UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2021. |
or
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to . |
Commission File Number: 000-17007
REPUBLIC FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania |
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(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
50 South 16th | 19102 | |
(Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code 215-735-4422
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock | FRBK |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YESYes ☐ NONo ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YESYes ☐ NONo ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YESYes ☐ No ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months. YESYes ☒ NONo ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ | |
Non-Accelerated filer ☐ | Smaller reporting company | |
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESYes ☐ NONo ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $257,259,804$212,546,594 based on the last sale price on Nasdaq Global Market on June 30, 2019.2021.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share |
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Title of Class | Number of Shares Outstanding as of |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Shareholders, which Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2019, are incorporated by reference into Part III of this Form 10-K; provided, however, that the Compensation Committee Report, the Audit Committee Report and any other information in such proxy statement that is not required to be included in this Annual Report on Form 10-K, shall not be deemed to be incorporated herein by reference or filed as a part of this Annual Report on Form 10-K.None
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY | ||
TABLE OF CONTENTS |
PART I:
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Item 1. | Business | 1 |
Item 1A. | Risk Factors |
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Item 1B. | Unresolved Staff Comments |
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Item 2. | Properties |
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Item 3. | Legal Proceedings |
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Item 4. | Mine Safety Disclosures |
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PART | ||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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Item 6. |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
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Item 8. | Financial Statements and Supplementary Data |
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 139 |
Item 9A. | Controls and Procedures | 139 |
Item 9B. | Other Information | 140 |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 140 |
PART | ||
Item 10. | Directors, Executive Officers and Corporate Governance |
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Item 11. | Executive Compensation |
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Item 13. | Certain Relationships and Related Transactions, and Directors Independence |
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Item 14. | Principal Accounting Fees and Services |
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PART | ||
Item 15. | Exhibits, Financial Statement Schedules |
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Item 16. | Form 10-K Summary | 164 |
Signatures |
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PART I
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. TheseForward-looking statements, which are statements other than statements of historical fact, can be identified by reference to a future period or periods or by the use of words such as “would be,“believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “should,” “could, be,” “should be,“would,” “probability,“will,” “risk,“confident,” “may,” “can,” “potential,” “possible,” “proposed,” “target,” “objective,“pursue,” “may,“outlook,” “will,“maintain,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” andor similar expressions, or variations on such expressions. These forward-looking statements include, among others: statements ofwhen we discuss our guidance, strategy, goals, intentions and expectations, statements regarding the impact of accounting pronouncements, statements regarding prospects and business strategy, statements regarding allowance for loan losses, asset quality and market risk and estimates of future costs, benefits and results.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 andor uncertainties can arise with changes in or related to:
● | deterioration in general economic |
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● | changes in concentrations within our loan |
● | our ability to identify, negotiate, secure and develop new store locations and renew, modify, or terminate leases or dispose of properties for existing store locations effectively; |
● | business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items; |
● | changes in deposit flows and loan demand; |
● | the regulatory environment, including evolving banking industry standards, |
● | our securities portfolio and the valuation of our securities; |
● | changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements; |
● | operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; |
● | our |
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● | failure to attract or retain key employees; |
● | our ability to access cost-effective funding; |
● | fluctuations in real estate values; |
● | the continuing impact of the COVID-19 pandemic on our business and results of operation; |
● | 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; |
● | strategic transactions we may enter into; |
● | litigation liabilities, including costs, expenses, settlements and judgments; |
● | the effects of war or armed conflict in other countries, acts of terrorism, or other events that may affect general economic conditions; and |
● | 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.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 we may referis referred to as Republic“Republic” or the Bank“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 areaareas 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 an important anda 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.
To achieve such a transformation, we recruited several key banking executives who had previously served in leadership roles at Commerce Bank, upon which this business model draws inspiration. With a strong management team in place, along with adequate capital resources to support this revitalized vision, we began to build a unique brand with the goal of establishing ourselves as a premier financial institution in the Philadelphia metropolitan area.
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.
In December 2011, we completed the sale of several distressed commercial real estate loans and foreclosed properties to a single investor. This transaction dramatically reduced our non-performing asset balances and significantly improved our credit quality metrics. This loan sale was a cornerstone transaction in the transformation of Republic Bank.
With these significant changes implemented, Republic Bank was then well-positioned to execute an aggressive expansion plan which was given the title, “The“The Power of Red is Back.Back.” To support this growth strategy, we completed the sale ofissued $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 becameis now a division of the Bank. The acquisition of Oak Mortgage is headquartered in Marlton, NJ and is licensedallows us to do business in Pennsylvania, Delaware, New Jersey, and Florida providingprovide our customers with opportunities in the residential lending market. The Oak Mortgage team has been a tremendous fit for Republic’s commitment to extraordinary customer service and has proven to be a perfect complement to the Bank’s network of store locations.
To strengthen our capital position and prepare for the next stage of growth and expansion, we completed a capital raise in the amountissued $100 million of $100 millionour common stock through a registered direct offering of our common stock in December 2016. At the same time, Vernon W. Hill, II became a member
Republic has also become one of the Board of Directorstop small business lenders in its market as proven by its performance during 2020 and was appointed Chairman of2021 in the Paycheck Protection Program (“PPP”) authorized by the CARES Act. Republic First Bancorp, Inc. He has beenoriginated 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 major investor and consultant to Republic since 2008. Mr. Hill is often credited with reinventing the concept of Retail Banking. He was the Founder and Chairman of Commerce Bancorp, a $50 billion Retail Bank headquartered in metro Philadelphia, which grew to 450 locations along the east coast before its sale in 2007.survey conducted during 2020.
TheIn August 2020, we issued $50 million of convertible preferred stock to strengthen our capital position and support our aggressive expansion plan has produced strong results from a balance sheet perspectivegrowth 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 continues to build momentum. Over the last six years, we have opened eighteen new stores using our signature glass building. During 2019,satisfaction. In 2020, we expanded our store network by building our signature glass building at new locations in the SouthernNorthfield, New Jersey area by opening a new locationand Bensalem, Pennsylvania and in Lumberton2021 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 expandedmobile options as well. We continue to make investments in the Greater Philadelphia area with a new store in Feasterville, PA. During 2019,digital and technology tools as we also expanded into the New York market with the grand opening of two stores located at 14th Street & 5th Avenue and 51st Street & 3rd Avenue in Manhattan.strive to maintain our position as “America’s #1 Bank for Service”.
As of December 31, 2019,2021, we had total assets of approximately $3.3$5.6 billion, total shareholders’ equity of approximately $249.2$324.2 million, total deposits of approximately $3.0$5.2 billion, net loans receivable of approximately $1.7$2.5 billion, and a net lossincome of $3.5$25.2 million with net income of $21.7 million available to common shareholders for the year ended December 31, 2019.2021. 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 (FDIC)(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 twenty-nine32 branch locations, which are commonly referredwe refer to as “stores” throughout this document to reflect our retail orientedretail-oriented approach to customer service and convenience. TwelveThirteen of these stores are located in Philadelphia and the surrounding suburbs of Plymouth Meeting, Wynnewood, Abington, Media, Fairless Hills, Feasterville, and FeastervilleBensalem in Pennsylvania. There are fifteenseventeen 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 Lumberton.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, as wellin addition to other states such as Delaware and Florida through our Oak Mortgage lending team.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, BB&T,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 among financial institutions 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 banking 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 financial 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 $38.2$51.2 million at December 31, 2019.2021. 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 smallsmall- to medium sizedmedium-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, lockbox services and individual retirement accounts andaccounts. 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 much needed 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– 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 thirty-one34 proprietary ATMs located in our store network.
Our lending activities generally are focused on smallsmall- and medium sizedmedium-sized businesses within the communities that we serve. Commercial real estate loans represent the largest category within our loan portfolio, amounting to approximately 35%31% of total loans outstanding at December 31, 2019.2021. Repayment of these loans is, in part, dependent on general economic conditions affecting our customers and various businesses within the community. As a commercial 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 loancredit loss methodology, and perform a comprehensive review of our loan portfolio on a regular basis.
WithAs a result of the addition of Oak Mortgage Company in 2016, we are now able to offer residential mortgage loan products to customers in Pennsylvania, New Jersey, New York, Delaware, and Florida.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 partythird-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 makesoriginates 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 2019,2021, we opened a new storesstore in Lumberton,Deptford, New Jersey and Feasterville, Pennsylvania utilizing our distinctive glass prototype building. We also opened two stores in Manhattan at 14th Street & 5th Avenue and 51st Street & 3rd Avenue. The Bank anticipates the continuation of its expansion strategy in the Metro Philadelphia market and New York City in 2020.2022. However, as previously announced, the pace of new store openings has and will be slowedcontinue to slow as we deal with the challenging nature of the pandemic, other economic headwinds, including inflation, and the current interest rate environment which has resultedmay result in compression of the net interest margin and a decline in earnings.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.
The addition of Oak Mortgage in July 2016 provides us with new growth opportunities in the residential lending market. Oak Mortgage is licensed to do business in Pennsylvania, New Jersey, New York, Delaware, and Florida and gives us the ability to serve both new and existing customers throughout our store network. We envision the expansion of the Oak Mortgage lending team along with the growth of our store network.
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, 20192021 and 2018,2020, approximately 94%95% and 92%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.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, asset-backed securities, and Federal Home Loan Bank (FHLB) capitalpreferred stock.
Supervision and Regulation
General
Republic, as a Pennsylvania state charteredstate-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 Federal Bank Holding Company Act of 1956, as amended (“BHC(the “BHC Act”). As a bank holding company, our activities and those of Republic are limited to the business of banking and activities closely related or incidental to banking, and we may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve.
We are subject to extensive requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be grantedoriginated 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
Dodd-Frank Wall Street ReformPowers and Consumer Protection ActActivities. The Pennsylvania Banking Code of 20101965 (“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 Dodd-Frank Wall Street ReformFDIC is also authorized to permit state banks to engage in state authorized activities and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) has hadinvestments 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 broad impact on the financial services industry, including significant regulatory and compliance changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory examination fees; (iv) changes to assessments to be paidrisk to the FDIC for federal deposit insurance;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 (v) numerous other provisions designeda 4% Tier 1 capital to improve supervision and oversight of, and strengthening safety and soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a new framework for systemic risk oversight within the financial system to be distributed among new and existing federal regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection Bureau, the Federal Reserve, the Officetotal assets leverage ratio.
For purposes of the Comptrollerregulatory 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 the Currency,consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and the FDIC. A summaryTier 2 capital. Tier 2 capital is comprised of certain provisions of the Dodd-Frank Act is set forth below.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.
