4,611 195,577 200,188 -
Owner occupied real estate
581 813 2,859 4,253 470,953 475,206 -
Consumer and other
92 28 1,302 1,422 100,946 102,368 -
Residential mortgage
- - 1,313 1,313 393,861 395,174 612
Paycheck protection program
- - - - 636,637 636,637 -
Total
$ 2,321 $ 938 $ 12,858 $ 16,117 $ 2,642,025 $ 2,658,142 $ 612
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within our internal risk rating system as of December 31, 2021 and 2020:
(dollars in thousands)
Pass
Special
Mention
Substandard
Doubtful
Total
At December 31, 2021:
Commercial real estate
$ 775,818 $ - $ 4,493 $ - $ 780,311
Construction and land development
216,008 - - - 216,008
Commercial and industrial
249,818 - 2,558 - 252,376
Owner occupied real estate
516,741 236 9,593 - 526,570
Consumer and other
82,412 - 1,075 - 83,487
Residential mortgage
535,631 - 701 - 536,332
Paycheck protection program
119,039 - - - 119,039
Total
$ 2,495,467 $ 236 $ 18,420 $ - $ 2,514,123
(dollars in thousands)
Pass
Special
Mention
Substandard
Doubtful
Total
At December 31, 2020:
Commercial real estate
$ 701,151 $ 80 $ 4,517 $ - $ 705,748
Construction and land development
142,821 - - - 142,821
Commercial and industrial
197,225 - 2,963 - 200,188
Owner occupied real estate
470,732 519 3,955 - 475,206
Consumer and other
101,066 - 1,302 - 102,368
Residential mortgage
394,473 - 701 - 395,174
Paycheck protection program
636,637 - - - 636,637
Total
$ 2,644,105 $ 599 $ 13,438 $ - $ 2,658,142
The following table shows non-accrual loans by class as of December 31, 2021 and 2020:
(dollars in thousands)
December 31,
December 31,
Commercial real estate
$ 4,493 $ 4,421
Construction and land development
- -
Commercial and industrial
2,558 2,963
Owner occupied real estate
3,714 2,859
Consumer and other
1,075 1,302
Residential mortgage
701 701
Paycheck protection program
- -
Total
$ 12,541 $ 12,246
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $700,000, $718,000, and $548,000, for 2021, 2020, and 2019, respectively.
Troubled Debt Restructurings
A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.
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 declared a termination of the COVID-19 national emergency were 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. As of December 31, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the height of the COVID pandemic have resumed contractual payments. As of December 31, 2020, there were deferrals 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 included 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 eight customers with outstanding balances of $3 million and second deferrals amounted to 13 customers with outstanding balances of $13 million.
The following table summarizes information with regard to outstanding troubled debt restructurings at December 31, 2021 and 2020:
(dollars in thousands)
Number
of Loans
Accrual
Status
Non-
Accrual
Status
Total TDRs
December 31, 2021
Commercial real estate
- $ - $ - $ -
Construction and land development
- - - -
Commercial and industrial
- - - -
Owner occupied real estate
- - - -
Consumer and other
- - - -
Residential mortgage
- - - -
Paycheck protection program
- - - -
Total
- $ - $ - $ -
December 31, 2020
Commercial real estate
1 $ 4,530 $ - $ 4,530
Construction and land development
- - - -
Commercial and industrial
- - - -
Owner occupied real estate
- - - -
Consumer and other
- - - -
Residential mortgage
- - - -
Paycheck protection program
- - - -
Total
1 $ 4,530 $ - $ 4,530
All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into our estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.
After a loan is determined to be a TDR, we continue to track its performance under the most recent restructured terms. There were no loan modifications made during the twelve months ended December 31, 2021, 2020, and 2019 that met the criteria of a TDR. There were no TDRs that subsequently defaulted during the years ended December 31, 2021 and 2020. The last remaining TDR on the Company’s books was paid off in full by the customer during 2021.
There was one residential mortgage in the process of foreclosure as of December 31, 2021 and as of December 31, 2020. There was no other real estate owned relating to residential real estate at December 31, 2021 and 2020.
6.
Other Real Estate Owned
Other real estate owned consists of properties acquired as a result of foreclosures or deeds in-lieu-of foreclosure. Costs relating to the development or improvement of assets are capitalized, and costs relating to holding the property are charged to expense. As of December 31, 2021, the balance of OREO was comprised of two properties.
The following table presents a reconciliation of other real estate owned for the years ended December 31, 2021, 2020, and 2019:
(dollars in thousands)
December 31,
December 31,
December 31,
Beginning Balance, January 1st
$ 1,188 $ 1,730 $ 6,223
Additions
360 233 1,225
Valuation adjustments
(722 ) (31 ) (646 )
Dispositions
(466 ) (744 ) (5,072 )
Ending Balance
$ 360 $ 1,188 $ 1,730
7.
Premises and Equipment
A summary of premises and equipment is as follows:
(dollars in thousands)
December 31,
December 31,
Land
$ 19,767 $ 21,304
Buildings
69,973 65,936
Leasehold improvements
32,831 31,909
Furniture, fixtures and equipment
36,304 33,400
Construction in progress
17,677 11,842
176,552 164,391
Less accumulated depreciation
(49,112 ) (41,221 )
Net premises and equipment
$ 127,440 $ 123,170
Depreciation expense on premises and equipment amounted to approximately $8.4 million, $8.2 million, and $6.5 million in 2021, 2020, and 2019, respectively. The construction in progress balance of $17.7 million mainly represents costs incurred for the selection and development of future store locations. Of this balance, $10.1 million represents land purchased and land deposits for four future store locations. Contractual construction commitments related to future store locations were $7.6 million as of December 31, 2021.
8.
Borrowings
Republic has a line of credit with FHLB of Pittsburgh with a maximum borrowing capacity of $1.3 billion as of December 31, 2021. As of December 31, 2021 and 2020, there were no fixed term borrowings against this line of credit. There were no overnight borrowings outstanding as of December 31, 2021 and 2020. At December 31, 2021 and 2020, FHLB had issued letters of credit, on Republic’s behalf, totaling $100.0 million and $150.0 million respectively, against its available credit line, primarily to be used as collateral for public funds deposit balances. There were no fixed term advances outstanding at any month-end during 2021 and 2020. At December 31, 2021, $1.8 billion of loans collateralized the FHLB line of credit. No overnight borrowings were outstanding at any month-end in 2021 and 2020.
Republic has a line of credit in the amount of $10.0 million available for the purchase of federal funds through the ACBB. At December 31, 2021 and 2020, Republic had no amount outstanding against the line at ACBB. There were no overnight advances on this line at any month end in 2021 and 2020.
Republic also has a line of credit with Zions Bank of $15.0 million to assist in managing our liquidity position. At December 31, 2021 and 2020, Republic had no amount outstanding against the line at Zions Bank. There were no overnight balances on this line at any month end in 2021 and 2020.
As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowings to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. The Company did not pledge any PPP loans or borrow any funds as part of the PPPLF program at December 31, 2021 since the PPPLF program was discontinued on July 30, 2021. 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% at December 31, 2020.
Trust Preferred Securities:
The Company has two outstanding issues of trust preferred securities. The subsidiary trusts are not consolidated with the Company 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 an amount 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, Republic Capital Trust III (“Trust III”) issued $5.0 million of trust preferred securities to investors and $0.2 million of 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.
Deferred issuance costs included in subordinated debt were $63,000 and $70,000 at December 31, 2021 and December 31, 2020, respectively. Amortization of deferred issuance costs was $7,000, $6,000, and $6,000 in the years ended December 31, 2021, 2020, and 2019, respectively.
9.
Deposits
The following is a breakdown, by contractual maturities of the Company’s time deposits for the years 2022 through 2026.
(dollars in thousands)
Thereafter
Total
Time Deposits
$ 166,031 $ 24,591 $ 2,682 $ 2,637 $ 2,004 $ - $ 197,945
Certificates of deposit of $250,000 or more totaled $82.9 million and $88.4 million at December 31, 2021 and 2020, respectively. Deposits of related parties totaled $103.9 million and $102.8 million at December 31, 2021 and 2020, respectively. The December 31, 2020 disclosure has been updated to include affiliates of directors resulting in an increase to the previously reported $98 million balance of related party deposits at December 31, 2020. Brokered deposits totaled $1.0 million at December 31, 2021 and 2020 respectively. Overdrafts totaled $501,000 and $227,000 at December 31, 2021 and 2020, respectively, and is included in loans receivable on the balance sheet.
10.
Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2021, 2020, and 2019 consists of the following:
(dollars in thousands)
Current
Federal
$ 5,968 $ 810 $ 394
State
2,106 1,490 -
Deferred
Federal
483 417 (1,524 )
State
(31 ) (1,327 ) (220 )
Total provision (benefit) for income taxes
$ 8,526 $ 1,390 $ (1,350 )
The following table reconciles the difference between the actual tax provision and the amount per the statutory federal income tax rate of 21.0% for the year ended December 31, 2021, 21.0% for the year ended December 31, 2020 and 21.0% for the year ended December 31, 2019.
(dollars in thousands)
Tax provision computed at federal statutory rate
$ 7,077 $ 1,353 $ (1,018 )
State income tax, net of federal benefit
1,639 360 (260 )
Tax exempt interest
(419 ) (461 ) (425 )
Other
229 138 353
Total provision (benefit) for income taxes
$ 8,526 $ 1,390 $ (1,350 )
The significant components of the Company’s net deferred tax asset as of December 31, 2021 and 2020 are as follows:
(dollars in thousands)
Deferred tax assets
Allowance for loan losses
$ 4,811 $ 3,291
Deferred compensation
674 641
Unrealized losses on securities available for sale
3,628 960
Deferred fees on PPP loans
1,110 3,737
Foreclosed real estate write-downs
1,147 985
Interest income on non-accrual loans
810 706
Stock option expense
2,263 1,780
Goodwill
805 890
Other
1,396 1,033
Total deferred tax assets
16,644 14,023
Deferred tax liabilities
Deferred loan costs
1,303 1,818
Premises and equipment
1,111 191
Total deferred tax liabilities
2,414 2,009
Net deferred tax asset
$ 14,230 $ 12,014
The Company’s net deferred tax asset increased to $14.2 million at December 31, 2021 compared to $12.0 million at December 31, 2020. The effective tax rates for the years ended December 31, 2021 and 2020 were 25 and 22%, respectively.
The $14.2 million net deferred tax asset as of December 31, 2021 was comprised of $1.1 million attributable to deferred fees on PPP Loans, which are expected to reverse in the coming year, and $13.1 million attributable to several items associated with temporary timing differences, which will reverse at some point in the future to provide a net reduction in tax liabilities. The largest future reversal relates to unrealized losses on the loan portfolio, which totaled $4.8 million as of December 31, 2021. The next largest future reversal relates to unrealized losses on securities which were designated as available for sale, which totaled $3.6 million as of December 31, 2021.
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 assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.
The Company is in a four-year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets has occurred over the last several years and is expected to continue. The Company has added fourteen store locations in the past five 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. As of December 31, 2021, the Company has no federal NOLs to carry forward, which would have potentially been at risk of expiring in the future.
Conversely, 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, 2021 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, 2021.
The net deferred tax asset balance was $14.2 million as of December 31, 2021 and $12.0 million as of December 31, 2020. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The Company has not identified any uncertain tax position as of December 31, 2021. No interest or penalties have been recorded for the years ended December 31, 2021, 2020, or 2019. The Internal Revenue Service has completed its audits of the Company’s federal tax returns for all tax years through December 31, 2017. The Pennsylvania Department of Revenue is not currently conducting any income tax audits. The Company’s federal income tax returns filed subsequent to 2018 remain subject to examination by the Internal Revenue Service.
11.
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its 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. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $549.8 million and $428.9 million and standby letters of credit of approximately $18.0 million and $16.6 million at December 31, 2021 and 2020, respectively. Commitments often expire without being drawn upon. Of the $549.8 million of commitments to extend credit at December 31, 2021, 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. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. The current amount of liability as of December 31, 2021 and 2020 for guarantees under standby letters of credit issued is not material.
12.
Commitments and Contingencies
The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic, except as noted below.
On March 8, 2022, George E. Norcross, III, Gregory B. Braca, and Philip Norcross filed a complaint in the Court of Common Pleas of Philadelphia County (Commerce Program) against the Company and Company directors Vernon W. Hill II, Theodore J. Flocco, Jr., Brian Tierney, and Barry Spevak. The complaint seeks, among other things, declaratory and injunctive relief enjoining the Company and the individual defendants from implementing any amendments to the Company’s executive employment agreements until after the Company’s 2022 annual meeting of shareholders or taking any other actions outside the ordinary course of business, including executing or extending any related party agreements or any agreements obligating the incurrence of expenses related to the opening of new branches and the renovation of existing branches, without the affirmative vote of a majority of independent directors.
On March 29, 2022, George E. Norcross, III filed suit in the Philadelphia Court of Common Pleas to compel the Company to make available for inspection the books and records as is required under Pennsylvania law.
As of the date of this filing, Mr. Norcross has filed papers with the Court dismissing the actions without prejudice.
On September 19, 2022, a complaint was filed in the Court of Common Pleas in Philadelphia, Pennsylvania against the Company and its current Interim Chief Executive Officer and director and two other current directors. The plaintiffs, the former Chairman of the Board and Chief Executive Officer of the Company and a former director of the Company, allege defamation, defamation per se and false light against the three individual defendants and a breach of the plaintiff’s employment agreement by the Company. The complaint seeks certain reimbursement payments and compensatory and punitive damages. The matter is in its early stages and, accordingly, the Company is still assessing the potential outcomes and materiality of the matter. The Company plans to defend itself vigorously in this matter.
As a result of shareholder activism and related lawsuits, an independent investigation commissioned by the Company’s audit committee and other ongoing legal matters the Company has incurred a significant amount of legal expenses, including reimbursement requests from current and former indemnified directors in accordance with the Company’s Articles of Incorporation and Bylaws, during 2022 which will impact earnings during this year. The amount of legal fees incurred during the nine-month period ended September 30, 2022 related to these matters was approximately $10.3 million.
13.
Regulatory Capital
Dividend payments by Republic to the Company are subject to the Pennsylvania Banking Code of 1965 (the “Banking Code”) and the Federal Deposit Insurance Act (the “FDIA”). Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, undivided profits) without regulatory approval. Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, Republic would be limited to $83.5 million of dividends plus an additional amount equal to its net profit for 2022, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios.
State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by Republic. Federal banking agencies impose four minimum capital requirements on the Company’s risk-based capital ratios based on total capital, Tier 1 capital, CET 1 capital, and a leverage capital ratio. 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.