• Increased Capital StandardsAlso included in Tier 2 capital is the allowance for loan and Enhanced Supervision. The federal banking agencies established minimum leveragelease 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 requirementsratios, 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 banksasset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and bank holding companies. These new standards are summarized under “Capital Adequacy” below. The Dodd-Frank Act also requiresU.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 be countercyclical such thatmanagement if the requiredinstitution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount ofnecessary to meet its minimum risk-based capital increases in times of economic expansion and decreases in times of economic contraction consistent with safety and soundness.
• The Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act created the CFPB within the Federal Reserve. The CFPB is tasked with establishing and implementing rules and regulations under certain federal consumer protection laws with respect to the conduct of providers of certain consumer financial products and services. The CFPB has broad rulemaking, supervisory and enforcement powers for a wide range of consumer protection laws applicable to banks with greater than $10 billion or more in assets. Smaller institutions will be subject to rules promulgated by the CFPB, but will continue to be examined and supervised by federal banking regulators for consumer compliance purposes. In addition, the Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent than those regulations promulgated by the CFPB and state attorneys general are permitted to enforce consumer protection rules adopted by the CFPB against state-chartered institutions.
• Deposit Insurance. The Dodd-Frank Act permanently increased the maximum deposit insurance amount to $250,000 for insured deposits. Amendments to the Federal Deposit Insurance Act, which were mandated by the Dodd-Frank Act, have revised the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) are calculated. Under the amendments, the assessment base is no longer the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period. Additionally, the Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, by increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits by 2020 and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds. The Dodd- Frank Act also provided that, effective July 21, 2011, depository institutions may pay interest on demand deposits. For further discussion of deposit insurance regulatory matters, see “Deposit Insurance and Assessments” below.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.
TransactionsPrompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with Affiliatesrespect 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%. Under federal law, weAn 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 restrictions that limit certain types of transactions between Republic and its non-bank affiliates. In general, we areadditional measures including, subject to quantitative and qualitative limits on extensionsa narrow exception, the appointment of credit, purchases of assets and certain other transactions involving us and our non-bank affiliates. Transactions between Republic and its non-bank affiliates are required to be on arms length terms. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including expanding the definition of “covered transactions” and “affiliates,” as well as increasing the amount of time for which collateral requirements regarding covered transactions must be maintained.a receiver or conservator within 270 days after such status is triggered.
• Transactions with Insiders. Under the Dodd-Frank Act, insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions. Restrictions have also been placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, if representing more than 10% of capital, approved by the institution’s board of directors.
• Holding Company Capital Levels. The Dodd-Frank Act requires bank regulators to establish minimum capital levels for holding companies that are at least as stringent as those applicable to depository institutions. All trust preferred securities, or TRUPs, issued prior to May 19, 2010 by bank holding companies with less than $15 billion in assets are permanently grandfathered in Tier 1 capital, subject to limitation of 25% of Tier 1 capital.
Gramm-Leach-Bliley Act
The federal Gramm-Leach-Bliley Act (the “GLB Act”), enacted in 1999, repealed the key provisions of the Glass Steagall Act so as to permit commercial banks to affiliate with investment banks (securities firms). It also amended the BHC Act to permit qualifying bank holding companies to engage in many types of financial activities that were not permitted for banks themselves and permitted subsidiaries of banks to engage in a broad range of financial activities that were not permitted for themselves.
The result was to permit banking companies to offer a wider range of financial products and services to combine with other types of financial companies, such as securities and insurance companies. The impact of the GLB Act has, however, now been substantially limited by the Dodd-Frank Act and regulations issued by the Federal Reserve thereunder, specifically the so-called “Volcker Rule,” which will limit the ability of certain banks and their affiliates to invest in, or to engage in, non-banking activities for their own account.
The GLB Act created a new type of bank holding company called a “financial holding company” (“FHC”). An FHC is authorized to engage in any activity that is “financial in nature or incidental to financial activities” and any activity that the Federal Reserve determines is “complementary to financial activities” and does not pose undue risks to the financial system. Among other things, “financial in nature” activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities. A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is “well capitalized,” “well managed,” and has a rating under the Community Reinvestment Act (“CRA”) of “satisfactory” or better. A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC. We have not elected to become an FHC. Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those previously permitted by law and regulation.
In addition, the GLB Act provided significant new protections for the privacy of customer information. These provisions apply to any company the business of which is engaging in activities permitted for an FHC, even if it is not itself an FHC. The GLB Act subjected a financial institution to four new requirements regarding non-public information about a customer. The financial institution must: adopt and disclose a privacy policy; give customers the right to “opt out” of disclosures to non-affiliated parties; not disclose any information to third party marketers; and follow regulatory standards to protect the security and confidentiality of customer information.
Sarbanes-Oxley Act of 2002Republic 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 Sarbanes-Oxleyterm “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 2002 (“Sarbanes-Oxley”) comprehensively revised the laws affecting corporate governance, auditingFDIA, and accounting, executive compensationRegulation O of the Federal Reserve, generally applicable to FDIC-supervised institutions by Section 337.3 of the FDIC Rules and corporate reporting for entities, such as us, with equity or debt securities registered under the Exchange Act.Regulations. Among other things, Sarbanes-Oxleythese provisions generally require that extensions of credit to insiders:
• be made on terms that are substantially the same as, and its implementing regulations have established new membership requirementsfollow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and additional responsibilities for our audit committee, imposed restrictionsthat do not involve more than the normal risk of repayment or present other unfavorable features; and
• not exceed certain limitations on the relationship between usamount of credit extended to such persons, individually and our outside auditors (including restrictionsin the aggregate, which limits are based, in part, on the typesamount of non-audit services our auditors may provide to us), imposed additional responsibilities for our external financial statements on our chief executive officer and chief financial officer, and expanded the disclosure requirements for our corporate insiders. The requirements are intended to allow shareholders to more easily and efficiently monitor the performance of companies and directors.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 holding companyCompany are subject to the Pennsylvania Banking Code of 1965 (“Banking Code”) and the Federal Deposit Insurance Act (“FDIA”).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 $48.2$83.5 million of dividends payable plus an additional amount equal to its net profit for 2020,2022, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios as discussed in “Capital Adequacy”.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 2020 or 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.
Deposit Insurance and AssessmentsPennsylvania Holding Company Regulation
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The deposits of Republic are insured up to applicable limits per insured depositor by the FDIC. As noted above, pursuant. In addition to the Dodd-Frank Act, the maximum deposit insurance amount has been permanently increasedfederal holding company regulation, as a Pennsylvania incorporated bank holding company, we are also subject to $250,000.various restrictions on our activities as set forth in Pennsylvania law.
As an FDIC-insured bank, RepublicFederal Securities Laws
Our common stock is registered with the SEC under the Exchange Act. We are, therefore, subject to FDIC insurance assessments. The FDIC regulations assess insurance premiums for small insured depository institutions based on a risk-based assessment system. Under this assessment system, the FDIC evaluates the risk of each financial institution based on regulatory capital ratiosinformation, proxy solicitation, insider trading restrictions and other supervisory factors. The rules base assessments on an institution’s average consolidated total assets less its average tangible equity, as opposed to total deposits.requirements under the Exchange Act.
The FDIC has authority to increase insurance assessments. Any future increase in insurance premiums may adversely affect our resultsSarbanes-Oxley Act of operations.2002
The Dodd-FrankSarbanes-Oxley Act also requires the FDICaddresses, 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 take such steps as are necessary to increase the reserve ratio of the DIF from 1.15% to 1.35% of insured deposits by 2020. The reserve ratio is the DIF balance divided by estimated insured deposits. The reserve ratio reached 1.36% on September 30, 2018. Because the reserve ratio has reached 1.35%, two deposit insurance assessment changes occurred under FDIC regulations: (1) surcharges on insured depository institutionsensure compliance with total consolidated assets of $10 billion or more (large institutions) will cease; and (2) banks with assets of less than $10 billion, such as us, began to receive assessment credits for the portion of their assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, as the reserve ratio exceeded 1.38% as of the June 30, 2019 assessment date, with credits received in September and December 2019.these regulations.
In addition to paying basic deposit insurance assessments, the FDIC collected Financing Corporation (“FICO”) assessments to pay interest on FICO bonds. FICO bonds were issued in the late 1980’s to recapitalize the (former) Federal Savings & Loan Insurance Corporation. The last of the remaining FICO bonds matured in September 2019. The last FICO assessment was collected on March 29, 2019.
Capital Adequacy
The Federal Reserve has issued risk-based and leverage capital rules applicable to U.S. banking organizations such as the Company and Republic. These guidelines are intended to reflect the relationship between the banking organization’s capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet items. The Federal Reserve may from time to time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization’s financial condition or actual or anticipated growth.
The capital adequacy rules define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain. Common equity Tier 1 capital generally includes common stock and related surplus, retained earnings and, in certain cases and subject to certain limitations, minority interest in consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions. Tier 1 capital for banks and bank holding companies generally consists of the sum of common equity Tier 1 elements, non-cumulative perpetual preferred stock, and related surplus in certain cases and subject to limitations, minority interests in consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less certain deductions. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses. The sum of Tier 1 and Tier 2 capital less certain required deductions represents qualifying total risk-based capital. Prior to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations. However, the Federal Reserve’s capital rule applicable to bank holding companies permanently grandfathers non-qualifying capital instruments, including trust preferred securities, issued before May 19, 2010 by depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, subject to a limit of 25% of Tier 1 capital. In addition, under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in Tier 1 capital; however, we were permitted to make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. We have made this election.
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 capital conservation buffer, which is composed of common equity Tier 1 capital, began on January 1, 2016 at the 0.625% level and was phased in over a three year period (increasing by that amount on each January 1, until it reached 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity Tier 1 capital began on January 1, 2015 and were phased-in over a three-year period.
The following table shows the required capital ratios with the conversation buffer over the phase-in period.
Basel III Community Banks Minimum Capital Ratio Requirements | ||||||||||||||||
2016 | 2017 | 2018 | 2019 | |||||||||||||
Common equity tier 1 capital (CET1) | 5.125 | % | 5.750 | % | 6.375 | % | 7.000 | % | ||||||||
Tier 1 capital (to risk weighted assets) | 6.625 | % | 7.250 | % | 7.875 | % | 8.500 | % | ||||||||
Total capital (to risk-weighted assets) | 8.625 | % | 9.250 | % | 9.875 | % | 10.500 | % |
Republic is considered “well capitalized” under the FDIC's prompt corrective action rules. The risk-based capital standards are required to take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities.
Economic Growth, Regulatory Relief, and Consumer Protection Act
The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018 (the “Regulatory Relief Act”), amended certain provisions of the Dodd-Frank Act, as well as certain other statutes administered by the federal banking agencies. Some of the key provisions of the Regulatory Relief Act as it relates to community banks and bank holding companies include: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions pertaining to high volatility commercial real estate loans, which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for use of the small bank holding company policy statement from institutions with under $1 billion in assets to institutions with under $3 billion in assets.
In September 2019, the federal banking agencies approved the final rule to implement the provisions of Section 201 of the Regulatory Relief Act relating to the community bank leverage ratio (“CBLR”). Under the new rule, which became effective January 1, 2020, a qualifying community banking organization is defined as a depository institution or depository institution holding company with less than $10 billion in assets. A qualifying community banking organization has the option to elect the CBLR framework if its CBLR is greater than 9%, it has off-balance sheet exposures of 25% or less of consolidated assets, and trading assets and liabilities of 5% or less of total consolidated assets. The leverage ratio for purposes of the CBLR is calculated as Tier I capital divided by average total assets, consistent with the manner banking organizations calculate the leverage ratio under generally applicable capital rules. Qualifying community banking organizations that exceed the CBLR level established by the agencies, and that elect to be covered by the CBLR framework, will be considered to have met: (i) the generally applicable leverage and risk-based capital requirements under the banking agencies’ capital rules; (ii) the capital ratio requirements necessary to be considered “well capitalized” under the banking agencies’ prompt corrective action framework in the case of insured depository institutions; and (iii) any other applicable capital or leverage requirements. For institutions that fall below the 9% capital requirement but remain above 8%, are allowed a two-quarter grace period to either meet the qualifying criteria again or to comply with the generally applicable capital rules. We have not at this time opted to use the CBLR framework. We do not believe that the changes resulting from the Regulatory Relief Act, including whether we elect to use the CBLR framework, will materially impact our business, operations, or financial results.
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 ConditionsCondition
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, 2019,2021, we had a total of 599556 employees, including 537525 full-time employees.
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:
• | Demand for our products and services may decline; |
• | If the economy worsens, loan delinquencies, problem assets, and foreclosures may increase; |
• | Collateral for loans, especially real estate, may decline in value; |
• | Our allowance for credit losses may have to be increased if economic conditions worsen or if borrowers experience financial difficulties; |
• | The net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; |
• | Our cyber security risks are increased as a result of an increase in the number of employees working remotely; and |
• | 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 theour 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 $14.1$12.5 million at December 31, 2019.2021. Our allowance for loan losses was approximately $9.3$19.0 million at December 31, 2019.2021. Our loans between thirty and eighty-nine30-89 days delinquent totaled $1.9$9.6 million at December 31, 2019.2021.
Our concentration of commercial real estate loans could result in increased loan losses and costs of compliance.
A substantial portionAt December 31, 2021, commercial real estate loans totaled $780.3 million, or 31.0% of our loan portfolio is comprisedportfolio. 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 loancredit 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 loancredit losses may not be adequate to absorb actual loan losses, and we may be required to make further provisions for loancredit losses and charge off additional loans in the future, which could materially and adversely affect our business.
We attempt to maintain an allowance for loancredit losses, established through a provision for loancredit losses accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio. If our allowance for loancredit losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.
The determination of the allowance for loancredit losses inherently 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 loancredit losses. Increases in nonperforming loans have a significant impact on our allowance for loancredit losses. Our allowance for loancredit 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 familyone-to four-family residential mortgage loans. As a result, we may have to make provisions for loancredit 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 loancredit losses and may require us to increase the provision for loancredit losses or recognize further loan charge-offs, based on judgments that differ from those of our management. If loan charge-offs in future periods exceed the allowance for loan losses, we will need to increase our allowance for loan losses. Furthermore, growth in our loan portfolio would generally lead to an increase in the provision for loan losses. Any increases in our allowance for loancredit 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.
We are required to make significant estimatesOur mortgage banking revenue 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. Critical estimates are made by management in determining, among other things, the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, 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 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.
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.
Potential concerns for the longer term economic outlook include the continued flattening of the yield curve and an increasingly inverted yield curve (which may or may not signal a future recession), the risk of economic overheating in the near future, and concerns surrounding the long term fiscal position of the United States. 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.
We are a holding company dependent for liquidity on payments from our banking subsidiary, which payments are subject to restrictions.
We are a holding company and depend on dividends, distributions and other payments from Republic to fund dividend payments, if any, and to fund all payments on obligations. Republic and its subsidiaries are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to us. Restrictions or regulatory actions of that kind could impede our access to funds that we may need to make payments on our obligations or dividend payments, if any. In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.
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 and Southern New Jersey. 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.
Unfavorable economic and financial market conditions may adversely affect our financial position and results of operations.
Economic pressure on consumers and businesses and any resulting lack of confidence in the financial markets 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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Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.
As of December 31, 2019, we had approximately $24.1 million of U.S. Federal net operating loss carryforwards, referred to as “NOLs,” available to reduce taxable income in future years.
Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code of 1986, as amended, referred to as the “Code.” These ownership changes may limit the amount of NOLs thatmortgage servicing rights can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any post-change year would be determined by multiplying the value of our stock immediately before the ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused annual limitation may be carried over to later years, and the limitation may under certain circumstances be increased by built-in gains which may be present with respect to assets held by us at the time of the ownership change that are recognized in the five-year period after the ownership change.volatile.
In addition, the ability to use NOLs will be dependent on our ability to generate taxable income. The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in the fiscal years ended December 31, 2019 and December 31, 2018. There are no NOLs that could expire if not utilized for the year ending December 31, 2020.
Our assets as of December 31, 2019 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, 2019, the net deferred tax asset was $12.6 million, compared to a balance of $12.3 million at December 31, 2018.
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, 2019. 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 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.
We are required to adopt the FASB's accounting standard which requires measurement of certain financial assets (including loans) using the current expected credit losses (CECL) beginning in calendar year 2020.
Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The FASB's amendment replaces the current incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. We are currently evaluating the impact of ASU 2016-13, continuing our implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Calculations of expected losses under the new guidance were run parallel to the calculations under existing guidance to assess and evaluate the potential impact to our financial statements. The new model includes different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and considers expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to our allowance for loan losses which will depend upon the nature and characteristics of our loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. We expect an initial increase to the allowance for credit losses, in the range of 0% to 11% of the December 31, 2019 allowance for credit losses, or an incremental increase to the allowance for credit losses in the range of $0 up to approximately $1.0 million. When finalized, this one-time increase as a result of the adoption of ASU 2016-13 will be recorded, net of tax, as an adjustment to retained earnings effective January 1, 2020. This estimate is subject to change based on continuing refinement and validation of the model and methodologies. This ASU became effective for us as of January 1, 2020.
Our mortgage lending business may not provide us with significant noninterest income.
In 2019,2021, we originated $461$579.8 million residential mortgage loans and sold $328$398.7 million of those loans to investors onin 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 aggregateoriginate 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 related to changing market conditions to reducereducing our pricing margins, andboth of which would reduce our mortgage revenues generally.revenues. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (i)(1) the existence of an active secondary market and (ii)(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:
● | increased regulation of our industry and increased compliance costs; |
● | 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; |
● | increasing our credit risk, by increasing the likelihood that our customers are unable to satisfy their obligations to us; |
● | 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 |
● | 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 theLondon 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 have a material effect on our operating results and financial condition, including short and long-term liquidity and capital structure. Our acquisition activities could be material to us. For example, we could issue additional shares of common stock in a purchase transaction, which could dilute current shareholders’ ownership interest. These activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Any potential charges for impairment related to goodwill would not impact cash flow, tangible capital or liquidity but would decrease shareholders' equity.
Our acquisition activities could involve a number of additional risks, including the risks of:
● | incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions; |
● | using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or its assets; |
● | 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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● | failing to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits of |
● | potential disrupting our business; |
● | the time and expense required to integrate the operations and personnel of the combined businesses; |
● | creating an adverse short-term effect on our results of operations; and |
● | 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 storesbranches 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 Republic, to add to our management team. We believe that our ability to successfully implementexecute our retailgrowth 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.
Our disclosure controls and procedures and our internal control over financial reporting may not achieve their intended objectives.
We maintain disclosure controls and procedures designed to ensure that we timely report information as specified in the rules and forms of the Securities and Exchange Commission. We also maintain a system of internal control over financial reporting. These controls may not achieve their intended objectives. 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.
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.
If we wantRisks Related 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.our Common Stock
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, 2019, 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.
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 borrow 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 likely dilute the ownership interests of investors, 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.
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.
Our common stock is not insured by any governmental entity and, therefore, an investment in our common stock involves risk.
Our common stock is not a deposit account or other obligation of any bank, and is not insured by the FDIC or any other governmental entity, and is subject to investment risk, including possible loss.
There may be future sales of our common stock, which may materially and adversely affect the market price of our common stock.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 or securities convertible into or exchangeable or exercisable for 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 and our ability to raise capital through future offerings of equity or equity-related securities. The convertible trust preferred securities of Republic First Bancorp Capital Trust IV were converted into 1.7 million shares of our common stock in the years 2017 and 2018.stock.
In addition, our Board of Directors is authorizedRisks Related to designate and issue preferred stock without further shareholder approval, and we may issue other equity securities that are senior to our common stock in the future for a number of reasons, including, without limitation, to support operations and growth, to maintain our capital ratios and to comply with any future changes in regulatory standards.Governance Matters
Our common stock is currently traded on the Nasdaq Global Market. During 2019, the average daily trading volume for our common stock was approximately 156,200 shares. Sales of our common stock may place significant downward pressure on the market price of our common stock. Furthermore, it may be difficult for holders to resell their shares at prices they find attractive, or at all.
Our common stock is subordinate to our existing and future indebtedness and any preferred stock and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.
Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our existing and future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred stock that our Board of Directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors and preferred shareholders. As of December 31, 2019, we had $11.3 million of outstanding debt related to trust preferred securities.
Our ability to pay dividends depends upon the results of operations of our subsidiaries.
We have never declared or paid cash dividends on our common stock. Our Board of Directors intends to follow a policy of retaining earnings for the purpose of increasing our capital for the foreseeable future.
Holders of our common stock are entitled to receive dividends if, as and when declared from time to time by our Board of Directors in its sole discretion out of funds legally available for that purpose, after debt service payments and payments of dividends required to be paid on our outstanding preferred stock, if any.