The following table presents the Company’s and Republic’s capital regulatory ratios calculated based on Basel III guidelines at December 31, 2021 and 2020:
(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, 2021:
Total risk based capital
Republic
$ 347,030 11.43 %
$ 242,787 8.00 %
$ 318,658 10.50 %
$ 303,484 10.00 %
Company
360,175 11.83 %
243,591 8.00 %
319,713 10.50 %
- - %
Tier one risk based capital
Republic
328,066 10.81 %
182,091 6.00 %
257,962 8.50 %
242,787 8.00 %
Company
341,211 11.21 %
182,693 6.00 %
258,816 8.50 %
- - %
CET 1 risk based capital
Republic
328,066 10.81 %
136,568 4.50 %
212,439 7.00 %
197,265 6.50 %
Company
281,886 9.26 %
137,020 4.50 %
213,142 7.00 %
- - %
Tier one leveraged capital
Republic
322,097 5.85 %
224,247 4.00 %
224,247 4.00 %
280,309 5.00 %
Company
324,242 6.08 %
224,656 4.00 %
224,656 4.00 %
- - %
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 %
- - %
Management believes that Republic met, as of December 31, 2021, all capital adequacy requirements to which it is subject. As of December 31, 2021 and 2020, 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 that management believes have changed Republic’s category.
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.
14.
Benefit Plans
Defined Contribution Plan
The Company has a defined contribution plan pursuant to the provision of 401(k) of the Internal Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan provides for elective employee contributions with a matching contribution from the Company limited to 4% of total salary. The total expense charged to Republic, which is included in salaries and employee benefits relating to the plan, was $1.4 million in 2021, $1.5 million in 2020, and $1.2 million in 2019.
Directors’ and Officers’ Plans
The Company has agreements that provide for an annuity payment upon the retirement or death of certain directors and officers, ranging from $15,000 to $25,000 per year for ten years. The agreements were modified for most participants in 2001 to establish a minimum age of 65 to qualify for the payments. All participants are fully vested. The accrued benefits under the plan amounted to $1.1 million at both December 31, 2021 and December 31, 2020, which is included in other liabilities. The expense for the years ended December 31, 2021, 2020, and 2019 totaled $25,000, $6,000, and $16,000, respectively, which is included in salaries and employee benefits. The Company funded the plan through the purchase of certain life insurance contracts. The aggregate cash surrender value of these contracts (owned by the Company) was $1.7 million at December 31, 2021 and $2.6 million at December 31, 2020 and is included in other assets.
The Company maintains a deferred compensation plan for the benefit of certain officers and directors. The plan permitted certain participants to make elective contributions to their accounts, subject to applicable provisions of the Internal Revenue Code. In addition, the Company made discretionary contributions to participant accounts. Company contributions were subject to vesting, and generally vested three years after the end of the plan year to which the contribution applied, subject to acceleration of vesting upon certain changes in control (as defined in the plan) and to forfeiture upon termination for cause (as defined in the plan). No future contributions are permitted. Participant accounts are adjusted to reflect distributions, and income, gains, losses, and expenses as if the accounts had been invested in permitted investments selected by the participants, including the Company’s common stock. The plan provides for distributions upon retirement and, subject to applicable limitations under the Internal Revenue Code, limited hardship withdrawals.
As of December 31, 2021 and 2020, $1.6 million and $1.4 million in benefits, respectively, had vested and the accrued benefits are included in other liabilities. A reduction in expense of $13,000 and $10,000 was recognized for the deferred compensation plan during 2021 and 2020. Expense recognized for the deferred compensation plan for 2019 was $2,000 and is included in salaries and employee benefits. Although the plan is an unfunded plan, and does not require the Company to segregate any assets, the Company has purchased shares of Company common stock in anticipation of its obligation to pay benefits under the plan. Such shares are classified in the financial statements as stock held by deferred compensation plan. No purchases were made in 2021, 2020, and 2019. As of December 31, 2021, approximately 25,437 shares of Company common stock were classified as stock held by deferred compensation plan.
15.
Fair Value Measurements and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.
The Company follows 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 or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2021 and December 31, 2020 were as follows:
(dollars in thousands)
Total
(Level 1)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
December 31, 2021
Assets:
U.S. Government agencies
$ 24,928 $ - $ 24,928 $ -
Collateralized mortgage obligations
371,549 - 371,549 -
Agency mortgage-backed securities
441,483 - 441,483 -
Municipal securities
6,940 - 6,940 -
Corporate bonds
230,466 - 227,841 2,625
Investment securities available for sale
$ 1,075,366 $ 1,072,741 $ 2,625
Equity securities
9,173 9,173 - -
Mortgage Loans Held for Sale
$ 8,538 $ - $ 8,538 $ -
SBA Servicing Assets
4,705 - - 4,705
Interest Rate Lock Commitments
378 - 378 -
Best Efforts Forward Loan Sales Commitments
5 - 5 -
Mandatory Forward Loan Sales Commitments
5 - 5 -
Liabilities:
Interest Rate Lock Commitments
- - - -
Best Efforts Forward Loan Sales Commitments
96 - 96 -
Mandatory Forward Loan Sales Commitments
44 - 44 -
December 31, 2020
Assets:
U.S. Government agencies
$ 31,886 $ - $ 31,886 $ -
Collateralized mortgage obligations
221,546 - 221,546 -
Agency mortgage-backed securities
150,528 - 150,528 -
Municipal securities
8,225 - 8,225 -
Corporate bonds
116,323 - 113,692 2,631
Investment securities available for sale
$ 528,508 $ 525,877 $ 2,631
Equity Securities
9,039 9,039 - -
Mortgage Loans Held for Sale
$ 50,387 $ - $ 50,387 $ -
SBA Servicing Assets
4,626 - - 4,626
Interest Rate Lock Commitments
1,580 - 1,580 -
Best Efforts Forward Loan Sales Commitments
2 - 2 -
Mandatory Forward Loan Sales Commitments
- - - -
Liabilities:
Interest Rate Lock Commitments
- - - -
Best Efforts Forward Loan Sales Commitments
612 - 612 -
Mandatory Forward Loan Sales Commitments
800 - 800 -
The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2021, 2020, and 2019:
(dollars in thousands)
Beginning balance, January 1st
$ 4,626 $ 4,447 $ 4,785
Additions
733 537 1,026
Fair value adjustments
(654 ) (358 ) (1,364 )
Ending balance, December 31st
$ 4,705 $ 4,626 $ 4,447
Fair value adjustments are recorded as loan and servicing fees on the statement of operations. Servicing fee income, not including fair value adjustments, totaled $2.2 million, $1.8 million, and $1.9 million for the years ended December 31, 2021, 2020, and 2019, respectively. Total loans in the amount of $218.9 million at December 31, 2021 and $208.7 million at December 31, 2020 were serviced for others.
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, 2021, 2020, and 2019:
Level 3 Investments Only
(dollars in thousands)
Corporate
Bonds
Corporate
Bonds
Corporate
Bonds
Balance, January 1st
$ 2,631 $ 2,820 $ 3,069
Unrealized gains (losses)
(6 ) (189 ) (249 )
Proceeds from sales
- - -
Realized losses
- - -
Balance, December 31st
$ 2,625 $ 2,631 $ 2,820
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2021 and 2020, respectively, were as follows:
(dollars in thousands)
Total
(Level 1)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
December 31, 2021:
Impaired loans
$ 11,664 $ - $ - $ 11,664
Other real estate owned
360 - - 360
December 31, 2020:
Impaired loans
$ 5,678 $ - $ - $ 5,678
Other real estate owned
364 - - 364
The table below presents additional quantitative information about Level 3 assets measured at fair value (dollars in thousands):
Quantitative Information about Level 3 Fair Value Measurements
Asset Description
Fair Value
Valuation Technique
Unobservable Input
Range (Weighted Average)
December 31, 2021
Corporate bonds
$ 2,625 Discounted
Cash Flows
Discount Rate
(3.42%)
SBA servicing assets
$ 4,705 Discounted
Cash Flows
Conditional
Prepayment Rate
(13.93%)
Discount Rate (10.00%)
Impaired loans
$ 11,664 Appraised Value of Collateral (1)
Liquidation expenses (2)
11% - 27% (16%) (3)
Sales Price
Liquidation expenses (2)
(12%) (3)
Estimated Value of Insurance Proceeds (4)
Other real estate owned
$ 360 Appraised Value of Collateral (1)
Liquidation expenses (2)
(19%) (3)
Sales Price
Liquidation expenses (2)
(13%) (3)
December 31, 2020
Corporate bonds
$ 2,631 Discounted
Cash Flows
Discount Rate
(3.48%)
SBA servicing assets
$ 4,626 Discounted
Cash Flows
Conditional
Prepayment Rate
(13.22%)
Discount Rate (10.00%)
Impaired loans
$ 5,678 Appraised Value of Collateral (1)
Liquidation expenses (2)
0% - 23% (12%) (3)
Other real estate owned
$ 364 Appraised Value of Collateral (1)
Liquidation expenses (2)
7% - 16% (13%) (3)
(1)
Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.
(2)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3)
The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.
(4)
The valuation technique is determined based on estimated insurance proceeds and litigation.
The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company’s actual sales of other real estate owned which are assessed annually.
Fair Value Assumptions
The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at December 31, 2021 and December 31, 2020:
Investment Securities
The fair value of investment 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 investment 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 fair value of equity securities (carried at fair value) is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1).
The types of instruments valued based on matrix pricing in active markets include all of the Company’s U.S. government and agency securities, corporate bonds, and municipal obligations held in the investment securities portfolio. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such instruments.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. Republic has one Level 3 investment classified as available for sale which is a single corporate bond.
The corporate bond included in Level 3 was transferred from Level 2 in 2010 and 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.
Mortgage Loans Held for Sale (Carried at Fair Value)
The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect their economic value. Interest income on loans held for sale, totaled $735,000 and $846,000 for the twelve months ended December 31, 2021 and December 31, 2020, respectively, are included in interest and fees in the statements of operations.
The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of December 31, 2021 and December 31, 2020 (dollars in thousands):
Carrying
Amount
Aggregate Unpaid
Principal Balance
Excess Carrying
Amount Over
Aggregate Unpaid
Principal Balance
December 31, 2021
$ 8,538 $ 8,241 $ 297
December 31, 2020
$ 50,387 $ 48,109 $ 2,278
Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of operations in mortgage banking income. Republic did not have any mortgage loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual at December 31, 2021 and December 31, 2020.
Interest Rate Lock Commitments (“IRLC”)
The Company determines the value of IRLCs by comparing the market price to the price locked in with the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing, and subtracting estimated remaining loan origination costs to the bank based on the processing status of the loan. The Company also considers pull-through as it determines the fair value of IRLCs. Factors that affect pull-through rates include the origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage (purchase versus financing), the stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. IRLCs are classified within Level 2 of the valuation hierarchy.
Best Efforts Forward Loan Sales Commitments
Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy. Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made. These best efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.
Mandatory Forward Loan Sales Commitments
Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Due to the observable inputs used by Republic, best efforts mandatory loan sales commitments are classified within Level 2 of the valuation hierarchy.
Impaired Loans (Carried at Lower of Cost or Fair Value)
Impaired loans are those that the Company has measured impairment based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows or it is calculated based on discounted collateral values if the loans are collateral dependent.
Other Real Estate Owned (Carried at Lower of Cost or Fair Value)
These assets are carried at the lower of cost or fair value. Fair value is determined through valuations periodically performed by third-party appraisers, and the real estate is carried at the lower of its carrying amount or fair value less estimated costs to sell. Any declines in the fair value of the real estate properties below the initial cost basis are recorded through a valuation expense. At December 31, 2021 and December 31, 2020, these assets are carried at current fair value and classified within Level 3 of the fair value hierarchy.
SBA Servicing Asset (Carried at Fair Value)
The SBA servicing asset is initially recorded when loans are sold and the servicing rights are retained and recorded on the balance sheet. An updated fair value is obtained from an independent third party on a quarterly basis and adjustments are presented as loan and servicing fees on the statement of operations. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, the Company’s market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing the Company’s market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.
The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. At December 31, 2021 and December 31, 2020, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% adverse changes in key assumptions are included in the accompanying table.
(dollars in thousands)
December 31, 2021
December 31, 2020
SBA Servicing Asset
Fair Value of SBA Servicing Asset
$ 4,705 $ 4,626
Composition of SBA Loans Serviced for Others
Fixed-rate SBA loans
4 % 2 %
Adjustable-rate SBA loans
96 % 98 %
Total
100 % 100 %
Weighted Average Remaining Term (in years)
19.6
20.0
Prepayment Speed
13.93 % 13.22 %
Effect on fair value of a 10% increase
$ (204 ) $ (170 )
Effect on fair value of a 20% increase
(393 ) (329 )
Weighted Average Discount Rate
10.00 % 10.00 %
Effect on fair value of a 10% increase
$ (148 ) $ (152 )
Effect on fair value of a 20% increase
(288 ) (295 )
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one factor may magnify or counteract the effect of the change.
Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account, the remaining terms of the agreements and the counterparties’ credit standing.
The estimated fair values of the Company’s financial instruments at December 31, 2021 were as follows:
Fair Value Measurements at December 31, 2021
(dollars in thousands) Carrying
Amount
Fair
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance Sheet Data
Financial assets:
Cash and cash equivalents
$ 118,884 $ 118,884 $ 118,884 $ - $ -
Investment securities available for sale
1,075,366 1,075,366 - 1,072,741 2,625
Investment securities held to maturity
1,660,292 1,647,360 - 1,647,360 -
Equity securities
9,173 9,173 9,173 - -
Restricted stock
3,510 N/A N/A N/A N/A
Loans held for sale
13,762 13,762 - 8,538 5,224
Loans receivable, net
2,488,401 2,475,944 - - 2,475,944
SBA servicing assets
4,705 4,705 - - 4,705
Accrued interest receivable
15,073 15,073 - 15,073 -
Interest rate lock commitments
378 378 - 378 -
Best efforts forward loan sales commitments
5 5 - 5 -
Mandatory forward loan sales commitments
5 5 - 5 -
Financial liabilities:
Deposits
Demand, savings and money market
$ 4,993,235 $ 4,993,235 $ - $ 4,993,235 $ -
Time
197,945 197,764 - 197,764 -
Subordinated debt
11,278 8,644 - - 8,644
Accrued interest payable
550 550 - 550 -
Interest rate lock commitments
- - - - -
Best efforts forward loan sales commitments
96 96 - 96 -
Mandatory forward loan sales commitments
44 44 - 44 -
Off-Balance Sheet Data
Commitments to extend credit
- - - - -
Standby letters-of-credit
- - - - -
The estimated fair values of the Company’s financial instruments at December 31, 2020 were as follows:
Fair Value Measurements at December 31, 2020
(dollars in thousands)
Carrying
Amount
Fair
Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance Sheet Data
Financial assets:
Cash and cash equivalents
$ 775,300 $ 775,300 $ 775,300 $ - $ -
Investment securities available for sale
528,508 528,508 - 525,877 2,631
Investment securities held to maturity
814,936 836,972 - 836,972 -
Equity securities
9,039 9,039 9,039 - -
Restricted stock
3,039 N/A N/A N/A -
Loans held for sale
53,370 53,370 - 50,387 2,983
Loans receivable, net
2,632,367 2,618,104 - - 2,618,104
SBA servicing assets
4,626 4,626 - - 4,626
Accrued interest receivable
16,120 16,120 - 16,120 -
Interest rate lock commitments
1,580 1,580 - 1,580 -
Best efforts forward loan sales commitments
2 2 - 2 -
Mandatory forward loan sales commitments
- - - - -
Financial liabilities:
Deposits
Demand, savings and money market
$ 3,827,390 $ 3,827,390 $ - $ 3,827,390 $ -
Time
186,361 187,292 - 187,292 -
Subordinated debt
11,271 8,026 - - 8,026
Accrued interest payable
926 926 - 926 -
Interest rate lock commitments
- - - - -
Best efforts forward loan sales commitments
612 612 - 612 -
Mandatory forward loan sales commitments
800 800 - 800 -
Off-Balance Sheet Data
Commitments to extend credit
- - - - -
Standby letters-of-credit
- - - - -
16.