While we, as a bank holding company, are not subject to certain restrictions on dividends applicable to Republic, our ability to pay dividends to the holders of our common stock will depend to a large extent upon the amount of dividends paid by Republic to us. Regulatory authorities restrict the amount of cash dividends Republic can declare and pay without prior regulatory approval. Presently, Republic cannot declare or pay dividends in any one-year in excess of retained earnings for that year subject to risk based capital requirements.
If we fail to maintain an effective system of internal control over financial reporting and disclosure controls and procedures, current and potential shareholders may lose 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. While we have reported no material weaknesses in the Form 10-K for the fiscal year ended December 31, 2019, we cannot guarantee that we will not have any material weaknesses in the future.
Compliance with the requirements of Section 404 is expensive and time-consuming. If, in the future, we fail to complete this evaluation in a timely manner we could be subject to regulatory scrutiny and a loss of public confidence in our internal control over financial reporting. In addition, any failure to maintain an effective system of disclosure controls and procedures could cause our current and potential shareholders and customers to lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.
Our governing documents, Pennsylvania law, and current policies of our Board of DirectorsDirectors 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 bylawsbylaws: 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 inhibitprevent 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. Pennsylvania law also provides that our shareholders are not entitled by statute to propose amendments to our articles of incorporation.
Uncertainty about the future of LIBOR may adversely affect our business.
LIBOR and certain other interest rate “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced that it intends to stop persuading or compelling banks to submit information to the administrator of LIBOR after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot be guaranteed after 2021. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of market participants convened by the Federal Reserve, the Alternative Reference Rate Committee, has selected the Secured Overnight Finance Rate as its recommended alternative to LIBOR. The Federal Reserve Bank of New York started to publish the Secured Overnight Financing Rate in April 2018. The Secured Overnight Financing Rate is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to the depth and robustness of the U.S. Treasury repurchase market. At this time, it is impossible to predict whether the Secured Overnight Financing Rate will become an accepted alternative to LIBOR.
The market transition away from LIBOR to an alternative reference rate, such as the Secured Overnight Financing Rate, is complex and could have a range of adverse effects on our business, financial condition and results of operations. In particular, any such transition could:
adversely affect the interest rates paid or received on, the revenue and expenses associated with or the value of our LIBOR-based assets and liabilities, which include certain variable rate loans and subordinated debt;
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result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based contracts and securities.
The transition away from LIBOR to an alternative reference rate will require the transition to or development of appropriate systems and analytics to effectively transition our risk management and other processes from LIBOR-based products to those based on the applicable alternative reference rate, such as the Secured Overnight Financing Rate. There can be no guarantee that these efforts will successfully mitigate the operational risks associated with the transition away from LIBOR to an alternative reference rate.
The manner and impact of the transition from LIBOR to an alternative reference rate, as well as the effect of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain.
Our financial results maybusiness could be adversely affectedimpacted by changes in U.S. and non-U.S. tax and other laws and regulations.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act, was signed into law. The Tax Act includes many provisions that effected our income tax expenses, including reducing its corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result of the rate reduction, we were required to re-measure, through income tax expense in the period of enactment, our deferred tax assets and liabilities using the enacted rate at which we expected them to be recovered or settled. The re-measurement of the net deferred tax asset resulted in additional income tax expense of $7.7 million recorded in fourth quarter 2017.
The ongoing success of our growth and expansion strategy, along with the successful integration of the mortgage company acquired in 2016 and the limited exposure remaining with current asset quality issues put us in a position to rely on projections of future taxable income when evaluating the need for a valuation allowance against deferred tax assets in the fourth quarter of 2017. Based on the guidance provided in ASC 740, we believed that the positive evidence considered at December 31, 2017 outweighed the negative evidence and that it was more likely than not that all of our deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was not required at December 31, 2017 and a $10.6 million benefit for income taxes was recorded in the fourth quarter of 2017 to reflect the reversal of the valuation allowance.
The $10.6 million tax benefit recognized when reversing the deferred tax asset valuation allowance offset the $7.7 million charge related to the change in the corporate tax rate resulting in a net tax benefit and increase in net income of $2.9 million during 2017.
Also on December 22, 2017, the SEC released SAB 118 to address any uncertainty or diversity of views in practice in accountingpotential proxy contest for the income tax effectselection of the Act in situations where a registrant does not have the necessary information available, prepared or analyzed in reasonable detail to complete this accounting in the reporting period that includes the enactment date. SAB 118 allowed for a measurement period not to extend beyond one year from the Act’s enactment date to complete the necessary accounting.
We recorded provisional amountsdirectors at our 2022 Annual Meeting of deferred income taxes using reasonable estimates in three areas where information necessary to complete the accounting was not available, prepared or analyzed as follows: (i) the deferred tax liability for temporary differences between the tax and financial reporting bases of fixed assets principally due to the accelerated depreciation under the Act which allowed for full expensing of qualified property purchased and placed in service after September 27, 2017; (ii) the deferred tax asset for temporary differences associated with accrued compensation was awaiting final determinations of amounts that were paid and deducted on the 2017 income tax returns and (iii) the deferred tax liability for temporary differences associated with equity investments in partnerships were awaiting receipt of Schedules K-1 from outside preparers, which was necessary to determine the 2017 tax impact from these investments.Shareholders.
In a fourth area, we made no adjustmentsDecember 2021, Driver Management Company LLC (together with its affiliates, the "Activist Investor"), announced the nomination of three candidates for election to deferred tax assets representing future deductions for accrued compensation that were subject to new limitations under Internal Revenue Code Section 162(m) which, generally, limitsour Board of Directors at our 2022 Annual Meeting of Shareholders. A proxy contest with the annual deduction for certain compensation paid to certain team members to $1 million. There was uncertainty in applying the newly enacted rules to existing contracts, and we were seeking further clarifications before completing its analysis. We completed the calculationsActivist Investor for the provisional items withelection 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 completion of the 2017 tax returns and completed the analysis of the Section 162(m) rules after further guidance was issued. The impact of the completed calculations to the re-measurement of the deferred taxes resulted in an immaterial change and the analysis of the 162(m) rules resulted in no adjustment.
The outbreak of the recent coronavirus ("COVID-19"), or an outbreak of another highly infectious or contagious disease, could adversely affect our business, financial condition and results of operations.
Our business is dependent upon the willingness and abilityattention of our customers to conduct bankingBoard of Directors, management, and other financial transactions. The spread of a highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in the U.S. economy, which could in turnemployees, and may disrupt the business, activities, and operations of our customers, as wellmomentum in our business and operations. Moreover, ssinceoperations, as well as our ability to execute our strategic plan. The actions of the beginningActivist Investor may also create perceived uncertainties as to the future direction of January 2020, the coronavirus outbreak has caused significant disruption in the financial markets both globallyour business or strategy, which may be exploited by our competitors and in the United States. The spread of COVID-19, or an outbreak of another highly infectious or contagious disease, may result in a significant decrease in business and/or causemake it more difficult to attract and retain qualified personnel, and may impact our customers to be unable to meet existing payment orrelationship with investors, vendors, and other obligations to us, particularly in the event of a spread of COVID-19 or an outbreak of an infectious disease in our market area. Although we maintain contingency plans for pandemic outbreaks, a spread of COVID-19, or an outbreak of another contagious disease,third parties. A proxy contest could also negatively impact the availabilitymarket price and the volatility of key personnel necessary to conduct our business. Such a spread or outbreak could also negatively impact the business and operations of third party service providers who perform critical services for our business. If COVID-19, or another highly infectious or contagious disease, spreads or the response to contain COVID-19 is unsuccessful, we could experience a material adverse effect on our business, financial condition, and results of operations.common stock.
Item 1B:Unresolved Staff Comments
None.
Item 2:Description of Properties
We currently have thirty-sixthirty-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. Twenty nineThirty-two properties are store locations that are open and operating as of December 31, 2019.2021. We have another sixfour locations under our control for future store locations. Of the forty-twoforty-three total locations, eighteenseventeen are owned by Republic. The remaining twenty-fourtwenty-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.
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.
Item 4: Mine Safety DisclosuresOn 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.
Not applicable.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.
Item 4:Mine Safety Disclosures
Not applicable.
PART II
Item 5:Market for Registrant’sRegistrant’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 March 10, 2020,October 18, 2022, there were approximately 100 record holders.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 20202022. 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.
Item 6: Selected Financial Data
As of or for the Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
INCOME STATEMENT DATA | ||||||||||||||||||||
Total interest income | $ | 104,864 | $ | 92,074 | $ | 70,849 | $ | 54,227 | $ | 45,436 | ||||||||||
Total interest expense | 27,057 | 16,170 | 8,784 | 6,863 | 5,381 | |||||||||||||||
Net interest income | 77,807 | 75,904 | 62,065 | 47,364 | 40,055 | |||||||||||||||
Provision for loan losses | 1,905 | 2,300 | 900 | 1,557 | 500 | |||||||||||||||
Non-interest income | 23,738 | 20,322 | 20,097 | 15,312 | 9,943 | |||||||||||||||
Non-interest expenses | 104,490 | 83,721 | 75,276 | 56,293 | 47,091 | |||||||||||||||
Income (loss) before provision (benefit) for income taxes | (4,850 | ) | 10,205 | 5,986 | 4,826 | 2,407 | ||||||||||||||
Provision (benefit) for income taxes | (1,350 | ) | 1,578 | (2,919 | ) | (119 | ) | (26 | ) | |||||||||||
Net income (loss) | $ | (3,500 | ) | $ | 8,627 | $ | 8,905 | $ | 4,945 | $ | 2,433 | |||||||||
PER SHARE DATA | ||||||||||||||||||||
Basic earnings (loss) per share | $ | (0.06 | ) | $ | 0.15 | $ | 0.16 | $ | 0.13 | $ | 0.06 | |||||||||
Diluted earnings (loss) per share | $ | (0.06 | ) | $ | 0.15 | $ | 0.15 | $ | 0.12 | $ | 0.06 | |||||||||
Book value per share | $ | 4.23 | $ | 4.17 | $ | 3.97 | $ | 3.79 | $ | 3.00 | ||||||||||
Tangible book value per share (1) | $ | 4.15 | $ | 4.09 | $ | 3.89 | $ | 3.70 | $ | 3.00 | ||||||||||
BALANCE SHEET DATA | ||||||||||||||||||||
Total assets | $ | 3,341,290 | $ | 2,753,297 | $ | 2,322,347 | $ | 1,923,931 | $ | 1,438,824 | ||||||||||
Total loans, net | 1,738,929 | 1,427,983 | 1,153,679 | 955,817 | 866,066 | |||||||||||||||
Total investment securities | 1,186,630 | 1,088,331 | 938,561 | 803,604 | 460,131 | |||||||||||||||
Total deposits | 2,999,163 | 2,392,867 | 2,063,295 | 1,677,670 | 1,249,298 | |||||||||||||||
Short-term borrowings | - | 91,422 | - | - | 47,000 | |||||||||||||||
Subordinated debt | 11,265 | 11,259 | 21,681 | 21,881 | 21,857 | |||||||||||||||
Total shareholders’ equity | 249,168 | 245,189 | 226,460 | 215,053 | 113,375 | |||||||||||||||
PERFORMANCE RATIOS | ||||||||||||||||||||
Return on average assets | (0.12% | ) | 0.34 | % | 0.43 | % | 0.30 | % | 0.19 | % | ||||||||||
Return on average shareholders’ equity | (1.41% | ) | 3.69 | % | 4.02 | % | 3.97 | % | 2.14 | % | ||||||||||
Net interest margin | 2.85 | % | 3.16 | % | 3.23 | % | 3.14 | % | 3.29 | % | ||||||||||
Total non-interest expenses as a percentage of average assets | 3.51 | % | 3.28 | % | 3.64 | % | 3.45 | % | 3.59 | % | ||||||||||
ASSET QUALITY RATIOS | ||||||||||||||||||||
Allowance for loan losses as a percentage of loans | 0.53 | % | 0.60 | % | 0.74 | % | 0.95 | % | 0.99 | % | ||||||||||
Allowance for loan losses as a percentage of non-performing loans | 74.65 | % | 83.31 | % | 57.93 | % | 48.45 | % | 68.95 | % | ||||||||||
Non-performing loans as a percentage of total loans | 0.71 | % | 0.72 | % | 1.28 | % | 1.96 | % | 1.44 | % | ||||||||||
Non-performing assets as a percentage of total assets | 0.42 | % | 0.60 | % | 0.94 | % | 1.51 | % | 1.66 | % | ||||||||||
Net charge-offs as a percentage of average loans, net | 0.08 | % | 0.17 | % | 0.13 | % | 0.12 | % | 0.41 | % | ||||||||||
LIQUIDITY AND CAPITAL RATIOS | ||||||||||||||||||||
Average equity to average assets | 8.36 | % | 9.16 | % | 10.72 | % | 7.63 | % | 8.67 | % | ||||||||||
Leverage ratio | 7.83 | % | 9.35 | % | 10.64 | % | 12.74 | % | 9.65 | % | ||||||||||
CET 1 capital to risk-weighted assets | 11.41 | % | 13.90 | % | 14.75 | % | 16.59 | % | 10.42 | % | ||||||||||
Tier 1 capital to risk-weighted assets | 11.93 | % | 14.53 | % | 16.13 | % | 18.28 | % | 12.40 | % | ||||||||||
Total capital to risk-weighted assets | 12.37 | % | 15.03 | % | 16.70 | % | 18.99 | % | 13.19 | % |
(1) ANon-GAAP Disclosure
Item 6:[Reserved]
Item 7: Management’sManagement’s Discussion and Analysis of Financial Conditionand Results of Operations
The following discussion and analysis of the results of operations and financial condition should be read in conjunction with Item 6 “Selected Financial Data” and the consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, “Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.
For the Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands, except per share data) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||
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 | 900 | |||||||||||||||
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 | 923 | - | - | - | |||||||||||||||
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
“The Power2021 was an incredibly successful year for Republic Bank and the “Power of Red is Back” expansion campaign continues to produce impressive results from a balance sheet perspective. During 2019 totalcampaign. We grew assets, grewloans, and deposits resulting in dramatic improvement in profitability during the year. Earnings improved by $588 million or 21% driven by the success of our customer centric banking philosophy of turning customers into “FANS”. Deposit balances increased by 25% as our network of stores continues to drive new customer relationships. Loan production was also significant as outstanding balances increased by 22%.
Earnings during 2019 were negatively impacted by compression of our net interest margin caused by a flat and, at times, an inverted yield curve. The shape of the yield curve is driving lower yields on interest earning assets and higher rates on interest bearing liabilities. In the midst of this challenging interest rate environment we have also incurred costs required to expand into New York City. In addition to new hires, training, advertising, and occupancy expenses for the opening of our first two stores in New York thisnearly 400% year we have also established a management and lending team for this new market.
As we enter the newover year 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. These measures will beginour ongoing effort to take effect during the first quarter of 2020.drive revenue growth at a greater rate than expense growth.
Additional highlights for the year ended December 31, 2019 were as follows: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 |
| 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 |
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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. In addition, managementManagement 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, 20192021 and December 31, 2018.2020.
(dollars in thousands) | December 31, 2019 | December 31, 2018 | December 31, 2021 | December 31, 2020 | ||||||||||||
Total shareholders’ equity | $ | 249,168 | $ | 245,189 | $ | 324,242 | $ | 308,113 | ||||||||
Reconciling items: | ||||||||||||||||
Preferred stock | (48,325 | ) | (48,325 | ) | ||||||||||||
Goodwill | (5,011 | ) | (5,011 | ) | - | - | ||||||||||
Tangible common equity | $ | 244,157 | $ | 240,178 | $ | 275,917 | $ | 259,788 | ||||||||
Common shares outstanding | 58,842,778 | 58,789,228 | 58,943,153 | 58,859,778 | ||||||||||||
Book value per common share | $ | 4.68 | $ | 4.41 | ||||||||||||
Tangible book value per common share | $ | 4.15 | $ | 4.09 | $ | 4.68 | $ | 4.41 |
Critical Accounting Policies, Judgments and Estimates
In reviewing and understanding our financial information, you are encouraged to read and understand the significant accounting policies used in preparing the consolidated financial statements. These policies are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses carrying values of other real estate owned, other than temporary impairment of securities, fair value of financial instruments and deferred income taxes. Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the policies related to the allowance for loan losses other-than-temporary impairment of securities, loans receivable, mortgage loans held for sale, interest rate lock commitments, forward loan sale commitments, goodwill, other real estate owned, and deferred income taxes as being critical.
Allowance for Loan Losses - Management’s ongoing evaluation–The allowance for credit losses consists of the adequacyallowance 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 based on our pastrestricted to any individual loan loss experience,or group of loans, and the volumeentire allowance is available to absorb any and composition of our lending, adverse situations that may affect a borrower’s ability to repay,all loan losses.
In estimating the estimated value of any underlying collateral,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 affectinginclude:
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 knowntime 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 inherent riskevents, 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 portfolio. Theprobability 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 increased by charges to income throughestablished for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of substantially all of the provision for loan losses and decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management,Company’s impaired loans are measured based upon its evaluation, considers adequate to absorb losses inherent inon the loan portfolio. This evaluation is inherently subjective as it requires material estimates including, among others, the amount and timing of expected future cash flows on impacted loans, exposure at default,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, andwhich is considered to be the estimated losses on ourfair value. The discounts also include estimated costs to sell the property.
For commercial and residential loan portfolios. Allindustrial 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 estimates may be susceptible to significant change.sources are generally discounted based on the age of the financial information or the quality of the assets.
The allowance consists of specific allowances for impaired loans,As a general allowance on the remainderresult of the portfolio, and an unallocated componentchanges in economic conditions related to accountthe COVID-19 pandemic, we increased the qualitative factors for a levelcertain components of imprecision in management’s estimation process. Although management determines the amount of each element of the allowance separately, the allowance for loan lossesloss 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 whole is availabletroubled 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 entireCARES Act, loan portfolio.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.
Management establishes anThe general component of the allowance on certain impaired loans for the amount by which the discounted cash flows, observable market price, or faircalculation 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 loan is collateral dependent, is lower than the carrying valuepotential weaknesses may result in deterioration of the loan. A loan is considered to be impaired when, based upon current information and events, it is probablerepayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that we will be unable to collect all amounts due according tojeopardize the contractual termsliquidation of the loan. A delay or shortfall in amount of payments does not necessarily result indebt. They include loans that are inadequately protected by the loan being identified as impaired.
Management also establishes a general allowance on non-impaired loans to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular loans. This general valuation allowance is determined by segregating the loans by loan categorycurrent sound net worth and assigning allowance percentages based on our historical loss experience, delinquency trends, and management’s evaluationpaying capacity of the collectabilityobligor or of the loan portfolio.
Management also evaluatescollateral pledged, if any. Loans classified loans, which are not impaired. We segregate these loans by category and assign qualitative factors to each loan based on inherent losses associated with each type of lending and consideration that these loans, indoubtful have all the aggregate, represent an above-average credit risk and that more of these loans will prove to be uncollectible compared to loans in the general portfolio. Classification of a loan within this category is based on identified weaknesses that increase the credit risk of the loan.
The allowance is adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting its primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business cycle, and bank regulatory examination results. The applied loss factors are re-evaluated each reporting period to ensure their relevance in the current economic environment.
While management uses the best information known to it in order to make loan loss allowance valuations, adjustments to the allowance may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times of economic slowdown, either regional or national, the risk inherent in loans classified substandard with the loan portfolio could increase resultingadded characteristic that collection or liquidation in full, on the need for additional provisionsbasis 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 in future periods. An increase could also be necessitated by an increase in the size of the loan portfoliolosses. Loans not classified as special mention, substandard, doubtful, or in any of its components even though the credit quality of the overall portfolio may be improving. Historically, the estimates of the allowance for loan loss have provided adequate coverage against actual losses incurred. are rated pass.
In addition, the Pennsylvania Department of Bankingfederal and Securities and the FDIC,state regulatory agencies, as an integral part of their examination processes,process, periodically review the allowance for loan losses. The Pennsylvania Department of Banking and Securities or the FDIC may require the recognition of adjustment to theCompany’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgment ofjudgments about information available to them at the time of their examinations. Toexamination. Management believes the extent that actual outcomes differ from management’s estimates, additional provisions tolevel of the allowance for loan losses may be required that would adversely impact earnings in future periods.
Other-Than-Temporary Impairment of Securities - 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 and our intent and ability to retain its investment in the security for a period of time sufficient to allow for 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 value of the security is reduced and a corresponding charge to earnings is recognized.
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 income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.
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 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 income. Outstanding 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 servicing released, and the servicing released premium is included in the market price. See Note 23 Derivatives and Risk Management Activities for further detail on IRLCs.
Forward Loan Sale Commitments - Forward loan sale commitments are commitments to sell individual mortgage loans at a fixed price to an investor at a future date. 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 income.