Stock Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of December 31, 2020, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014, the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. At December 31, 2021, the maximum number of common shares issuable under the 2014 Plan was 6.5 million shares. During the twelve months ended December 31, 2021, 551,179 stock units were granted under the 2014 Plan with a fair value of $1.85 million. During 2021, stock units to purchase the Company’s common stock were granted to certain employees and directors. The exercise price for the stock units granted was equal to the closing price of the Company’s common stock on the date of grant. The stock units issued are subject to a one to four year vesting period and expire after ten years.
On April 27, 2021, the Company’s shareholders approved the 2021 Equity Incentive Plan of Republic First Bancorp, Inc. (the “2021 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2021 Plan, the maximum number of shares which may be issued or awarded is 7.5 million shares of common stock. As of December 31, 2021, no shares have been granted under the 2021 Plan.
The Company utilized the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant. During 2021, 641,384 options vested as compared to 918,790 options in 2020 and 842,898 options in 2019. Expense is recognized ratably over the period required to vest. At December 31, 2021, the intrinsic value of the 5.3 million options outstanding was $1.4 million, while the intrinsic value of the 3.7 million exercisable (vested) options was $634,000. During 2021, 483,275 options were forfeited with a weighted average grant date fair value of $1.0 million.
Information regarding stock based compensation related to stock options for the years ended December 31, 2021, 2020, and 2019 is set forth below:
Stock based compensation expense recognized
$ 1,480,000 $ 1,918,000 $ 2,632,000
Number of unvested stock options
1,643,740 2,514,800 2,367,515
Fair value of unvested stock options
$ 2,859,062 $ 4,702,676 $ 6,108,271
Amount remaining to be recognized as expense
$ 1,155,748 $ 2,788,559 $ 3,574,740
The remaining amount of $1.2 million will be recognized ratably as expense through December 2024.
A summary of stock option exercises and related proceeds during the years end December 31, 2021, 2020, and 2019 is as follows:
For the Years Ended December 31,
Number of options exercised
83,375 17,000 53,550
Cash received
$ 205,166 $ 41,305 $ 261,143
Intrinsic value
$ 81,614 $ 10,410 $ 72,187
Tax benefit
$ 333 $ 355 $ 5,159
A summary of stock option activity under the plans as of December 31, 2021, 2020, and 2019 is as follows:
For the Years Ended December 31,
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Outstanding, beginning of year
5,899,425 $ 5.44 4,979,475 $ 6.05 3,861,650 $ 5.96
Granted
- - 1,270,450 2.98 1,356,500 6.35
Exercised
(83,375 ) 2.46 (17,000 ) 2.43 (53,550 ) 4.88
Forfeited
(483,275 ) 5.32 (333,500 ) 5.34 (185,125 ) 6.76
Outstanding, end of year
5,332,775 $ 5.50 5,899,425 $ 5.44 4,979,475 $ 6.05
Options exercisable at year-end
3,689,035 $ 5.91 3,384,625 $ 5.67 2,611,960 $ 5.28
Weighted average fair value of options granted during the year
$ - $ 0.91 $ 2.15
The following table summarizes information about options outstanding at December 31, 2021:
Options Outstanding Options Exercisable
Range of
Exercise Prices
Number
Outstanding
Weighted-
Average
Remaining
Contractual Life
Weighted-
Average
Exercise Price
Shares
Weighted-
Average
Exercise Price
$1.90
to $3.53 1,482,675 6.4 $ 2.85 511,923 $ 2.61
$3.55
to $3.94 559,850 2.8 3.60 557,850 3.60
$3.99
to $7.85 1,585,625 6.2 5.73 1,128,625 5.52
$8.00
to $9.45 1,704,625 5.6 8.22 1,490,637 8.19
5,332,775 $ 5.50 3,689,035 $ 5.90
A roll-forward of non-vested options during the year ended December 31, 2021 is as follows:
Number of
Shares
Weighted-
Average Grant
Date Fair Value
Nonvested, beginning of year
2,514,800 $ 1.87
Granted
- -
Vested
(641,384 ) 2.57
Forfeited
(229,676 ) 1.75
Nonvested, end of year
1,643,740 $ 1.74
The Company granted stock units under the 2014 Plan during the year ended December 31, 2021. The compensation expense for the stock units is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.
The following table details the Stock Units for the year ended December 31, 2021:
Year Ended December 31, 2021
Number
of Units
Weighted
Average
Grant Date
Fair Value
Beginning balance
- $ -
Granted
551,179 3.36
Vested
- -
Forfeited
(34,666 ) 3.34
Ending balance
516,513 $ 3.36
Information regarding stock based compensation related to RSUs for the year ended December 31, 2021 is set forth below:
Stock based compensation expense recognized
$ 613,497
Number of unvested stock units
516,513
Fair value of unvested stock units
$ 1,849,595
Amount remaining to be recognized as expense
$ 1,236,098
The remaining unrecognized expense amount of $1,236,098 will be recognized ratably as expense through December 2025.
17. Segment Reporting
The Company has one reportable segment: community banking. The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Mortgage loans in Delaware and Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. We do not have loan production offices in those states.
18. Transactions with Affiliates and Related Parties
The Company made payments to related parties in the amount of $993,000, $690,000, and $1.4 million during 2021, 2020, and 2019, respectively. The disbursements made during 2021, 2020, and 2019 include $696,000, $390,000, and $1.1 million, respectively, in fees for marketing, graphic design, architectural and project management services paid to InterArch, a company owned by the spouse of Vernon W. Hill, II. Mr. Hill was the Chairman of the Company, and beneficially owns 9.9% of the common shares currently outstanding. In February 2021, he was named to the additional role of Chief Executive Officer of both the Company and the Bank. Mr. Hill resigned from his position of Chief Executive Officer and as a member of the Board of both the Company and the Bank. His resignation was effective in August 2022. The Company paid $177,000, $177,000 and $158,000 during 2021, 2020, and 2019 to Glassboro Properties, LLC related to a land lease agreement for its Glassboro store. Mr. Hill has an ownership interest in Glassboro Properties LLC, a commercial real estate firm.
The Company paid $120,000 during 2021, 2020 and 2019 to Brian Communications for public relations services in addition to reimbursements for out-of-pocket expenses and other reimbursable costs. Brian Tierney, a member of the Board of Directors, is the CEO of Brian Communications, a strategic communications agency.
The Company utilized the services of a commercial real estate firm to assist with the acquisition of properties for development of branch locations. This firm earned commissions of $190,000, $246,000, and $170,000 for the years ended December 31, 2021, 2020, and 2019, respectively, on transactions the Company entered into to purchase or lease real estate during those years. These commissions were paid directly to the commercial real estate firm by the seller or landlord in each instance. The Company made no direct payments to this firm during these years. The December 31, 2020 and 2019 disclosure has been updated from the previously reported balance of zero.
19. Parent Company Financial Information
The following financial statements for Republic First Bancorp, Inc. (Parent Company) should be read in conjunction with the consolidated financial statements and the other notes related to the consolidated financial statements.
Balance Sheet
December 31, 2021 and 2020
(Dollars in thousands)
December 31,
December 31,
ASSETS
Cash
$ 3,017 $ 22,872
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust holding junior obligations of the corporation
341 341
Investment in subsidiaries
322,097 287,114
Other assets
10,197 9,347
Total Assets
$ 335,652 $ 319,674
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accrued expenses
$ 132 $ 290
Corporation-obligated mandatorily redeemable securities of subsidiary trust holding solely junior subordinated debentures of the corporation
11,278 11,271
Total Liabilities
11,410 11,561
Shareholders’ Equity
Total Shareholders’ Equity
324,242 308,113
Total Liabilities and Shareholders’ Equity
$ 335,652 $ 319,674
Statements of Operations, Comprehensive Income, and Changes in Shareholders’ Equity
For the years ended December 31, 2021, 2020, and 2019
(Dollars in thousands)
Interest income
$ 6 $ 9 $ 14
Total income
6 9 14
Trust preferred interest expense
214 297 476
Other expenses
3,284 2,805 3,662
Total expenses
3,498 3,102 4,138
Net loss before taxes
(3,492 ) (3,093 ) (4,124 )
Benefit for income taxes
(840 ) (703 ) (917 )
Loss before undistributed income of subsidiaries
(2,652 ) (2,390 ) (3,207 )
Equity in undistributed income of subsidiaries
27,828 7,444 (293 )
Net income (loss)
$ 25,176 $ 5,054 $ (3,500 )
Net income (loss)
$ 25,176 $ 5,054 $ (3,500 )
Total other comprehensive income (loss)
(7,845 ) 4,512 4,586
Total comprehensive income
$ 17,331 $ 9,566 $ 1,086
Shareholders’ equity, beginning of year
$ 308,113 $ 249,168 $ 245,189
Stock based compensation
2,093 1,918 2,632
Exercise of stock options
205 41 261
Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675
- 48,325 -
Preferred stock dividends
(3,500 ) (923 ) -
Return of short swing profit
- 18
Net income (loss)
25,176 5,054 (3,500 )
Total other comprehensive income (loss)
(7,845 ) 4,512 4,586
Shareholders’ equity, end of year
$ 324,242 $ 308,113 $ 249,168
Statements of Cash Flows
For the years ended December 31, 2021, 2020, and 2019
(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)
$ 25,176 $ 5,054 $ (3,500 )
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Share based compensation
2,093 1,918 2,632
Amortization of debt issuance costs
7 6 6
Increase in other assets
(850 ) (707 ) (1,069 )
Net increase (decrease) in other liabilities
(158 ) 257 (18 )
Equity in undistributed income of subsidiaries
(27,828 ) (7,444 ) 293
Net cash used in operating activities
(1,560 ) (916 ) (1,656 )
Cash flows from investing activities:
Investment in subsidiary
(15,000 ) (30,000 ) (20,000 )
Net cash used in investing activities
(15,000 ) (30,000 ) (20,000 )
Cash flows from financing activities:
Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675
- 48,325
Preferred share dividends
(3,500 ) (923 )
Return of short swing profit
- 18
Exercise of stock options
205 41 261
Net cash provided by financing activities
(3,295 ) 47,461 261
Increase (decrease) in cash
(19,855 ) 16,545 (21,395 )
Cash, beginning of period
22,872 6,327 27,722
Cash, end of period
$ 3,017 $ 22,872 $ 6,327
20.
Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the Company for each of the quarters ended during 2021 and 2020.
Summary of Selected Quarterly Consolidated Financial Data
(dollars in thousands, except per share data)
For the Quarter Ended
December 31st
September 30th
June 30th
March 31st
Interest income
$ 40,251 $ 35,778 $ 35,354 $ 36,420
Interest expense
4,552 4,336 4,715 4,988
Net interest income
35,699 31,442 30,639 31,432
Provision for loan losses
1,850 900 - 3,000
Non-interest income
7,473 7,317 7,680 10,275
Non-interest expense
32,865 29,775 30,519 29,347
Provision (benefit) for income taxes
2,379 1,988 1,866 2,292
Net income (loss)
$ 6,078 $ 6,096 $ 5,934 $ 7,068
Preferred stock dividends
875 875 875 875
Net income available to common shareholders
$ 5,203 $ 5,221 $ 5,059 $ 6,193
Net income (loss) per share(1):
Basic
$ 0.09 $ 0.09 $ 0.09 $ 0.11
Diluted
$ 0.08 $ 0.08 $ 0.08 $ 0.09
Interest income
$ 31,248 $ 28,560 $ 27,859 $ 27,283
Interest expense
5,527 5,630 5,432 6,529
Net interest income
25,721 22,930 22,427 20,754
Provision for loan losses
1,400 850 1,000 950
Non-interest income
11,235 10,031 8,424 6,545
Non-interest expense
29,907 33,580 26,664 27,272
Provision (benefit) for income taxes
1,548 (503 ) 675 (330 )
Net income (loss)
$ 4,101 $ (967 ) $ 2,512 $ (593 )
Preferred stock dividends
923 - - -
Net income available to common shareholders
$ 3,178 $ (967 ) $ 2,512 $ (593 )
Net income (loss) per share(1):
Basic
$ 0.05 $ (0.02 ) $ 0.04 $ (0.01 )
Diluted
$ 0.05 $ (0.02 ) $ 0.04 $ (0.01 )
(1)
Quarterly net income per share does not add to full year net income per share due to rounding.
21.
Changes in Accumulated Other Comprehensive Income (Loss) By Component (1)
The following table presents the changes in accumulated other comprehensive loss by component, net of taxes, for the years ended December 31, 2021, 2020, and 2019.
Unrealized Gains
(Losses) on Available-
For-Sale Securities
Unrealized Holding
Losses on Securities
Transferred From
Available-For-Sale
To Held-To-Maturity
Total
(dollars in thousands)
Balance January 1, 2021
$ 985 $ (3,814 ) $ (2,829 )
Unrealized loss on securities
(9,646 ) - (9,646 )
Amounts reclassified from accumulated other comprehensive income to net income (2)
(1 ) 1,802 1,801
Net current-period other comprehensive income
(9,647 ) 1,802 (7,845 )
Total change in accumulated other comprehensive income
(9,647 ) 1,802 (7,845 )
Balance December 31, 2021
$ (8,662 ) $ (2,012 ) $ (10,674 )
Balance January 1, 2020
$ (1,275 ) $ (6,066 ) $ (7,341 )
Unrealized gain on securities
4,320 - 4,320
Amounts reclassified from accumulated other comprehensive income to net income (2)
(2,060 ) 2,252 192
Net current-period other comprehensive income
2,260 2,252 4,512
Total change in accumulated other comprehensive income
2,260 2,252 4,512
Balance December 31, 2020
$ 985 $ (3,814 ) $ (2,829 )
Balance January 1, 2019
$ (4,736 ) $ (7,191 ) $ (11,927 )
Unrealized gain on securities
4,284 - 4,284
Amounts reclassified from accumulated other comprehensive income to net income (2)
(823 ) 1,125 302
Net current-period other comprehensive income
3,461 1,125 4,586
Total change in accumulated other comprehensive income (loss)
3,461 1,125 4,586
Balance December 31, 2019
$ (1,275 ) $ (6,066 ) $ (7,341 )
(1)
All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income.