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. The Company completed an annual impairment test for goodwill as of July 31, 2019 and 2018. Future impairment testing will be conducted each year as of July 31, unless a triggering event occurs in the interim that would suggest impairment, in which case it would be tested as of the date of the triggering event. During the twelve months ended December 31, 2019 and 2018, there was no goodwill impairment recorded. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings. There was $5.0 million of goodwill at December 31, 2019 and 2018.2021 was adequate.
Other Real Estate Owned - Other real estate owned consistsThe Company adopted CECL effective January 1, 2022. Our implementation process included, among other things, assessment and documentation of assets acquired through, or in lieu of, loan foreclosure. They are held for salegovernance 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 managementreporting processes and related internal controls; model development, documentation and validation; and the assetsincorporation of qualitative adjustments for model limitations. ASU 2016-13 lists several credit loss methods that are carried at the loweracceptable such as a discounted cash flow method, loss-rate method and probability of carrying amount or fair value, less the costdefault/loss given default (“PD/LGD”). We contracted with a third-party vendor to sell. Revenue and expenses from operations and changesassist us in the valuationapplication 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 includeddiscussed in net expenses from other real estate owned.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 all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. Any reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.
Results of Operations
For the year ended December 31, 20192021 as compared to the year ended December 31, 20182020
We reported a net lossincome of $3.5$25.2 million, or ($0.06)$0.33 per diluted share, for the twelve months ended December 31, 20192021 compared to net income of $8.6$5.1 million, or $0.15$0.07 per diluted share, for the twelve months ended December 31, 2018.2020. Earnings in 20192021 were negativelypositively impacted by compression of the net interest margin caused by a flatCompany’s focus on driving revenue growth and inverted yield curve which drove lower yields on interest earning assets and higher rates on interest bearing liabilities. In the midst of this challenging rate environment we have also incurred costs to execute our expansion strategy in New York City. In addition to new hires, training, advertising, and occupancy expenses related to the opening of our first two stores in New York, we also established a management and lending team for this new market.limiting expense growth through cost control initiatives.
Net interest income for the twelve months ended December 31, 20192021 increased $1.9$37.4 million to $77.8$129.2 million as compared to $75.9$91.8 million for the twelve months ended December 31, 2018. Total assets grew by $588 million, or 21%, during 2019 to $3.3 billion. However, growth2020. Growth in net interest income was a result of $8.8 million driven by thean increase in interest earning assets was offset byincome of $32.9 million and a decreasereduction in interest expense of $6.9 million as a result of interest rate changes resulting$4.5 million. The increase in a net increase of only $1.9 million in net interest income. For comparison purposes net interest income increased by $13.5 million during 2018 on growth in assets of $431 million. Interest income increased $12.8$32.9 million, or 14%29%, due primarily towas driven by an increase in average interest-earning assets, primarily investment securities and loans receivable. Interest expense increased $10.9decreased $4.5 million, or 67%20%, primarily due to an increasea decrease in the rate on average interest-bearing liabilities and average deposit balances.liabilities. The net interest margin decreasedincreased by 3118 basis points to 2.85%2.69% during the twelve months ended December 31, 20192021 compared to 3.16%2.51% during the twelve months ended December 31, 2018.2020.
We recorded a loan loss provision in the amount of $1.9$5.8 million, a decreasean increase of $395,000$1.6 million for the twelve months ended December 31, 20192021 compared to a provision of $2.3$4.2 million during the twelve months ended December 31, 2018.2020. The provision recordedincrease 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 twelve months ended December 31, 2019 is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. The decrease in the provision year over year was primarily a result of a decrease in the allowance required for loans individually evaluated for impairment during 2019 and is supported by the steady decline in the ratio of non-performing assets to total assets.period.
Non-interest income increased $3.4decreased $3.5 million to $23.7$32.7 million during the twelve months ended December 31, 20192021 as compared to $20.3$36.2 million during the twelve months ended December 31, 2018.2020. The increasedecrease was primarily driven by highera 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 investment securitiesSBA loans during the twelve months ended December 31, 2019.2021.
Non-interest expenses increased $20.8$5.1 million to $104.5$122.5 million during the twelve months ended December 31, 20192021 as compared to $83.7$117.4 million during the twelve months ended December 31, 2018.2020. The increase was primarily driven by higher salaries, employee benefits, occupancy, and equipment expenses associated with the addition of new stores related to our expansion strategy, which we refer to as “The Poweroffset by a goodwill impairment charge of Red is Back”.$5.0 million in 2020.
Return on average assets and average equity were (0.12%)0.50% and (1.41%)7.92%, respectively, during the twelve months ended December 31, 20192021 compared to 0.34%0.13% and 3.69%1.86%, respectively, for the twelve months ended December 31, 2018.2020.
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-earninginterest‑earning assets and interest paid on interest-bearinginterest‑bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earninginterest‑earning assets and interest-bearinginterest‑bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, a non-GAAP measure, using a rate of 21% in 2019,2021, 21% in 2018,2020, and 35%21% in 2017.2019.
Average Balances and Net Interest Income
For the Year Ended December 31, 2019 | For the Year Ended December 31, 2018 | For the Year Ended December 31, 2017 | 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) | 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 | $ | 129,528 | $ | 2,571 | 1.98% | $ | 40,931 | $ | 847 | 2.07% | $ | 48,148 | $ | 577 | 1.20% | $ | 352,417 | $ | 453 | 0.13 | % | $ | 242,132 | $ | 514 | 0.21 | % | $ | 129,528 | $ | 2,571 | 1.98 | % | |||||||||||||||||||||||||||||||||||||||
Investment securities and restricted stock | 1,074,706 | 27,886 | 2.59% | 1,037,810 | 27,316 | 2.63% | 811,269 | 20,466 | 2.52% | 1,890,629 | 32,542 | 1.72 | % | 1,086,386 | 21,166 | 1.95 | % | 1,074,706 | 27,886 | 2.59 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivable | 1,544,904 | 74,946 | 4.85% | 1,340,117 | 64,455 | 4.81% | 1,090,851 | 50,687 | 4.65% | 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 | 2,749,138 | 105,403 | 3.83% | 2,418,858 | 92,618 | 3.83% | 1,950,268 | 71,730 | 3.68% | 4,820,544 | 148,335 | 3.08 | % | 3,687,687 | 115,534 | 3.13 | % | 2,749,138 | 105,403 | 3.83 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 229,767 | 131,369 | 115,770 | 255,721 | 265,893 | 229,767 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 2,978,905 | $ | 2,550,227 | $ | 2,066,038 | $ | 5,076,265 | $ | 3,953,580 | $ | 2,978,905 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand – non-interest bearing | $ | 555,385 | $ | 488,995 | $ | 372,171 | $ | 1,256,043 | $ | 926,692 | $ | 555,385 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Demand – interest bearing | 1,184,530 | 15,621 | 1.32% | 918,508 | 7,946 | 0.87% | 687,586 | 3,020 | 0.44% | 2,025,420 | 13,107 | 0.65 | % | 1,509,826 | 12,645 | 0.84 | % | 1,184,530 | 15,621 | 1.32 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Money market & savings | 705,445 | 6,796 | 0.96% | 697,135 | 4,898 | 0.70% | 629,464 | 3,160 | 0.50% | 1,162,032 | 3,720 | 0.32 | % | 916,607 | 6,247 | 0.68 | % | 705,445 | 6,796 | 0.96 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Time deposits | 190,567 | 3,850 | 2.02% | 128,892 | 1,588 | 1.23% | 110,952 | 1,238 | 1.12% | 190,960 | 1,511 | 0.79 | % | 211,636 | 3,859 | 1.82 | % | 190,567 | 3,850 | 2.02 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total deposits | 2,635,927 | 26,267 | 1.00% | 2,233,530 | 14,432 | 0.65% | 1,800,173 | 7,418 | 0.41% | 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 | 2,080,542 | 26,267 | 1.26% | 1,744,535 | 14,432 | 0.83% | 1,428,002 | 7,418 | 0.52% | 3,378,412 | 18,338 | 0.54 | % | 2,638,069 | 22,751 | 0.86 | % | 2,080,542 | 26,267 | 1.26 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowings | 22,911 | 790 | 3.45% | 73,573 | 1,738 | 2.36% | 35,429 | 1,366 | 3.86% | 22,303 | 253 | 1.11 | % | 30,413 | 367 | 1.21 | % | 22,911 | 790 | 3.45 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 2,103,453 | 27,057 | 1.29% | 1,818,108 | 16,170 | 0.89% | 1,463,431 | 8,784 | 0.60% | 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 | 2,658,838 | 27,057 | 1.02% | 2,307,103 | 16,170 | 0.70% | 1,835,602 | 8,784 | 0.48% | 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 | 71,131 | 9,431 | 8,942 | 101,473 | 87,200 | 71,131 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders’ equity | 248,936 | 233,693 | 221,494 | 318,034 | 271,206 | 248,936 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 2,978,905 | $ | 2,550,227 | $ | 2,066,038 | $ | 5,076,265 | $ | 3,953,580 | $ | 2,978,905 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest income(2) | $ | 78,346 | �� | $ | 76,448 | $ | 62,946 | $ | 129,744 | $ | 92,416 | $ | 78,346 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest spread | 2.54% | 2.94% | 3.08% | 2.52 | % | 2.26 | % | 2.54 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin(2) | 2.85% | 3.16% | 3.23% | 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 equivalenttax-equivalent basis, a Non-GAAP measure. Net interest income has been increased over the financial statement amount by $532, $585, and $539 $544,in 2021, 2020, and $881 in 2019, 2018, and 2017, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates. Net interest income and net interest margin are presented on a tax equivalent basis, a Non-GAAP measure.basis.