(2)
Reclassification amounts are reported as gains/losses on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Operations.
22.
Goodwill
In connection with the review of our financial condition in light of the COVID-19 pandemic, we evaluated our assets, including goodwill and other intangibles for potential impairment on an interim basis at the end of each quarter during 2020. Goodwill was written off as a result of an interim test completed as of September 30, 2020. This was a complete write-off of all goodwill on the balance sheet.
In 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. The Company’s goodwill related to the acquisition of Oak Mortgage in July 2016 is detailed below:
(dollars in thousands)
Balance
December 31,
Additions/
Adjustments
Write-offs
Amortization
Balance
December 31,
Amortization
Period (in
years)
Goodwill
$ 5,011 $ - $ (5,011 ) $ - $ - None
23.
Derivatives and Risk Management Activities
Republic did not have any derivative instruments designated as hedging instruments, or subject to master netting and collateral agreements for the twelve months ended December 31, 2021 and 2020. The following table summarizes the amounts recorded in Republic’s statement of financial condition for derivatives not designated as hedging instruments as of December 31, 2021 and December 31, 2020 (in thousands):
December 31, 2021
Balance Sheet
Presentation
Fair
Value
Notional
Amount
Asset derivatives:
IRLC’s
Other Assets
$ 378 $ 14,419
Best efforts forward loan sales commitments
Other Assets
5 3,222
Mandatory forward loan sales commitments
Other Assets
5 1,667
Liability derivatives:
IRLC’s
Other Liabilities
$ - $ -
Best efforts forward loan sales commitments
Other Liabilities
96 11,197
Mandatory forward loan sales commitments
Other Liabilities
44 6,460
December 31, 2020
Balance Sheet
Presentation
Fair
Value
Notional
Amount
Asset derivatives:
IRLC’s
Other Assets
$ 1,580 $ 48,223
Best efforts forward loan sales commitments
Other Assets
2 2,069
Mandatory forward loan sales commitments
Other Assets
- -
Liability derivatives:
IRLC’s
Other Liabilities
$ - $ -
Best efforts forward loan sales commitments
Other Liabilities
612 46,154
Mandatory forward loan sales commitments
Other Liabilities
800 48,373
The following table summarizes the amounts recorded in Republic’s statement of operations for derivative instruments not designated as hedging instruments for the twelve months ended December 31, 2021, 2020, and 2019 (in thousands):
Twelve Months Ended December 31, 2021
Income Statement
Presentation
Gain/(Loss)
Asset derivatives:
IRLC’s
Mortgage banking income
$ (1,202 )
Best efforts forward loan sales commitments
Mortgage banking income
Mandatory forward loan sales commitments
Mortgage banking income
Liability derivatives:
IRLC’s
Mortgage banking income
$ -
Best efforts forward loan sales commitments
Mortgage banking income
Mandatory forward loan sales commitments
Mortgage banking income
Twelve Months Ended December 31, 2020
Income Statement
Presentation
Gain/(Loss)
Asset derivatives:
IRLC’s
Mortgage banking income
$ 1,218
Best efforts forward loan sales commitments
Mortgage banking income
(2 )
Mandatory forward loan sales commitments
Mortgage banking income
(2 )
Liability derivatives:
IRLC’s
Mortgage banking income
$ -
Best efforts forward loan sales commitments
Mortgage banking income
(479 )
Mandatory forward loan sales commitments
Mortgage banking income
(717 )
Twelve Months Ended December 31, 2019
Income Statement
Presentation
Gain/(Loss)
Asset derivatives:
IRLC’s
Mortgage banking income
$ (48 )
Best efforts forward loan sales commitments
Mortgage banking income
(1 )
Mandatory forward loan sales commitments
Mortgage banking income
(8 )
Liability derivatives:
IRLC’s
Mortgage banking income
$ -
Best efforts forward loan sales commitments
Mortgage banking income
Mandatory forward loan sales commitments
Mortgage banking income
The fair value of Republic’s IRLCs, best efforts forward loan sales commitments, and mandatory forward loan sales commitments are based upon the estimated value of the underlying mortgage loan (determined consistent with “Loans Held for Sale”), adjusted for (1) estimated costs to complete and originate the loan, and (2) the estimated percentage of IRLCs that will result in a closed mortgage loan. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price.
24.
Revenue Recognition
The following table presents non-interest income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, “Revenue from Contracts with Customers”, for the twelve months ended December 31, 2021, 2020, and 2019.
Twelve Months Ended
December 31,
(dollars in thousands)
Non-interest income
In-scope of Topic 606
Service charges on deposit accounts
$ 13,953 $ 11,058 $ 7,541
Other non-interest income
603 168 214
Non-interest income (in-scope of Topic 606)
14,556 11,226 7,755
Non-interest income (out-of-scope of Topic 606)
18,189 25,009 15,983
Total non-interest income
$ 32,745 $ 36,235 $ 23,738
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transaction activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term contracts with customers, and therefore, does not experience significant contract balances. As of December 31, 2021, 2020, and 2019, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize as an expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the assets that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.
25.
Leases
We have operating lease agreements for certain land, buildings, and equipment. In some instances, a lease may contain renewal options to extend the term of the lease. We do not have any short-term leases in the calculation of the right-of-use assets and lease liability obligations. The most significant assumption related to the Company’s lease application of ASC 842 was the discount rate assumption. Since most of the lease agreements do not provide an implicit interest rate, the discount rate used in determining the operating lease liability obligation for each individual lease was the assumed incremental borrowing rate for the Company that corresponded with the remaining lease term.
At December 31, 2021, the Company had 44 operating lease agreements, which include operating leases for twenty branch locations, seven offices that are used for general office space, and seventeen operating leases for equipment. Two of the real property operating leases did not include one or more options to extend the lease term. Eight of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The 44 operating leases have maturity dates ranging from June 2022 to August 2059 most of which include options for multiple five- and ten-year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 19.05 years as of December 31, 2021.
At December 31, 2020, the Company had 42 operating lease agreements, which include operating leases for twenty branch locations, seven offices that are used for general office space, and fifteen operating leases for equipment. Two of the real property operating leases did not include one or more options to extend the lease term. Eight of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The forty-two operating leases have maturity dates ranging from August 2021 to August 2059 most of which include options for multiple five- and ten-year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 21.04 years as of December 31, 2020.
The discount rate used in determining the operating lease liability obligation for each individual lease was the assumed incremental borrowing rate for the Company that corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered in to. The weighted average operating lease discount rate was 3.35% and 3.33% as of December 31, 2021 and 2020, respectively.
The following table presents operating lease costs net of sublease income for the twelve months ended December 31, 2021 and 2020.
Twelve Months
Ended
December 31, 2021
Twelve Months
Ended
December 31, 2020
(dollars in thousands)
Operating lease cost
$ 8,650 $ 7,915
Sublease income
- -
Total lease cost
$ 8,650 $ 7,915
The following table presents a maturity analysis of total operating lease liability obligations and reconciliation of the undiscounted cash flows to total operating lease liability obligations at December 31, 2021 and 2020.
December 31, 2021
December 31, 2020
(dollars in thousands)
Operating lease payments due:
Within one year
$ 8,134 $ 8,260
One to three years
15,062 15,719
Three to five years
13,820 14,938
More than five years
78,867 85,176
Total undiscounted cash flows
115,883 124,093
Discount on cash flows
(34,113 ) (46,517 )
Total operating lease liability obligations
$ 81,770 $ 77,576
The following table presents cash and non-cash activities for the twelve months ended December 31, 2021 and 2020.
Twelve Months
Ended
December 31,
Twelve Months
Ended
December 31,
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
$ 8,244 $ 7,383
Non-cash investing and financing activities
Additions to Operating leases - right of use asset
New operating lease liability obligation
$ 8,808 $ 10,973
Note 26 - Preferred Stock
On August 26, 2020, the Company issued 2,000,000 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $25.00 per share. The Company will pay dividends on the Series A Preferred Stock when and if declared by its Board of Directors or an authorized committee thereof. If declared, dividends will be due and payable at a rate of 7.00% per annum, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year, beginning with the first dividend payment on December 1, 2020. The Company received net proceeds of $48.3 million from the offering, after deducting offering costs. Preferred stock dividends of $3.5 million were paid for the year ended December 31, 2021 and $923,000 were paid for the year ended December 31, 2020.
Holders of shares of Series A Preferred Stock may convert such shares at any time and from time to time into shares of the Company’s common stock at a conversion price of $3.00 per share of our common stock, subject to adjustment upon certain events. At any time after August 26, 2025, the Company may cause the outstanding shares of Series A Preferred Stock to convert into shares of common stock if the price of the common stock exceeds 125% of the Conversion Price then applicable to the Series A Preferred Stock for at least 20 trading days in a period of 30 consecutive trading days.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A: Disclosure Controls and Procedures
In preparing this report, the Company’s management, under the supervision and with the participation of the Interim Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the last day of the period covered by this report. Based on that evaluation, the Interim Chief Executive Officer and the Chief Financial Officer concluded that, due to the material weakness in the Company’s internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of December 31, 2021 to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that it is accumulated and communicated to our management, including the Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Notwithstanding the material weakness, management believes, based on its procedures in preparing this report, that the consolidated financial statements included in this report fairly present, in all material respects, the Company’s financial position, results of operations and cash flows as of and for the periods presented in conformity with accounting principles generally accepted in the United States of America.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for the preparation, integrity and fair presentation of the financial statements included in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning the effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15 under the Exchange Act). The Company’s internal control over financial reporting includes those policies and procedures that:
●
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;
●
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting procedures;
●
provide reasonable assurance that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
●
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation.
Management assessed the Company’s system of internal control over financial reporting as of December 31, 2021. This assessment was conducted based on the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission “Internal Control - Integrated Framework (2013).” Based on this assessment, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2021 due to the material weaknesses identified below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
In 2022, the Audit Committee of the Board of Directors of the Company engaged outside legal counsel that had no involvement in the underlying matters, to investigate the Company’s financial controls, certain corporate governance matters and related party transactions. After review of legal counsel’s report, management concluded there were deficiencies in the Company’s internal control over financial reporting that represented material weaknesses in the Company’s internal control over financial reporting as of December 31, 2021. The first material weakness stemmed from a failure to maintain an effective control environment, which resulted in deficiencies in the communication of certain relevant information to the Board of Directors of the Company, including information related to branch expenditures. This material weakness did not result in a misstatement of the Company’s financial statements or an adjustment to related disclosures.
The second material weakness related to the failure to maintain effective controls over related party transactions. Specifically, effective controls were not designed and maintained over the review, analysis and approval of related party transactions. The material weakness specifically manifested in deficiencies in: (1) the timely testing of related party information; (2) the failure of management to properly consider Accounting Standards Codification 850, Related Party Disclosures, in identifying all related parties; and (3) the failure of management to operate in accordance with the Company’s internal related party transaction approval process. This material weakness resulted in a misstatement of the Company’s related party disclosures.
In addition, a third material weakness was identified in connection with the Company’s implementation of FASB’s accounting standard, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaced the “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. Specifically, the material weakness related to the failure to maintain effective controls over the quantification and review of the transition adjustment from the incurred loss model to the CECL model for purposes of disclosing such transition in the audited footnotes to the consolidated financial statements. . This material weakness resulted in an adjustment to the Company’s disclosures related to the adoption of Topic 326.
These material weaknesses could result in misstatements of the aforementioned accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
The 2021 financial statements have been audited by the independent registered public accounting firm of Crowe LLP (“Crowe”). Crowe has also issued a report on the effectiveness of internal control over financial reporting. That report has also been made a part of this Annual Report.
Remediation
During 2022, Management believes that the deficiencies that contributed to the material weaknesses are in the process of being remediated. The material weaknesses will not be considered fully remediated until the enhanced controls are fully implemented and operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
The following changes are contributing to the ongoing remediation:
●
the appointment of Harry D. Madonna as Executive Chair of the Board and Interim Chief Executive Officer of the Company;
●
the re-appointment of a Lead Independent Director of the Company;
●
the restructuring of the Board of Directors to strengthen its risk and financial reporting oversight functions, including the addition of one new independent director with extensive public company and financial reporting experience;
●
reconstitution of the membership of the committees of the Board of Directors and the appointment of new committee chairs;
●
more frequent meetings of the Board of Directors and its committees; and
●
the active encouragement by management, with the assistance of the Chairman and the rest of the Board, of an open and collaborative culture, to set an appropriate “tone at the top”.
Specific controls added or enhanced to mitigate the potential for identified deficiencies from continuing include:
●
the enhancement of information to be provided by management to the Board of Directors, specifically with regard to any potential branch expansion opportunities;
●
the enhancement of the Company’s policies and procedures for the identification, review and reporting of existing related party transactions and the discontinuation of future transaction with related party transactions; and
●
the implementation of design controls related to CECL and the Allowance for Credit Losses, which includes hiring an external consultant to assist with the continued refinement and testing of design features and controls.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B: Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10: Directors, Executive Officers and Corporate Governance
Directors
Each of the following individuals is an incumbent director who will continue to serve as a director of the Company until the end of his or her respective term or until a successor is elected and qualified.
Harry D. Madonna, Esq., age 79, has served as Executive Chairman and Interim Chief Executive Officer of the Company and the Bank since August 2022. He has served as president of the Company since 2001, and as a director of the Company since 1988. He previously served as chief executive officer of the Company from 2001 through February 2021. Mr. Madonna also served as chairman of the Bank from 1988 through February 2021 and chief executive officer of the Bank from 2001 through February 2021. He served as chairman of the Company from 1988 to 2016 and served as the Bank’s president from 2001 until May 2010. From 1999 through November 2012, Mr. Madonna served as executive chairman of First Bank of Delaware, a commercial bank headquartered in the state of Delaware, and served as its chief executive officer from January 2002 until July 2008. Mr. Madonna was of counsel to Spector Gadon & Rosen, PC, a general practice law firm located in Philadelphia, Pennsylvania from January 1, 2002 until June 30, 2005 and prior to that, was a partner of Blank Rome LLP, a law firm located in Philadelphia, Pennsylvania from 1980 until December 2001. Mr. Madonna’s background as an attorney and years of experience with the Bank provides him with the skills to serve on the board of both the Company and the Bank. Mr. Madonna’s position within the Company and the Bank also provides him with intimate knowledge of our business, results of operations and financial condition.
Peter B. Bartholow, age 74, has been a director of the Company and the Bank since September 2022. Mr. Bartholow most recently served as Chief Operating Officer and as a member of the Board of Directors of Texas Capital Bancshares, Inc. [Nasdaq: TCBI], a bank holding company, from 2003 until his retirement in 2017. He also served as the Chief Operating Officer of Texas Capital Bancshares from 2014 through 2017. Prior to that, Mr. Bartholow served as Managing Director of Hat Creek Partners LLC, a private equity investment company, from 1999 to 2003. From 1995 to 1998, Mr. Bartholow served as Corporate Vice President of Finance at Electronic Data Systems, Corp. (formerly NYSE: EDS) (“EDS”), a multinational information technology equipment and services company. Mr. Bartholow served as Chief Financial Officer of First USA, Inc. (formerly NYSE: FUS), a financial services company originally formed as a subsidiary of MCorp, from 1994 to 1995. From 1989 to 1994, Mr. Bartholow served as Chairman of the Board of Directors, Chief Financial Officer, Chief Executive Officer and President of MCorp, which was a bank holding company a majority of whose banks were acquired by Bank One Corporation (formerly NYSE: ONE). Mr. Bartholow served on the board of directors of MTech, a publicly owned technology services company, of which MCorp was the majority stockholder, from 1985 to 1988, when MTech was acquired by EDS. Mr. Bartholow also served on the board of directors of A.T. Kearney, Inc., a subsidiary of EDS and provider of management consulting services, from 1995 to 1998 and MCorp, from 1989 to 1994. Mr. Bartholow received an M.B.A. from the University of Texas and a Bachelor’s Degree in Economics from Vanderbilt University. Mr. Bartholow’s extensive experience in the financial services industry and his significant experience in executive roles provides the Company with valuable knowledge in corporate governance, oversight, and leadership. In addition, his background in capital markets, mergers and acquisitions, divestitures, and litigation management, combined with his prior board experience make him well suited and qualified to assist the Company with its strategic direction going forward.
Andrew B. Cohen, age 50, has been a director of the Company and the Bank since June 2017. Andrew B. Cohen is the Chief Investment Officer and Co-Founder of Cohen Private Ventures which invests long-term capital primarily in direct private investments and other opportunistic transactions, and manages family office activities, on behalf of Steven A. Cohen and his family. Mr. Cohen received his B.A. from the University of Pennsylvania and his M.B.A. from the Wharton School of the University of Pennsylvania. Mr. Cohen is the Vice Chairman, member of the board of directors, and a minority owner of the New York Mets Baseball Club. He is a member of the board of directors of several public and private companies including Laureate Education, Inc. Mr. Cohen serves on the National Advisory Board of the Johns Hopkins Berman Institute of Bioethics and is a trustee and member of the investment committee of The Gilman School. Mr. Cohen's background and experience in evaluating companies when making investment decisions and assessing financial performance of those companies on a regular basis provides the board with valuable knowledge and business acumen across multiple industries. In addition, his participation on various other boards demonstrates leadership experience and a strong background in corporate governance matters.
Benjamin C. Duster, IV, age 61, has been a director of the Company and the Bank since July 2022. He is the founder and Chief Executive Officer of Cormorant Corporation, LLC, a consulting firm specializing in operational turnarounds and organizational transformations which he founded in 2014. Mr. Duster is a 30-year veteran of Wall Street with extensive experience in mergers and acquisitions and strategic advisory services in both developed and emerging markets. He served as the Chief Executive Officer of CenterLight Health System, Inc., a diversified managed care and assisted living services organization from 2016-2018. Since June 2020, he has also served on the board of directors and is chairman of the compensation committee of Weatherford International [Nasdaq: WFRD], an oil field services company. Since February 2021, Mr. Duster has also served on the board of directors and is chairman of the audit committee at Chesapeake Energy Corporation [Nasdaq: CHK], an oil and gas producer. He previously served on the board of directors of Alaska Communications Systems Group [Nasdaq: ALSK], a broadband and telecom services company from June 2020 to July 2021 where he served as chairman of the audit committee and a member of the transaction committee. Mr. Duster has also previously served on the boards of various other public companies throughout his career. Mr. Duster’s extensive experience serving on the board of directors at various public companies and his participation in multiple committees while on those boards, provides the Company with valuable experience and knowledge in matters of corporate governance, oversight, and leadership. His experience as a consultant specializing in operational turnarounds and organizational transformations, mergers and acquisitions, and strategic advisory services provides the Company with valuable insight to assist with operational and business decisions.
Lisa R. Jacobs, Esq., age 63, has been a director of the Company and the Bank since February 2017. Ms. Jacobs has been a partner at Stradley Ronon Stevens & Young, LLP, since August 2021 and prior to that was a partner at DLA Piper, LLP from 2011 through July 2021, each of which is a law firm specializing in business law. She represents businesses, institutional clients and individuals in domestic and international matters including complex corporate finance matters, institutional and private equity financings, asset securitizations, private placements, mergers and acquisitions, and governance issues. Ms. Jacobs is active in a number of national and regional professional organizations, as well as in national and local politics. She is a commissioner of the Uniform Law Commission, which provides states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to areas of state statutory law, (currently serving on its Executive Committee and a number of other leadership positions), as well as a member of the American Law Institute, a research and advocacy group of judges, lawyers and legal scholars, the American College of Commercial Finance Lawyers, a professional organization dedicated to promoting the field of commercial finance law, and the Pennsylvania Department of State Corporations Advisory Board (Chair). Ms. Jacobs is also active in several civic and charitable organizations including the Museum of the American Revolution, Teen Cancer America, and serves on the board of directors of the Philadelphia-Freedom Valley YMCA. Ms. Jacob’s wide-ranging experience as an attorney provides the Company with valuable experience in matters of corporate law and governance issues. In addition, her participation in numerous professional, civic and charitable organizations provides respected leadership skills and insightful management perspective.
Harris Wildstein, Esq., age 76, has been a director of the Company and the Bank since 1988. From 1999 through November 2012, Mr. Wildstein served as a director of First Bank of Delaware, a commercial bank headquartered in the state of Delaware. Since September 2004, Mr. Wildstein has been an owner and officer of Lifeline Funding, LLC, a pre-settlement funding organization. He has been the Vice President of R&S Imports, Ltd., an automobile dealership, since 1977, and president of HVW, Inc., an automobile dealership, since 1982. Mr. Wildstein’s background in owning and managing multiple businesses has made him sophisticated in the analysis of financial matters and offers the board insight into understanding the many customers that the Bank serves today. Mr. Wildstein also provides the board with valuable leadership and management perspectives and business acumen.
Executive Officers
The following sets forth certain information regarding the current executive officers of the Company and the Bank.
Harry D. Madonna, Esq., age 79, has served as Interim Chief Executive Officer of the Company and the Bank since July 2022. Mr. Madonna is both a director and executive officer of the Company and the Bank. Further information pertaining to Mr. Madonna’s background can be found in the section above entitled “Directors”.
Frank A. Cavallaro, age 53, has served as an executive vice president and Chief Financial Officer of the Company and the Bank since February 2012. Mr. Cavallaro had previously served as a senior vice president and Chief Financial Officer of the Company and the Bank since August 2009. Prior to joining the Company, Mr. Cavallaro, served as a vice president in the finance department for Commerce Bank, N.A. and its successor TD Bank, N.A., an American national bank, from September 1997 to August 2009. Mr. Cavallaro, a certified public accountant, has more than twenty-five years of experience in the financial services industry and, prior to that, three years of experience in public accounting with Ernst & Young LLP.
Andrew J. Logue, age 64, has served as president and chief operating officer of the Bank since May 2010. Mr. Logue had previously served as executive vice president and chief operating officer of the Bank since August 2008. Prior to joining the Bank, Mr. Logue, served as senior vice president/enterprise risk management for Commerce Bank, N.A. and its successor TD Bank, N.A., an American national bank, from March 1991 to August 2008. Mr. Logue served in various functions during his tenure at Commerce Bank, N.A.
Jay M. Neilon, age 68, has served as an executive vice president and chief credit officer of the Bank since February 2012. Mr. Neilon had previously served as a senior vice president and chief credit officer of the Bank since December 2008. Prior to joining the Bank, Mr. Neilon, served as senior credit officer for Commerce Bank, N.A. and its successor TD Bank, N.A., an American National Bank, from July 1992 to December 2008. Prior to Commerce Bank, N.A., Mr. Neilon held various credit and lending positions with Fidelity Bank, Philadelphia, PA from September 1976 to July 1992.
Tracie A. Young, age 52, has served as an executive vice president and chief risk officer of the Bank since February 2015. Ms. Young had previously served as a senior vice president and chief risk officer of the Bank since April 2010. Ms. Young has over 30 years of experience in the areas of risk management and compliance for financial institutions. Prior to joining the Bank, Ms. Young served in various internal audit, compliance and risk management roles for Harleysville National Bank and Trust Company, a Pennsylvania-based regional bank, from 1992 to 2010 including the Director of Risk Management and Director of Internal Audit positions.
Code of Ethics
The Company has adopted a code of ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The text of the Company’s code of ethics is available on the Company’s website at www.myrepublicbank.com. We intend to disclose any changes in or revision to our code of ethics on our website, if applicable.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires the Company’s officers and directors and persons who own more than 10% of a registered class of the Company’s equity securities (collectively, the “Reporting Persons”) to file reports of ownership and changes in ownership with the SEC and to furnish the Company with copies of these reports. Based on the Company’s review of the copies of the reports filed by such persons and written representations, the Company believes that all filings required to be made by Reporting Persons for the period from January 1, 2021 through December 31, 2021 were made on a timely basis with the exception of one Form 4 filing for Mr. Wildstein related to one sale of common stock which was inadvertently filed four days late. In addition, Form 4 filings for each member of the Board and each named executive officer related to the grant of restricted stock units on February 18, 2021 were inadvertently filed two days late.
Audit Committee
The Board has designated a standing audit committee, currently consisting of Messrs. Duster (chair), Cohen and Wildstein. All members of the audit committee are independent as defined under the applicable SEC rules and the listing standards of NASDAQ, including the independence criteria applicable to audit committee members. The Board has determined that Mr. Duster qualifies as an audit committee financial expert, as defined in SEC rules and regulations.
The audit committee held nine meetings during 2021, and it operates under a written charter approved by the Board. The responsibilities of the audit committee are to, among others:
●
assist the Board with the oversight of the integrity of the Company’s financial statements and internal controls, the Company’s compliance with legal and regulatory requirements, the independent registered public accounting firm’s qualifications and independence and the performance of the Company’s internal audit function and the independent registered public accounting firm;
●
establish procedures for receipt, retention, and handling complaints regarding accounting, internal accounting controls, and auditing matters, including procedures for confidential, anonymous submission of concerns by employees regarding accounting and auditing matters;
●
retain, evaluate, and where appropriate, replace the independent auditor, set the independent auditor’s compensation, oversee the work of the independent auditor and pre-approve all audit services to be provided by the independent auditor;
●
review with the independent auditor and members of management conducting the internal audit, the adequacy and effectiveness of the systems of internal controls, accounting practices, and disclosure controls and procedures of the Company and current accounting trends and developments, and take such action with respect thereto as may be deemed appropriate;
●
make a recommendation to the Board as to whether the audited financial statements should be included in the Company’s Annual Report on Form 10-K;
●
prepare the report required to be prepared by the audit committee pursuant to the rules of the SEC for inclusion in the Company’s annual proxy statement; and
●
review in advance the public release of all financial information.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11: Executive Compensation
The following table shows the annual compensation of our Chief Executive Officer, our Chief Financial Officer and the three most highly compensated executive officers of the Company other than the Chief Executive Officer and Chief Financial Officer for the fiscal year ended December 31, 2021. Collectively, these officers are referred to as our “named executive officers.”
2021 Summary Compensation Table
The following table shows the annual compensation of the Company’s named executive officers for the fiscal years ended December 31, 2021, 2020 and 2019.
Name and
Principal Position
Year
Salary ($)
Bonus
($)
Stock Awards
(1) ($)
Option
Awards
(2) ($)
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation ($)
Total ($)
Vernon W. Hill, II
403,846
-
110,220
-
-
8,405
522,471
Chairman and
Chief Executive Officer (3)
Harry D. Madonna
455,577
-
110,220
-
56,503
55,330
677,630
President and
330,961
-
-
92,000
61,350
150,237
634,548
Chairman Emeritus (4)
415,000
-
-
223,000
167,000
64,955
869,955
Frank A. Cavallaro
354,231
75,000
83,500
-
-
31,805
544,535
Chief Financial Officer (5)
342,692
10,000
-
36,800
-
30,555
420,047
320,769
50,000
-
90,000
-
29,914
490,683
Andrew J. Logue
483,000
75,000
83,500
-
-
40,973
682,473
Chief Operating Officer (6)
448,077
10,000
-
46,000
-
38,440
542,517
465,384
60,000
-
112,500
-
36,477
674,361
Jay Neilon
324,692
60,000
45,090
-
-
29,889
459,671
Chief Credit Officer (7)
327,115
10,000
-
36,800
-
29,028
402,943
312,692
50,000
-
90,000
-
29,500
482,192
Tracie A. Young
309,692
60,000
45,090
-
-
23,400
438,182
Chief Risk Officer (8)
311,538
-
-
36,800
-
23,861
372,199
290,769
50,000
-
90,000
-
22,862
453,631
(1)
Reflects the grant date fair value of restricted stock units (“RSUs”) which were granted in February 2021 pursuant to the terms of the 2014 Equity Incentive Plan. The RSUs granted to Mr. Hill and Mr. Madonna vest in full on the one-year anniversary date of the grant. The RSUs granted to Messrs. Cavallaro, Logue, Neilon and Ms. Young vest ratably in four equal installments each year on the anniversary date of the grant.
(2)
The amount shown is the aggregate fair value as of the grant date in accordance with FASB ASC Topic 718. We will include the assumptions used in the calculation of these amounts in the footnotes to our audited financial statements that will be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
(3)
Mr. Hill was named to the role of Chief Executive Officer and became an employee of the Company in February 2021. Mr. Hill resigned from his role as Chief Executive Officer and as a member of the board of directors effective in August 2022. In 2021, all other compensation for Mr. Hill includes $8,405 of automobile and transportation allowance.
(4)
Mr. Madonna served as the Company’s Chief Executive Officer through February 2021 at which time he transitioned to the role of President and Chairman Emeritus of the Company. In 2021, all other compensation for Mr. Madonna includes $32,481 of automobile and transportation allowance, $5,640 for a club membership, $5,809 for Company paid supplemental long-term disability policy premiums, and $11,400 in matching contributions made to Mr. Madonna’s 401(k) plan account.