Year ended December 31, 2019 vs. 2018 | Year ended December 31, 2018 vs. 2017 | Year ended December 31, 2021 vs. 2020 | Year ended December 31, 2020 vs. 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Changes due to: | Changes due to: | Changes due to: | Changes due to: | |||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Average Volume | Average Rate | Total Change | Average Volume | Average Rate | Total Change | Average Volume | Average Rate | Total Change | Average Volume | Average Rate | Total Change | ||||||||||||||||||||||||||||||||||||
Interest earned: | ||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and other interest-earning assets | $ | 1,759 | $ | (35 | ) | $ | 1,724 | $ | (149 | ) | $ | 419 | $ | 270 | $ | 142 | $ | (203 | ) | $ | (61 | ) | $ | 239 | $ | (2,296 | ) | $ | (2,057 | ) | ||||||||||||||||||
Securities | 958 | (388 | ) | 570 | 5,963 | 887 | 6,850 | 13,843 | (2,467 | ) | 11,376 | 227 | (6,947 | ) | (6,720 | ) | ||||||||||||||||||||||||||||||||
Loans | 9,439 | 1,052 | 10,491 | 11,596 | 2,172 | 13,768 | 8,244 | 13,242 | 21,486 | 32,296 | (13,388 | ) | 18,908 | |||||||||||||||||||||||||||||||||||
Total interest-earning assets | 12,156 | 629 | 12,785 | 17,410 | 3,478 | 20,888 | 22,229 | 10,572 | 32,801 | 32,762 | (22,631 | ) | 10,131 | |||||||||||||||||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing demand deposits | $ | 3,508 | $ | 4,167 | $ | 7,675 | $ | 1,998 | $ | 2,928 | $ | 4,926 | $ | 737 | $ | (275 | ) | $ | 462 | $ | 2,725 | $ | (5,701 | ) | $ | (2,976 | ) | |||||||||||||||||||||
Money market and savings | 46 | 1,852 | 1,898 | 516 | 1,222 | 1,738 | 3,337 | (5,864 | ) | (2,527 | ) | 1,462 | (2,011 | ) | (549 | ) | ||||||||||||||||||||||||||||||||
Time deposits | 1,246 | 1,016 | 2,262 | 221 | 129 | 350 | (164 | ) | (2,184 | ) | (2,348 | ) | 384 | (375 | ) | 9 | ||||||||||||||||||||||||||||||||
Total deposit interest expense | 4,800 | 7,035 | 11,835 | 2,735 | 4,279 | 7,014 | 3,910 | (8,323 | ) | (4,413 | ) | 4,571 | (8,087 | ) | (3,516 | ) | ||||||||||||||||||||||||||||||||
Other borrowings | (1,402 | ) | 454 | (948 | ) | 742 | (370 | ) | 372 | (28 | ) | (86 | ) | (114 | ) | 27 | (450 | ) | (423 | ) | ||||||||||||||||||||||||||||
Total interest expense | 3,398 | 7,489 | 10,887 | 3,477 | 3,909 | 7,386 | 3,882 | (8,409 | ) | (4,527 | ) | 4,598 | (8,537 | ) | (3,939 | ) | ||||||||||||||||||||||||||||||||
Net interest income | $ | 8,758 | $ | (6,860 | ) | $ | 1,898 | $ | 13,933 | $ | (431 | ) | $ | 13,502 | $ | 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, 20192020 increased by $1.9$14.1 million, or 2%18%, over twelve months ended December 31, 2018.2019. 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, an increase of $12.8 million, compared to $92.6 million for the twelve months ended December 31, 2018.2019. The increase in interest income earned was primarily the result of an increase in average interest-earning balances, primarily loans receivable. 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, 2019 increased $10.92021 decreased $4.5 million, or 67%20%, to $27.1$18.6 million from $16.2$23.1 million for the twelve months ended December 31, 2018.2020. Interest expense on deposits increaseddecreased by $11.8$4.4 million, or 82%19%, for the twelve months ended December 31, 2019 versus the twelve months ended December 31, 2018 due to higher rates and increases in average deposit balances. Interest expense on other borrowings decreased by $948,000 for the twelve months ended December 31, 20192021 compared to the twelve months ended December 31, 20182020 due primarilyto 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 $48.210 basis point decrease in the average rate on other borrowings and an $8.1 million decrease in the average overnight borrowings.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 2.54%2.52% during the twelve months ended December 31, 20192021 versus 2.94%2.26% during the twelve months ended December 31, 2018.2020. 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, 20192021 and 2018,2020, the fully tax-equivalent net interest margin was 2.85%2.69% and 3.16%2.51%, respectively. CompressionThe improvement in the net interest margin was driven by flatteningprimarily the result of the yield curve resulting in a more rapid increase in ourinterest income and a decline in the cost of funds compared to the yield on interest earning assets.funds.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $1.9$5.8 million, a decreasean increase of $395,000,$1.6 million, for the twelve months ended December 31, 20192021 compared to a $2.3$4.2 million provision for the twelve months ended December 31, 2018. The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.2020. The provision recorded for the twelve months ended December 31, 20192021 compared to the twelve months ended December 31, 2018 decreased primarily as a result2020 was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment, the nature of a decreaseand concentration in certain credit types within the allowance requiredloan portfolio and loan growth for loans individually evaluated for impairment. the period.
Non-performing assets as a percentage of total assets declined to 0.42%0.24% as of December 31, 20192021 compared to 0.60%0.28% as of December 31, 2018.2020. This is the fifthseventh consecutive year that this ratio has declined. Net (recoveries) charge-offs as a percentage of average loans also declined during 2019.2021.
Non-Interest Income
Total non-interest income for the twelve months ended December 31, 2019 increased2021 decreased by $3.4$3.5 million, or 17%10%, compared to the twelve months ended December 31, 2018. Service fees on deposit accounts2020. Mortgage banking income totaled $7.5$12.0 million for the twelve months ended December 31, 20192021, 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 $2.1$2.9 million compared to the twelve months ended December 31, 2018.2020. This increase was driven by growth in customer deposit accounts and transaction volume. We recognized gains of $1.1 million on the sale of securities during the twelve months ended December 31, 2019, an increase of $1.2 million, compared to losses of $67,000 on the sales of securities for the twelve months ended December 31, 2018. Loanvolume as we continue with our growth and servicing fees totaled $1.6 million for the twelve months ended December 31, 2019 which represents an increase of $167,000 compared to the twelve months ended December 31, 2018.expansion strategy. Gains on the sale of SBA loans totaled $3.2 million for the twelve months ended December 31, 2019,2021, an increase of $82,000, versus $3.1$1.5 million, compared to $1.7 million for the twelve months ended December 31, 2018. Mortgage banking income2020. Loan and servicing fees totaled $10.1 million and $10.2$3.0 million for the twelve months ended December 31, 2019 and 2018.2021, which represents an increase of $39,000 compared to the twelve months ended December 31, 2020.
Non-Interest Expenses
Non-interest expenses increased by $20.8$5.1 million, or 25%4%, for the twelve months ended December 31, 2019,2021, compared to the twelve months ended December 31, 2018.2020. 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, 20192021 increased by $9.8$3.0 million, or 22%5%, compared to the twelve months ended December 31, 2018.2020. The increase was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores, which we refer to as “The Power of Red is Back”.stores. There were twenty-nine32 stores open as of December 31, 20192021 compared to twenty-five31 stores open at December 31, 2018. The strategic decision to expand into New York City was also a significant factor driving the increase in salaries and employee benefits.2020.
Occupancy expense, including depreciation and amortization expense, increased by $4.6$1.3 million, or 34%6%, for the twelve months ended December 31, 20192021 compared to the twelve months ended December 31, 2018,2020, also as a result of our continuing growth and expansion strategy.
Other real estate owned expenses totaled $2.1 million$844,000 during the twelve months ended December 31, 2019,2021, an increase of $521,000,$385,000, when compared to the twelve months ended December 31, 2018.2020. This increase was a result of higher costs to carry foreclosed properties on foreclosed assets during the twelve months ended December 31, 2019.2020.
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, 20192021 increased $5.8$5.4 million compared to the twelve months ended December 31, 2018.2020. Increases in expenses related to data processing, advertising, automated teller machine expenses,professional fees, regulatory assessments and professional feescosts, 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 annualized net non-interest expenses to average assets, a non-GAAP measure.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, 2019,2021, the ratio equaled 2.71%was 2.41% compared to 2.49%2.97% for the twelve months ended December 31, 2018,2020, respectively. The increasedecrease in this ratio was mainly due to our growththe increase in average assets and expansion strategythe goodwill impairment charge recognized in 2020, which drives the addition of new stores, along with additional employees to support the growth strategy.did not recur in 2021.
Another productivity measure utilized by management is the operating efficiency ratio, another non-GAAP measure.ratio. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio equaled 102.90%was 76% for the twelve months ended December 31, 2019,2021, compared to 87.0%92% for the twelve months ended December 31, 2018.2020. The increasedecrease for the twelve months ended December 31, 20192021 versus the twelve months ended December 31, 20182020 was due to net interest income and non-interest expensesincome increasing at a faster rate than net interest income and non-interest income.expenses.
Provision (Benefit) for Income Taxes
We recorded a benefitprovision 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, 2019 compared to a provision of $1.6 million for the twelve months ended December 31, 2018.2020. The effective tax rates for both the twelve month periodstwelve-month period ended December 31, 20192021 and 2018 were (28%)2020 was 25% and 15%, respectively. The effect of permanent deductions increases the effective tax benefit percentage when in a pre-tax loss position and decreases the effective tax rate when in a pre-tax income position.22%.
We evaluate
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 Financial Accounting Standards Board (FASB)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 conductingassessing 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 analysis,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 believe itcan generate net income on the capital invested by our stockholders. ROE is importantcalculated by dividing net income by average stockholders’ equity. The ROE for the twelve months ended December 31, 2021 was 7.92%, compared to consider1.86% for the unique characteristicstwelve 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 industryincrease 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 business. In particular, characteristics such as business model, level of capital and reserves held10%, was driven by an increase in average interest-earning assets, primarily loans receivable, offset by a financial institution anddecrease in the abilityrate of average interest-earning assets. Interest expense decreased $3.9 million, or 15%, primarily due to absorb potential losses are important distinctionsa decrease in the rate on average interest-bearing liabilities. The net interest margin decreased by 34 basis points to be considered for bank holding companies like us. In addition, it is also important to consider that net operating loss carryforwards (“NOLs”) calculated for federal income tax purposes can generally be carried back two years and carried forward for a period of twenty years, for NOLs created prior to January 1, 2018. Federal NOLs generated after2.51% during the twelve months ended December 31, 2017 can be carried forward indefinitely. In order2020 compared to realize2.85% 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 deferred taxexpansion strategy.
Return on average assets we must generate sufficient taxable income in such future years.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 3-yearthree-year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Strong growthGrowth in interest-earning assets is expected to continue, and is supported by the capital raise completed at the end of 2016.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 10thirteen store locations in the past 3four years and since the inception of the “Power of Red is Back” growth and expansion strategy in 2014, almost every new store location has met or exceeded expectations. The success of the expansion into New York,strategy, combined with the stabilization of interest rates and continued loan growth, are expected to improvecontinue 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 generated a loss in the current year when factoring in pre-tax GAAP income and permanent book/tax differences. The Bank’sCompany’s net interest margin declined during 20192020 as a result of the challenging interest rate environment which appearsenvironment. The effects of the COVID-19 pandemic to be consistent across the financial services industry. Non-accrual loans increased by 20 percent during 2019.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.