(5)
In 2021, all other compensation for Mr. Cavallaro includes $20,405 of automobile and transportation allowance and $11,400 in matching contributions made to Mr. Cavallaro’s 401(k) plan account.
(6)
In 2021, all other compensation for Mr. Logue includes $22,805 of automobile and transportation allowance, $6,768 for a club membership, and $11,400 in matching contributions made to Mr. Logue’s 401(k) plan account.
(7)
In 2021, all other compensation for Mr. Neilon includes $18,489 of automobile and transportation allowance and $11,400 in matching contributions made to Mr. Neilon’s 401(k) plan account.
(8)
In 2021, all other compensation for Ms. Young includes $12,000 of automobile and transportation allowance and $11,400 in matching contributions made to Ms. Young’s 401 (k) plan account.
Grants of Plan-Based Awards in 2021
The following table sets forth information concerning the grant of plan-based awards to the Company’s named executive officers during the year ended December 31, 2021.
Name
Grant Date
All Other Stock
Awards: Number
of Units (1) (#)
Grant Date Fair
Value of Stock
Awards ($)
Vernon W. Hill, II
February 18, 2021
33,000
$ 110,220
Harry D. Madonna
February 18, 2021
33,000
$ 110,220
Frank A. Cavallaro
February 18, 2021
25,000
$ 83,500
Andrew J. Logue
February 18, 2021
25,000
$ 83,500
Jay M. Neilon
February 18, 2021
13,500
$ 45,090
Tracie A. Young
February 18, 2021
13,500
$ 45,090
(1)
Restricted stock units (RSUs) granted to Mr. Hill and Mr. Madonna vest in full on the one-year anniversary date of the grant, February 18, 2022. RSUs granted to Mr. Cavallaro, Mr. Logue, Mr. Neilon and Ms. Young vest in four equal annual installments beginning February 18, 2022, the first anniversary date of the grant.
The Company’s compensation committee authorized the granting of Restricted Stock Units (“RSUs”) as shown in the table above. RSUs issued to Mr. Madonna represented the equivalent of annual grant of equity awards as set forth in his employment agreement. Vesting provisions are set forth in the Outstanding Equity Awards table below.
Description of Employment Agreements
Employment Agreement with Mr. Madonna. The Company, the Bank and Mr. Madonna are parties to an amended employment agreement dated as of March 1, 2021 (the “2021 agreement” or the “agreement”), which superseded in its entirety the employment agreement dated March 10, 2017, as previously amended (the “prior employment agreement”). Mr. Madonna consented to the change in officer position in February 2021 from president and Chief Executive Officer to president and Chairman Emeritus of the Company and agreed that such change would not constitute a Termination Event within the meaning of the prior employment agreement or otherwise violate the terms of the prior employment agreement. The 2021 agreement provides for extensions on each annual anniversary date to continue through the end of the then-current Term, plus an additional one-year period, unless either party provides written notice that such party desires to terminate the agreement prior to the anniversary date of the effective date and each anniversary date thereafter. The Company and the Bank may also terminate Mr. Madonna’s employment at any time for specified events of “good reason” (as defined in the agreement). Mr. Madonna may terminate the 2021 agreement with six months prior notice. Mr. Madonna may also terminate the agreement for specified events of “good cause” (as defined in the agreement). In February 2022, following the approval of a majority of the members of the Compensation Committee, the Company and the Bank provided written notice to Mr. Madonna of their intention to not renew his employment agreement. As a result of this notice, the agreement was scheduled to terminate in accordance with its terms in February 2023. In August 2022, the Company’s Board of Directors appointed Mr. Madonna as Executive Chairman and Interim Chief Executive Officer of the Company and the Bank. In connection with such appointments, the non-renewal notice was rescinded and the 2021 agreement will continue under its existing terms.
Mr. Madonna’s annual base salary under the 2021 agreement was initially set at $415,000 effective March 2021. His base salary was increased to $500,000 in March 2022 while he serves as Interim Chief Executive Officer. Mr. Madonna is eligible to receive annual increases in base salary at the sole discretion of the compensation committee of the Company after taking into account criteria determined in advance by the compensation committee, and bonuses based on a percent of annual base salary in the sole discretion of the compensation committee upon achievement of established criteria. Any additional compensation may be granted in the form of equity-based awards to align his interests with those of the Company’s shareholders.
The 2021 amended employment agreement also provides for the annual issuance of options to Mr. Madonna to purchase not less than 100,000 shares of Common Stock (or an equivalent value in restricted stock or stock units) effective March 1, 2021 and continuing annually thereafter so long as Mr. Madonna remains employed under the terms of the agreement. Option grants will be based on meeting or exceeding criteria established from year to year by the committee charged with the responsibility for making grants under the Company’s stock incentive plan. Such options, restricted stock or stock units will vest one year after the date of grant or earlier upon the occurrence of either a Change in Control (as defined in the agreement) or a Termination Event (as defined in the agreement) and will be granted at a per share exercise price equal to fair market value of the stock on the date of grant.
Mr. Madonna will also be entitled to certain other customary perquisites, including use of an automobile and reimbursement of related operating expenses, health and disability insurance available to all employees, and reimbursement for travel, entertainment and club dues and expenses. Under the agreement, the Company and the Bank also agree to reimburse Mr. Madonna for the cost of term life insurance policies providing a death benefit in the amount of $4.0 million. The cost to the Company of such life insurance policies from and after March 1, 2021, will reduce, on a dollar-for-dollar basis, the severance payment payable to Mr. Madonna described below.
Mr. Madonna’s agreement provides for certain severance and change in control benefits. In the event of termination of Mr. Madonna’s employment for any reason, including a merger or sale of the Company or the Bank or transfer of a majority of the stock of the Company or the Bank (any one of which shall be considered a “Change in Control”) or failure by the Company and the Bank to continue his employment at the termination of the agreement or any subsequent employment agreement, or if Mr. Madonna is not elected a member of the boards of directors of the Company or the Bank or upon agreement that Mr. Madonna is to transition from service as President and Chairman Emeritus to service as a non-employee director of the Company and the Bank (each a “Termination Event”), Mr. Madonna would be entitled to receive a severance payment in the amount of $1.6 million, and five years of continued health benefits. Mr. Madonna would not be entitled to any severance or other payments in the event that his employment terminates for cause, resignation by him without good cause, or as a result of his death. Subject to compliance with Section 409A of the Internal Revenue Code, all severance payments are to be made in a lump sum within 30 days after the applicable termination event.
In the event of a merger or sale or transfer of a majority of the stock of the Company or the Bank while Mr. Madonna remains employed by the Company and the Bank or remains serving as a director (or within one year after Mr. Madonna ceases to provide any services to either the Company or the Bank in any capacity), he will be entitled, in addition to any other compensation payable to him under the agreement, to a transaction bonus in an amount determined by the compensation committees of the Company and the Bank, which amount cannot be less than $1.0 million. The transaction bonus is payable within 30 days following consummation of the transaction giving rise to payment of such bonus.
The agreement provides for non-disclosure by Mr. Madonna of any confidential information relating to the business of the Company or the Bank during or after the period of his employment, except in the course of employment related duties. In the event that the amounts and benefits payable under the agreement are such that Mr. Madonna becomes subject to the excise tax provisions of Section 4999 of the Internal Revenue Code, Mr. Madonna will be entitled to receive a tax gross-up payment to reimburse him for the amount of such excise taxes. He will also receive a tax gross-up payment for certain other taxes payable by him with respect to certain perquisites under the agreement.
Employment Agreements with Messrs. Logue, Cavallaro and Neilon and Ms. Young. On July 14, 2015, the Bank entered into employment agreements with each of Andrew J. Logue, President and Chief Operating Officer of the Bank; Frank A. Cavallaro, Executive Vice President and Chief Financial Officer of the Company and the Bank; Jay M. Neilon, Executive Vice President and Chief Credit Officer of the Bank; and Tracie A. Young, Executive Vice President and Chief Risk Officer of the Bank. Each of the employment agreements is for a one-year term commencing on July 1, 2015, with annual renewals thereafter absent notice of non-renewal by either party at least six months prior to an annual renewal date.
Under the employment agreements, each executive officer is entitled to receive a specified annual base salary and is eligible to participate in other compensation plans or programs maintained by the Company or the Bank for senior executive officers, including stock compensation, retirement, savings and similar plans. Each executive officer is also able to earn an annual bonus based on criteria established by the compensation committee of the Board.
In the event of termination of an executive officer’s employment, including resignation by the officer for specified events of “good reason” or a failure to continue an officer’s employment at termination of the employment agreement, the officer would be entitled to receive a lump-sum payment equal to two times the officer’s base salary in effect immediately prior to termination (the “Severance Payment”). If the executive’s employment is terminated as a result of, or in contemplation of, a change in control of the Company, the executive would be entitled to receive the Severance Payment unless the executive accepts a position after the change of control in the surviving company. No severance is payable in the event of termination of an executive’s employment for specified events of “cause,” or as a result of an executive’s death, disability or resignation without good reason.
The employment agreements include customary provisions relating to non-competition and non-solicitation of customers and employees for a period of twelve months following termination of employment. The employment agreements replace and supersede any prior employment or change in control agreements to which any of the executive officers were a party.
Services and Employment Agreements with Chairman and Chief Executive Officer
In March 2017, the Company entered into an agreement with Vernon W. Hill, II regarding his provision of services to the Company as Chairman of the Board (the “services agreement”). The initial term of the agreement was a five-year period commencing in March 2017. In addition to his position as Chairman of the Board, Mr. Hill became Chief Executive Officer of the Company and the Bank and Chairman of the Board of the Bank in February 2021. Accordingly, the Company and Mr. Hill entered into a new employment agreement (the “employment agreement”), which replaced the existing services agreement, effective as of March 2021, to reflect the changes in Mr. Hill’s duties and positions.
Under the services agreement, Mr. Hill served as Chairman of the Board, to preside over all meetings of the Board and shareholders, and perform such other functions as required of a public company board chairman and such other duties as the Board may require, which he did through February of 2021. For services under the agreement, Mr. Hill was entitled to receive base compensation of not less than $360,000 per year, and to participate in any bonus programs, incentive compensation plans, stock option plans or similar benefit or compensation plans at any time in effect that are made generally available to directors and executive officers of the Company.
Under the employment agreement, Mr. Hill was entitled to receive base compensation of not less than $490,000 per year, and to participate in any bonus programs, incentive compensation plans, stock option plans or similar benefit or compensation plans at any time in effect that are made generally available to directors and executive officers of the Company. The employment agreement was for a two-year term and extended on each annual anniversary date to provide for a two-year term unless either party provided written notice that such party desires to terminate the agreement prior to an annual anniversary date. The Company could terminate Mr. Hill’s services under the agreement at any time with or without “cause” (as defined in the agreement). In the event of a termination by the Company for cause, Mr. Hill would be entitled to any prorated portion of his compensation through the termination date and the Company would have no further obligations under the agreement. In the event that the Company terminated Mr. Hill’s services without cause, the Company would be required to pay Mr. Hill, a lump-sum severance payment equal to three times his base salary plus a continuation of specified benefits for a period of one year. The Company could also terminate the agreement for permanent disability, in which case Mr. Hill would have received a portion of his compensation for the balance of the remaining term of the agreement offset by any disability payments due to Mr. Hill under any company-sponsored disability plan. In the event of death, Mr. Hill’s estate would have been entitled to a death benefit equal to three times compensation.
Mr. Hill could voluntarily terminate his services under the employment agreement for specified events of “good reason” occurring within three years after a change in control of the Company. In the event of Mr. Hill’s voluntary termination for any of such events of good reason following a change in control of the Company, he would have been entitled to a lump-sum severance payment equal to three times his base salary plus a continuation of specified benefits for a period of one year.
In July 2022, Mr. Hill provided written notice to the Company of his resignation as Chief Executive Officer effective in August 2022. He disclosed his reasons for his resignation in a letter to the Board dated July 6, 2022, alleging a breach of his existing employment agreement. In August 2022, Mr. Hill provided written notice to the Company of his resignation as a member of the board of directors effective immediately. He disclosed his reasons for his resignation from the Board in a letter dated August 8, 2022, alleging, among other things, deprivation of meaningful representation in the management of the Company’s affairs. The Board of Directors disagrees with the allegations by Mr. Hill and has formed a Special Litigation Committee to respond to demands by shareholders of the Company to investigate whether claims should be brought by the Company against Mr. Hill, as well as former directors Barry Spevak and Brian Tierney, based upon allegations of improper conduct they may have taken against the Company or any of its operations.
Outstanding Equity Awards at 2021 Fiscal Year End
The following table sets forth information concerning outstanding equity awards held by the Company’s named executive officers as of December 31, 2021.
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Shares or
Units of Stock
That Have
Not Vested
(#) (5)
Market Value of Shares or
Units of Stock That Have
Not Vested
($) (6)
Vernon W. Hill, II
25,000
-
2.95
5/10/23
-
-
100,000
-
8.00
2/28/27
-
-
100,000
-
8.40
2/22/28
-
-
100,000
-
6.60
2/19/29
-
-
-
100,000
(1)
3.01
2/27/30
-
-
-
-
-
-
33,000
122,760
Harry D. Madonna
12,000
-
1.95
2/28/22
-
-
12,000
-
2.69
3/13/23
-
-
12,000
-
3.68
2/28/24
-
-
100,000
-
3.55
3/12/25
-
-
100,000
-
3.99
2/23/26
-
-
100,000
-
8.00
2/28/27
-
-
100,000
-
8.40
2/22/28
-
-
100,000
-
6.60
2/19/29
-
-
-
100,000
(1)
3.01
2/27/30
-
-
-
-
-
-
33,000
122,760
Frank A. Cavallaro
15,000
-
1.95
2/28/22
-
-
12,000
-
2.69
3/13/23
-
-
12,000
-
3.68
2/28/24
-
-
12,000
-
3.55
3/12/25
-
-
12,000
-
3.99
2/23/26
-
-
25,000
-
8.00
2/28/27
-
-
22,500
7,500
(2)
8.40
2/22/28
-
-
20,000
10,000
(3)
6.60
2/19/29
-
-
10,000
30,000
(4)
3.01
2/27/30
-
-
-
-
-
-
25,000
93,000
Option Awards
Stock Awards
Name
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#) (1)
Option
Exercise
Price
($)
Option
Expiration
Date
Number of
Shares or
Units of Stock
That Have
Not Vested
(#) (5)
Market Value of Shares or
Units of Stock That Have
Not Vested
($) (6)
Andrew J. Logue
15,000
-
1.95
2/28/22
-
-
12,000
-
2.69
3/13/23
-
-
12,000
-
3.68
2/28/24
-
-
12,000
-
3.55
3/12/25
-
-
15,000
-
3.99
2/23/26
-
-
50,000
-
8.00
2/28/27
-
-
30,000
10,000
(2)
8.40
2/22/28
-
-
25,000
25,000
(3)
6.60
2/19/29
-
-
12,500
37,500
(4)
3.01
2/27/30
-
-
-
-
-
-
25,000
93,000
Jay Neilon
15,000
-
1.95
2/28/22
-
-
12,000
-
2.69
3/13/23
-
-
12,000
-
3.68
2/28/24
-
-
12,000
-
3.55
3/12/25
-
-
12,000
-
3.99
2/23/26
-
-
25,000
-
8.00
2/28/27
-
-
22,500
7,500
(2)
8.40
2/22/28
-
-
20,000
20,000
(3)
6.60
2/19/29
-
-
10,000
30,000
(4)
3.01
2/27/30
-
-
-
-
-
-
13,500
50,220
Tracie A. Young
15,000
-
1.95
2/28/22
-
-
12,000
-
2.69
3/13/23
-
-
3,000
-
3.55
3/12/25
-
-
6,000
-
3.99
2/23/26
-
-
25,000
-
8.00
2/28/27
-
-
22,500
7,500
(2)
8.40
2/22/28
-
-
20,000
20,000
(3)
6.60
2/19/29
-
-
10,000
30,000
(4)
3.01
2/27/30
-
-
-
-
-
-
13,500
50,220
(1)
Options vest and become exercisable on February 27, 2022.
(2)
Options vest and become exercisable in four equal annual installments beginning February 22, 2019, the first anniversary date of the grant.
(3)
Options vest and become exercisable in four equal annual installments beginning February 19, 2020, the first anniversary date of the grant.
(4)
Options vest and become exercisable in four equal annual installments beginning February 27, 2021, the first anniversary date of the grant.
(5)
Restricted stock units (RSUs) granted to Mr. Hill and Mr. Madonna vest in full on the one-year anniversary date of the grant, February 18, 2022. RSUs granted to Mr. Cavallaro, Mr. Logue, Mr. Neilon and Ms. Young vest in four equal annual installments beginning February 18, 2022, the first anniversary date of the grant.
(6)
The market value realized upon vesting was calculated using the closing price of Common Stock ($3.72 per share) on December 31, 2021.
Option Exercises and Stock Vested in 2021
There were no exercises of outstanding stock options or vesting of stock awards for the Company’s named executive officers during the year ended December 31, 2021.
Pension Benefits at December 31, 2021
In 1992, the Company adopted a supplemental retirement plan for non-employee directors. The plan was frozen to new participants in 1992, but the Company continues to maintain the plan for participants who served as non-employee directors in 1992. At that time, Mr. Madonna was a non-employee director and he continues to be a participant in the plan. The present value of accumulated benefit was calculated based upon the actuarial present value of accumulated benefits, calculated as of December 31, 2021, as described below. The plan provides for a retirement benefit of $25,000 per year for ten years, which payments may begin at the later of actual retirement date or 65 years of age. Mr. Madonna has reached 65 years of age and the amount shown in the table below represents the present value of the accumulated benefit amount necessary to fund $25,000 annual payments over a ten year period commencing December 31, 2021, which was the end of the Company’s most recently completed fiscal year. Present value was calculated using a 4% discount rate.
Name
Plan Name
Number of
Years Credited
Service (#) (1)
Present Value
of Accumulated
Benefit (1)($)
Payments
During Last
Fiscal Year
($)
Harry D. Madonna
Amended and Restated Supplemental Retirement Plan
210,883
-
(1)
Mr. Madonna’s years of credited service and the present value of his accumulated benefit were determined as of December 31, 2021, which is the same pension plan measurement date that the Company used for financial statement reporting purposes with respect to its audited financial statements for the fiscal year ended December 31, 2021. Years of credited service reflect the number of years since the plan was adopted.
Nonqualified Deferred Compensation at December 31, 2021
The Company maintains a deferred compensation plan for the benefit of certain officers and directors. In 2009, the compensation committee prohibited any additional individuals from participating in the plan. Mr. Madonna is the only named executive officer who is an eligible participant. The plan permits participants to make elective contributions to their accounts, subject to applicable provisions of the Internal Revenue Code. In addition, the Company may make discretionary contributions to participant accounts. Company contributions are subject to vesting, and generally vest three years after the end of the plan year to which the contribution applies, subject to acceleration of vesting upon certain changes in control (as defined in the plan) and to forfeiture upon termination for cause (as defined in the plan). Participant accounts are adjusted to reflect contributions and distributions, and income, gains, losses, and expenses as if the accounts had been invested in permitted investments selected by the participants, including Common Stock. The plan provides for distributions upon retirement and, subject to applicable limitations under the Internal Revenue Code, limited hardship withdrawals.
Name
Executive
Contributions
in Last Fiscal
Year($)
Registrant
Contributions
in Last Fiscal
Year($)
Aggregate
Earnings
(Losses) in Last
Fiscal Year
($) (1)
Aggregate
Withdrawals/
Distributions
in Last Fiscal
Year($)
Aggregate
Balance at
Last Fiscal
Year-End ($)
(2)
Harry D. Madonna
-
-
56,503
-
897,092
(1)
Mr. Madonna’s deferred compensation account is credited with gains, losses and expenses as if it had been invested in shares of a private equity fund as allowed by the plan. The amount reported is also included in the Summary Compensation Table.
(2)
The Company contributions to the deferred compensation plan vested over a three-year period as defined in the plan. At December 31, 2021, the aggregate balance of $897,092 was fully vested.
Director Compensation
The following table sets forth information regarding compensation paid by the Company to its non-employee directors during 2021.
Director Compensation in 2021
Name
Fees Earned or
Paid in Cash
($)
Stock Awards
($) (1)
Change in
Pension Value
and Nonqualified
Deferred
Compensation
Earnings
Total
($)
Andrew B. Cohen
59,500
28,390
-
87,890
Theodore J. Flocco, Jr. (3)
95,500
28,390
-
123,890
Vernon W. Hill II (2) (3)
43,333
-
-
43,333
Lisa R. Jacobs, Esq.
68,750
28,390
-
97,140
Barry L. Spevak (3)
85,500
28,390
38,513
152,403
Brian Tierney, Esq. (3)
55,500
28,390
-
83,890
Harris Wildstein, Esq.
77,750
28,390
28,703
134,843
(1)
The amount shown is the aggregate grant date fair value calculated in accordance with FASB ASC Topic 718. Each of the non-employee directors in the table above, with the exception of Mr. Hill, received a grant of 8,500 restricted stock units (RSUs) on February 18, 2021. Each of the RSUs vest in full on the one-year anniversary date of the grant, subject to acceleration upon consummation of a change in control.
(2)
Mr. Hill’s services agreement (described in the section entitled “Services and Employment Agreements with Chairman and Chief Executive Officer” above) provided for aggregate compensation of $360,000 on an annual basis for all of the services he provided under the Services Agreement as Chairman of the Board. In February 2021, Mr. Hill was named to the additional role of Chief Executive Officer and entered into an employment agreement. The fees reflected in the table above represent payments made during the months of January and February 2021 under the Services Agreement while he served only as Chairman. All compensation, including equity awards, received under his new employment agreement are reported in the 2021 Summary Compensation Table for all named executive officers.
(3)
Mr. Flocco passed away in May 2022. He was replaced by Benjamin C. Duster who joined the Board in July 2022. Messrs. Hill and Spevak resigned from the Board of Directors in August 2022. Mr. Tierney resigned from the Board of Directors in September 2022.
At December 31, 2021, each of the non-employee directors in the table above held the following aggregate number of option awards and restricted stock awards:
Name
Option
Awards
Stock
Awards
Andrew B. Cohen
75,000
8,500
Theodore J. Flocco, Jr.
140,000
8,500
Lisa R. Jacobs, Esq.
75,000
8,500
Barry L. Spevak
140,000
8,500
Brian Tierney, Esq.
140,000
8,500
Harris Wildstein, Esq.
140,000
8,500
Employee directors receive no additional compensation for their service on the board. During 2021, non-employee directors received a $12,500 quarterly retainer fee. The audit committee chair received an annual fee of $20,000 for serving as the chairman of the committee during 2021 and $2,000 for each committee meeting attended. The other members of the audit committee received $1,500 for each committee meeting attended. The chair of all other Board committees received an annual fee of $3,000 for serving as a committee chairman during 2021 and each member of those committees received $1,000 for every committee meeting attended.
Certain non-employee directors, namely Messrs. Spevak and Wildstein, are also eligible to participate in a nonqualified deferred compensation plan. Their deferred compensation accounts are credited with gains, losses and expenses as if they had been invested in the common stock of the Company and shares of certain publicly traded mutual funds as allowed by the plan. The gains credited to their deferred compensation accounts during 2021 are reflected in the Director Compensation table above.
Chief Executive Officer Pay Ratio Disclosure
The following pay ratio information is provided in accordance with the requirements of Item 402(u) of Regulation S-K of the Exchange Act.
For fiscal 2021, the Company’s last completed fiscal year:
•
the median of the annual total compensation of all employees of the Company (other than the Chief Executive Officer) was $55,192; and
•
the annual total compensation of the Company’s Chief Executive Officer, Vernon W. Hill, II, was $618,625.
Based on this information, the ratio for 2021 of the annual total compensation of the Chief Executive Officer to the median of the annual total compensation of all employees is 11 to 1.
The following steps were taken to determine the annual total compensation of the median employee and the Chief Executive Officer:
•
As of December 31, 2021, the employee population consisted of approximately 514 individuals, including full time, part time, temporary, and seasonal employees employed on that date. This date was selected because it aligned with calendar year end and allowed identification of employees in a reasonably efficient manner.
•
For purposes of identifying the median employee from our employee population base, wages from our internal payroll records for the twelve-month period ended December 31, 2021 were used. These wages were consistent with amounts reported to the Internal Revenue Service on Form W-2 for fiscal 2021. Consistent with the calculation of the Chief Executive Officer’s annual compensation, other elements of employee compensation were considered and added, if applicable when calculating the annual total compensation for all employees.
•
In addition, the compensation of approximately 60 full time or part time employees who were hired during 2021 and employed on December 31, 2021 was annualized. No full-time equivalent adjustments were made for part time employees, of which there were approximately 20.
•
The median employee was identified using this compensation measure and methodology, which was consistently applied to all employees. The amounts reported in the 2021 Summary Compensation Table for named executive officers was used for the total annual compensation of the Chief Executive Officer. The salary amount reported in this table was annualized to reflect a full year’s compensation for the purpose of calculating the pay ratio disclosure.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of October 25, 2022, information with respect to the holdings of Company voting securities of all persons which the Company, pursuant to filings with the SEC and the Company’s stock transfer records, has reason to believe may be beneficial owners of more than five percent (5%) of the outstanding Common Stock, each current director or director nominee, each executive officer, and all of the Company’s directors, director nominees, and executive officers as a group.
Name of Beneficial Owner or Identity of Group (1)
Number of
Shares
Beneficially
Owned (2)
Percentage of
Ownership
(2)
Current Directors and Director Nominees
Peter B. Bartholow
6,000
*
Andrew B. Cohen
95,500
(3)
*
Benjamin C. Duster
-
-
Lisa R. Jacobs
100,433
(4)
*
Harry D. Madonna
669,000
(5)
1.0 %
Harris Wildstein
867,963
(6)
1.4 %
Named Executive Officers Who are not Directors
Frank A. Cavallaro
190,065
(7)
*
Andrew J. Logue
241,395
(8)
*
Jay Neilon
203,000
(9)
*
Tracie A. Young
141,062
(10)
*
All directors and executive officers as a group (9 persons)
2,508,418
3.8 %
5% Percent Beneficial Shareholders
Blackrock, Inc.
8,215,741
(11)
12.9 %
Vernon W. Hill, II
6,422,864
(12)
9.97 %
George E. Norcross
6,311,618
(13)
9.9 %
Camden Asset Management, LP
6,499,974
(14)
9.2 %
CPV Republic Investment, LLC
5,442,570
(15)
8.5 %
* Represents beneficial ownership of less than 1%.
(1)
Unless otherwise indicated, the address of each beneficial owner is c/o Republic First Bancorp, Inc., Two Liberty Place, 50 S. 16th Street, Suite 2400, Philadelphia, PA 19102. The group of directors and executive officers was determined as of October 25, 2022.
(2)
The securities “beneficially owned” by an individual are determined in accordance with the definition of “beneficial ownership” set forth in Rule 13d-3 under the Exchange Act of 1934. Any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of, common stock; and/or, (ii) investment power, which includes the power to dispose, or to direct the disposition, of common stock, is determined to be a beneficial owner of the common stock. All shares are subject to the named person’s sole voting and investment power unless otherwise indicated. Shares beneficially owned include shares issuable upon exercise of options which are currently exercisable or which will be exercisable within 60 days of October 25, 2022. Shares beneficially owned also include shares issuable upon conversion of convertible securities which are currently convertible or which will be convertible within 60 days of October 25, 2022. Percentage calculations presume that the identified individual or group exercise or convert all of his, her or their respective options and convertible securities, and that no other holders of options exercise their options or convert their convertible securities. As of October 25, 2022, there were 63,787,064 shares of the Common Stock outstanding. Other than those persons listed in the table above, the Company is not aware of any person, as such term is defined in the Exchange Act, that beneficially owns more than 5% of its Common Stock as of October 25, 2022.
(3)
Mr. Cohen’s total includes 75,000 shares of Common Stock issuable subject to options which are currently exercisable. Andrew Cohen is the Co-founder and Chief Investment Officer of Cohen Private Ventures, LLC which may be deemed an affiliate of CPV Partners, LLC, which holds shares of Common Stock as described in Footnote 15 below. Andrew Cohen does not have the power to vote on or dispose of such shares and accordingly does not beneficially own those shares.
(4)
Ms. Jacobs’ total includes 75,000 shares of Common Stock issuable subject to options which are currently exercisable and 1,000 shares of preferred stock which are currently convertible into 8,333 shares of common stock.
(5)
Mr. Madonna’s total includes 624,000 shares of Common Stock issuable subject to options which are currently exercisable.
(6)
Mr. Wildstein’s total includes 135,000 shares of Common Stock issuable subject to options which are currently exercisable. Also includes 19,083 shares in trust for his daughter, and 14,032 shares held by his wife.
(7)
Mr. Cavallaro’s total includes 153,000 shares of Common Stock issuable subject to options which are currently exercisable.
(8)
Mr. Logue’s total includes 203,500 shares of Common Stock issuable subject to options which are currently exercisable
(9)
Mr. Neilon’s total includes 153,000 shares of Common Stock issuable subject to options which are currently exercisable.
(10)
Ms. Young’s total includes 126,000 shares of Common Stock issuable subject to options which are currently exercisable.
(11)
Information is derived from a Schedule 13G Amendment No. 4 filed with the SEC on January 27, 2022 by BlackRock, Inc. The report states that BlackRock, Inc. had sole voting power over 7,371,806 common shares and sole dispositive power over 8,215,741 common shares as of December 31, 2021. The principal business office address is 55 East 52nd Street, New York, NY 10055.
(12)
Mr. Hill’s total includes 425,000 shares of Common Stock issuable subject to options which are currently exercisable. Also includes 2,295,666 shares held in multiple trusts of which Mr. Hill serves as a trustee and 500,000 shares held an IRA account controlled by his wife. Mr. Hill owns 50,000 shares of convertible preferred stock issued by the Company which are convertible into 416,667 shares of Common Stock. A restriction on conversion included in the preferred stock instrument prohibits conversion to the extent that such conversion would cause the holder to own or control 10% or more of the Common Stock outstanding. Accordingly, the calculation of the number of shares beneficially owned in the table does not include 23,000 shares of preferred stock which are currently convertible into 191,667 shares of Common Stock. The address of Mr. Hill is 14000 Horizon Way, Suite 100, Mt. Laurel, NJ 08054.
(13)
Information is derived from a Form 13D/A Amendment No. 20 filed with the SEC on September 22, 2022 by George E. Norcross, III, Avery Conner Capital Trust, Philip A. Norcross, Susan D. Hudson, Geoffrey B. Hudson, Rose M. Guida, and Gregory B. Braca as a group. The principal business office address is 350 Royal Palm Way, Suite 500, Palm Beach, FL 33480.
(14)
Information is derived from a Schedule 13G filed with the SEC on February 9, 2021, by Camden Asset Management, LP and John Wagner. The report states that each of the reporting persons named in the filing had shared voting and shared dispositive power over 6,499,974 common shares issuable upon conversion of shares of convertible preferred stock. The principal business office address of each reporting person is 2029 Century Park East, Suite 2010, Los Angeles, CA 90067.
(15)
Information is derived from a Form 13F filed with the SEC on August 15, 2022 by CPV Partners, LLC. The principal business office address is 72 Cummings Point Road, Stamford, CT 06902.
Equity Compensation Plans
The following table sets forth information as of December 31, 2021, with respect to the shares of common stock that may be issued under the Company’s existing equity compensation plans.
Plan Category
Number of Shares to
be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
Weighted- Average
Exercise Price of
Outstanding
Options, Warrants and
Rights
Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
First Column)
Equity compensation plans approved by security holders
5,849,288
$ 5.31
8,510,982
Equity compensation plans not approved by security holders
-
-
-
Total
5,849,288
$ 5.31
8,510,982

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13: Certain Relationships and Related Transactions, and Director Independence
Transactions with Related Persons
The Bank has made, and expects to continue to make in the future, loans to directors and executive officers of the Company and the Bank, and to their immediate family members, and to firms, corporations, and other entities in which they and their immediate family members maintain interests. None of such loans are nonaccrual, past due, restructured or potential problems, and all of such loans were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company or the Bank and did not involve more than the normal risk of collectability or present other unfavorable features.
The Company entered into a services agreement with Vernon W. Hill, II, effective in March 2017, regarding his provision of services to the Company as chairman of the Board. Effective in March 2021, the Company entered into a new employment agreement with Mr. Hill to reflect his additional position as chief executive officer. The employment agreement replaced in its entirety, the prior services agreement with Mr. Hill that was initially entered into in March 2017. Mr. Hill resigned from the position of Chief Executive Officer and as a member of the Board of Directors of the Company and the Bank in August 2022. Mr. Hill is beneficial owner of more than five percent of the outstanding Common Stock.
Accordingly, Mr. Hill and his wife were considered related persons during the years ended December 31, 2021, 2020 and 2019. Pursuant to the agreements described above, Mr. Hill received $43,333 during 2021 and $260,000 during 2020 as compensation under his services agreement for his role on the Board. In addition, the Company paid $696,000 and $390,000 during 2021 and 2020, respectively, to InterArch, Inc., a company that is wholly-owned by Mr. Hill’s wife, for marketing, graphic design, architectural, and project management services. We also paid $177,000 per year during 2021 and 2020 to Glassboro Properties, LLC related to a land lease agreement for our Glassboro store. Mr. Hill has an ownership interest in Glassboro Properties LLC, which is a commercial real estate firm.
We paid $120,000 per year during 2021 and 2020, to Brian Communications for public relations services. Brian Tierney, a member of the Board, is the chief executive officer of Brian Communications, a strategic communications agency.
Review, approval or ratification of transactions with related persons
All transactions, including arrangements and relationships, with related persons that are required to be disclosed pursuant to Item 404 of SEC Regulation S-K are approved by our Board excluding interested parties. Extensions of credit to insiders, including related persons, are made pursuant to a written policy designed to ensure compliance with Federal Reserve Board Regulation O, the primary federal banking regulation which governs extensions of credit to insiders, and is applicable to the Bank.
Director Independence
The Board has determined that all of the Company’s non-executive board members are independent under NASDAQ’s corporate governance listing standards, resulting in 75% of the Board being deemed independent of management. In addition, the Board has determined that all members of the audit, nominating and governance, and compensation committees are independent (as defined under the applicable SEC rules and the listing standards of NASDAQ).
To be independent, a director must have no disqualifying relationships as defined by the NASDAQ listing rules, and the Board must have affirmatively determined that the director has no other relationship with the Company, either directly or indirectly, that would interfere with his, her or their exercise of independent judgment in carrying out the responsibilities of a director. In determining the directors’ independence, the Board considered both loan and non-loan transactions between the Bank and the directors, their family members and businesses with whom they are associated.
Applying the foregoing, the Board has determined that the following directors are independent: Andrew Cohen, Benjamin C. Duster, Lisa Jacobs, Esq., and Harris Wildstein, Esq. The only director determined not to be independent was Harry D. Madonna, Chairman and Interim Chief Executive Officer. In addition, the Board has designated Harris Wildstein, Esq. as its lead independent director.
Each independent director has direct access to our chairman of the board and chief executive officer, as well as to our president and other members of the senior management team. The independent directors are also given the option at every board meeting to meet in executive session without management present.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14: Principal Accountant Fees and Services
Information Regarding Independent Registered Public Accounting Firm
As previously disclosed in the Company’s Current Report on Form 8-K filed on June 30, 2021, upon the review and recommendation of the Company’s audit committee, the Company dismissed BDO USA, LLP (“BDO”) as the Company’s independent registered public accounting firm, effective as of June 24, 2021.
As previously disclosed, the reports of BDO on the Company’s financial statements as of and for the years ended December 31, 2020 and 2019 did not contain an adverse opinion or a disclaimer of an opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.
As previously disclosed, during the Company’s fiscal years ended December 31, 2020 and 2019, and the subsequent interim period preceding BDO’s dismissal, there were: (i) no disagreements with BDO on any manner of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO, would have caused it to make reference to the subject matter of the disagreements in its report on the consolidated financial statements of the Company; and (ii) no “reportable events” (as such term is defined in Item 304(a)(1)(v) of Regulation S-K).
As previously disclosed, on June 24, 2021, the Company, after review and recommendation of the Company’s audit committee, selected Crowe as the Company’s new independent registered public accounting firm pending execution of an engagement letter for and with respect to the year ending December 31, 2021, effective upon the dismissal of BDO. During the Company’s fiscal years ended December 31, 2020 and 2019 and through the date of the Company’s appointment of Crowe, the Company did not consult with Crowe regarding: (i) the application of accounting principles to a specific completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and no written or oral advice was provided by Crowe that was an important factor considered by the Company in reaching a decision as to accounting, auditing or financial reporting issues; or (ii) any matter that was either the subject of a disagreement or was a reportable event, as those terms are described or defined in Items 304(a)(1)(iv) or 304(a)(1)(v) of Regulation S-K.
As previously disclosed, the Company provided BDO with a copy of the foregoing disclosures and requested BDO to furnish to the Company a letter addressed to the SEC stating whether or not it agrees with such disclosures. A copy of BDO’s letter dated June 30, 2021 was filed as Exhibit 16.1 to the Company’s Current Report on Form 8-K filed on June 30, 2021.
The aggregate fees for professional services rendered by Crowe and BDO for the fiscal years ended December 31, 2021 and December 31, 2020 were as follows:
Fee Category (1)
2021 Fees
2020 Fees
Audit Fees (2)
$ 1,530,500
$ 339,000
Audit-Related Fees (3)
5,595
34,150
Tax Fees (4)
-
6,158
All Other Fees (5)
10,000
7,500
Total Fees
$ 1,546,095
$ 386,808
(1)
The aggregate fees included in Audit Fees are fees billed for services associated with the audits of those fiscal years. The aggregate fees included in each of the other categories are fees billed in those fiscal years.
(2)
Audit Fees consist of fees billed for professional services rendered for the audit of the Company’s consolidated financial statements, internal control over financial reporting and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by the Company’s independent registered accounting firm in connection with statutory and regulatory filings or engagements.
(3)
Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under “Audit Fees.” Includes fees for services related to the employee benefit plan audit, and other attest services not required by statute or regulation.
(4)
Tax Fees consist of fees billed for professional services for tax compliance and other miscellaneous services. These services include assistance regarding federal and state tax compliance, tax audit defense, customs and duties, and mergers and acquisitions.
(5)
All Other Fees consist of fees billed for services provided in relation to the filing of registration statements with the SEC, responding to SEC staff comment letters, preparation of a competitive market analysis on executive compensation, and any other products and services provided by the independent registered public accounting firm, other than those services described above.
The audit committee meets with our independent auditors to approve the annual scope of accounting services to be performed and the related fee estimates. The audit committee also meets with the Company’s independent auditors, on a quarterly basis, following completion of their quarterly reviews and annual audit and prior to the Company’s earnings announcements, to review the results of the auditors’ work. During the course of the year, the chairman of the audit committee has the authority to pre-approve requests for services that were not approved in the annual pre-approval process. The chairman reports any interim pre-approvals at the following quarterly meeting. At each of the meetings, management and the Company’s independent auditors update the audit committee with material changes to any service engagement and related fee estimates as compared to amounts previously approved. All of the audit and non-audit services performed by Crowe and BDO for the Company in fiscal years 2021 and 2020 and described above were pre-approved by the audit committee in accordance with the foregoing procedures.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15: Exhibits, Financial Statement Schedules
(a)
(1) The following financial statements and related documents of Republic First Bancorp, Inc. are filed as part of this Annual Report on Form 10-K in Part II - Item 8 “Financial Statements and Supplementary Data”:
a.
Consolidated Balance Sheets as of December 31, 2021 and 2020;
b.
Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019;
c.
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020, and 2019;
d.
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019;
e.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019; and
f.
Notes to Consolidated Financial Statements.
(a)
(2) None
(a)
(3) The exhibits filed or furnished, as applicable, as part of this report are listed under Exhibits at subsection (b) of this Item 15.
(b)
Exhibits
The following Exhibits are filed as part of this report.
Exhibit
Number
Description
Location
3.1
Amended and Restated Articles of Incorporation of Republic First Bancorp, Inc.
Incorporated by reference to Form 10-K filed March 10, 2017
3.2
Statement with Respect to Shares regarding 7.0% Perpetual Non-Cumulative Preferred Stock, Series A of Republic First Bancorp, Inc.
Incorporated by reference to Form 8-K filed August 21, 2020
3.3
Amended and Restated By-Laws of Republic First Bancorp, Inc.
Incorporated by reference to Form 10-Q filed May 11, 2020
4.1
The Company will furnish to the SEC upon request copies of the following documents relating to the Company’s Floating Rate Junior Subordinated Debt Securities due 2037: (i) Indenture dated as of December 27, 2006, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic Capital Trust II, dated as of December 27, 2006; and (iii) Guarantee Agreement dated as of December 27, 2006, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic Capital Trust II
4.2
The Company will furnish to the SEC upon request copies of the following documents relating to the Company’s Floating Rate Junior Subordinated Debt Securities due 2037: (i) Indenture dated as of June 28, 2007, between the Company and Wilmington Trust Company, as trustee; (ii) Amended and Restated Declaration of Trust of Republic Capital Trust III, dated as of June 28, 2007; and (iii) Guarantee Agreement dated as of June 28, 2007, between the Company and Wilmington Trust Company, as trustee, for the benefit of the holders of the capital securities of Republic Capital Trust III
4.3
Description of Capital Securities
Incorporated by reference to Form 10-K filed March 16, 2020
Exhibit
Number
Description
Location
10.1
Form of Employment Agreement, dated July 1, 2015, by and among, certain named Executive Officers, Republic First Bancorp, Inc. and Republic First Bank*
Incorporated by reference to Form 8-K filed July 14, 2015
10.2
Amended and Restated Stock Option Plan and Restricted Stock Plan*
Incorporated by reference to Form 10-K filed March 10, 2008
10.3
Deferred Compensation Plan*
Incorporated by reference to Form 10-K filed March 16, 2010
10.4
Amended and Restated Supplemental Retirement Plan Agreements between Republic First Bank and Certain Directors*
Incorporated by reference to Form 10-Q filed November 7, 2008
10.5
Amended and Restated Employment Agreement, dated as of March 1, 2021, by and among Harry D. Madonna, Republic First Bancorp, Inc., and Republic First Bank*
Incorporated by reference to Form 8-K filed March 2, 2022
10.6
Republic First Bancorp, Inc. 2014 Equity Incentive Plan*
Incorporated by reference to the definitive proxy statement on Schedule 14A filed March 26, 2014
10.7
Form of Incentive Stock Option Award - 2014 Equity Incentive Plan*
Incorporated by reference to Form 10-K filed March 13, 2015
Exhibit
Number
Description
Location
10.8
Republic First Bancorp Inc. 2021 Equity Incentive Plan
Incorporated by reference to Proxy Statement filed April 27, 2021
21.1
Subsidiaries of the Company
Filed Herewith
23.1
Consent of BDO
Filed Herewith
23.2
Consent of Crowe
Filed Herewith
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chairman and Chief Executive Officer of Republic First Bancorp, Inc.
Filed Herewith
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Republic First Bancorp, Inc.
Filed Herewith
32.1
Section 1350 Certification of Harry D. Madonna
Furnished Herewith
32.2
Section 1350 Certification of Frank A. Cavallaro
Furnished Herewith
Exhibit
Number
Description
Location
The following materials from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, formatted in Inline XBRL; (i) Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020, (ii) Consolidated Statements of Operations for the years ended December 31, 2021, 2020, and 2019, (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020, and 2019, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019, (v) Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2021, 2020, and 2019, and (vi) Notes to Consolidated Financial Statements.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Constitutes a management compensation agreement or arrangement.
(c)
All financial statement schedules are omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or notes thereto contained herein.