The Company has experienced a growing balance sheet driven by the growth and expansion strategy over the last several years. Loans and deposits have consistently grown at rates far above industry standards generating a higher level of interest earning assets. Assets quality metrics have improved to levels not seen in more than 20 years. From 2014 to 2018, the Company demonstrated consistent and steady improvement in earnings despite the investments required to initiate the expansion plan which put it in a position to comfortably rely on projections of future taxable income when evaluating the need for a valuation allowance against its deferred tax assets for the years ended December 31, 2018 and 2017.
In 2019, the Company began opening branches in New York City. Management was aware of the initial costs and investments required to expand into this new market. As a result of the flat and inverted yield curve experienced in 2019, the net interest margin compressed and revenue did not grow at the rate necessary to support the increased expense levels which caused a decline in earnings. Management and the Board of Directors have engaged in detailed discussions on how to improve profitability going forward. During the preparation of the 2020 budget, several cost reduction and control initiatives were identified and incorporated into the projections. These initiatives include, but are not limited to, a reduction of store hours and slowing of the number of locations to be opened in the coming years. Efforts to reduce high cost deposits and increase loan production to improve the net interest margin have also been initiated. The Company’s multi-year budget plan projects future taxable income will be more than sufficient to support the realization of the deferred tax assets.
Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), the Company believed that the positive evidence considered at December 31, 20192020 outweighed the negative evidence and that it was more likely than not that all of the Company’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was not required at December 31, 2019.2020.
The net deferred tax asset balance was $12.0 million as of December 31, 2020 and $12.6 million as of December 31, 2019, $12.3 million as of December 31, 2018, and $12.7 million as of December 31, 2017.2019. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.
Net Income and Net Income per Common Share
The net loss for the twelve months ended December 31, 2019 was $3.5 million, compared to net income of $8.6 million for the twelve months ended December 31, 2018. For the twelve months ended December 31, 2019, basic and fully-diluted net loss per common share was ($0.06), compared to basic and fully-diluted net income per common share of $0.15, respectively for the twelve months ended December 31, 2018.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve months ended December 31, 2019 and 2018 was (0.12%) and 0.34%, respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE for the twelve months ended December 31, 2019 was (1.41%), compared to 3.69% for the twelve months ended December 31, 2018.
Results of Operations
For the year ended December 31, 2018 as compared to the year ended December 31, 2017
We reported net income of $8.6 million, or $0.15 per diluted share, for the twelve months ended December 31, 2018 compared to net income of $8.9 million, or $0.15 per diluted share, for the twelve months ended December 31, 2017. The decrease in net income of $278,000 was related to an increase in total non-interest expense and the provision for income taxes partially offset by an increase in net interest income and non-interest income. Net income before tax grew by 70%, or $4.2 million to $10.2 million for the twelve months December 31, 2018 compared to net income before tax of $6.0 million for the twelve months ended December 31, 2017.
Net interest income for the twelve months ended December 31, 2018 increased $13.8 million to $75.9 million as compared to $62.1 million for the twelve months ended December 31, 2017. Interest income increased $21.2 million, or 30.0%, due primarily to an increase in average loans receivable and investment securities balances. Interest expense increased $7.4 million, or 84.1%, primarily due to an increase in the cost of average interest-bearing liabilities and the balance of average interest-bearing liabilities. The increase in interest rates associated with the cost of interest-bearing liabilities was mainly driven by the increases in the Fed Funds rate during 2018.
We recorded a loan loss provision in the amount of $2.3 million, an increase of $1.4 million for the twelve months ended December 31, 2018 compared to a provision of $900,000 during the twelve months ended December 31, 2017. The higher provision recorded for the twelve months ended December 31, 2018 is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. The increase was primarily a result of an increase in the allowance required for loans collectively evaluated for impairment due to growth in outstanding loans during 2018.
Non-interest income increased $225,000 to $20.3 million during the twelve months ended December 31, 2018 as compared to $20.1 million during the twelve months ended December 31, 2017. The increase was primarily driven by service fees on deposit accounts, partially offset by a decrease in mortgage banking income, gains on the sale of SBA loans, and loan and servicing fees recorded during the twelve months ended December 31, 2017.
Non-interest expenses increased $8.4 million to $83.7 million during the twelve months ended December 31, 2018 as compared to $75.3 million during the twelve months ended December 31, 2017. The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment expenses associated with the addition of new stores related to our expansion strategy which we refer to as “The Power of Red is Back”.
Return on average assets and average equity were 0.34% and 3.69%, respectively, during the twelve months ended December 31, 2018 compared to 0.43% and 4.02%, respectively, for the twelve months ended December 31, 2017.
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, 2018 increased by $13.5 million, or 21.5%, over twelve months ended December 31, 2017. Interest income on interest-earning assets totaled $92.6 million for the twelve months ended December 31, 2018, an increase of $20.9 million, compared to $71.7 million for the twelve months ended December 31, 2017. The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable and investment securities. Total interest expense for the twelve months ended December 31, 2018 increased $7.4 million, or 84.1%, to $16.2 million from $8.8 million for the twelve months ended December 31, 2017. Interest expense on deposits increased by $7.0 million, or 94.6%, for the twelve months ended December 31, 2018 versus the twelve months ended December 31, 2017 due to increases in average deposit balances and higher rates. Interest expense on other borrowings increased by $372,000 for the twelve months ended December 31, 2018 compared to the twelve months ended December 31, 2017 due primarily to a $46.1 million increase in average overnight borrowings balances.
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 2.94% during the twelve months ended December 31, 2018 versus 3.08% during the twelve months ended December 31, 2017. 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, 2018 and 2017, the fully tax-equivalent net interest margin was 3.16% and 3.23%, respectively. The net interest margin for the twelve months ended December 31, 2018 decreased primarily as a result of the cost of funds associated with interest-bearing liabilities rising at a faster rate than the yield earned on interest-earning assets.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $2.3 million, an increase of $1.4 million, for the twelve months ended December 31, 2018 compared to a $900,000 provision for the twelve months ended December 31, 2017. The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. The provision recorded for the twelve months ended December 31, 2018 as compared to the twelve months ended December 31, 2017 increased primarily as a result of an increase in the allowance required for loans collectively evaluated for impairment driven by an increase in loans receivable.
Non-Interest Income
Total non-interest income for the twelve months ended December 31, 2018 increased by $225,000, or 1.1%, compared to the twelve months ended December 31, 2017. Service fees on deposit accounts totaled $5.5 million for the twelve months ended December 31, 2018 which represents an increase of $1.6 million compared to the twelve months ended December 31, 2017. This increase was driven by growth in customer deposit accounts and transaction volume. We recognized losses of $67,000 on the sale of securities during the twelve months ended December 31, 2018, a decrease of $79,000, compared to losses of $146,000 on the sales of securities for the twelve months ended December 31, 2017. Mortgage banking income totaled $10.2 million and $11.2 million for the twelve months ended December 31, 2018 and 2017. The decrease of $937,000 is primarily driven by fair adjustments on loans held for sale and IRLCs. Gains on the sale of SBA loans totaled $3.1 million for the twelve months ended December 31, 2018, a decrease of $273,000, versus $3.4 million for the twelve months ended December 31, 2017.
Non-Interest ExpensesPreferred Dividends
Non-interest expenses increased by $8.4 million, or 11.2%, for the twelve months ended December 31, 2018, compared to the twelve months ended December 31, 2017. An explanationPreferred dividends of changes of non-interest expenses for certain categories is presented in the following paragraphs.
Salary expenses$923,000 were declared and employee benefits for the twelve months ended December 31, 2018 increased by $6.1 million, or 16.1%, compared to the twelve months ended December 31, 2017. The increase was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores, which we refer to as “The Power of Red is Back”. There were twenty-five stores open as of December 31, 2018 compared to twenty-two stores open at December 31, 2017.
Occupancy expense, including depreciation and amortization expense, increased by $1.7 million, or 14.6%, for the twelve months ended December 31, 2018 compared to the twelve months ended December 31, 2017, also as a result of our continuing growth and expansion strategy.
Other real estate owned expenses totaled $1.6 millionpaid on preferred stock during the twelve months ended December 31, 2018, a decrease of $2.5 million, when compared to the twelve months ended December 31, 2017. This decrease was primarily due to the writedown of a single OREO property in the amount of $2.7 million during 2017. This writedown was driven by our decision to aggressively pursue a resolution for our largest non-performing asset.
All other non-interest expenses for the twelve months ended December 31, 2018 increased $3.1 million compared to the twelve months ended December 31, 2017. Increases in expenses related to data processing, automated teller machine expenses, professional fees, and regulatory assessments which were mainly associated with our growth strategy.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net non-interest expenses to average assets, a non-GAAP measure. For purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the twelve months ended December 31, 2018, the ratio equaled 2.49% compared to 2.67% for the twelve months ended December 31, 2017, respectively. The decrease in this ratio was mainly due to our growth in average assets.
Another productivity measure utilized by management is the operating efficiency ratio, another non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio equaled 87.0% for the twelve months ended December 31, 2018, compared to 91.6% for the twelve months ended December 31, 2017. The decrease for the twelve months ended December 31, 2018 versus the twelve months ended December 31, 2017 was due to net interest income increasing at a faster rate than non-interest expenses.
Provision (Benefit) for Income Taxes
We recorded a provision for income taxes of $1.6 million for the twelve months ended December 31, 2018, an increase of $4.2 million, compared to a benefit of $2.9 million for the twelve months ended December 31, 2017. We began recognizing an increased provision for federal and state income taxes during the first quarter of 2018 after reversing our deferred tax asset valuation allowance during the fourth quarter of 2017. We initially recorded a deferred tax asset valuation allowance in 2011 and continued to carry this allowance after determining that some portion of the deferred tax asset balance may not be realized within its life cycle based on the weight of available evidence. Adjustments to the valuation allowance resulted in the recognition of a minimal provision for income taxes in each period until its reversal in 2017. The effective tax rates for the twelve month periods ended December 31, 2018 and 2017 were 15% and 27%, respectively. The effective tax rate for December 31, 2017 excluded the adjustment to the deferred tax asset valuation allowance and offsets for the impact of the new tax legislation.2020.
Net Income and Net Income per Common Share
NetThe net income available to shareholders for the twelve months ended December 31, 20182020 was $8.6$4.1 million, a decrease of $278,000, compared to $8.9a net loss of $3.5 million for the twelve months ended December 31, 2017.2019. For the twelve months ended December 31, 2018,2020, basic and fully-dilutedfully diluted net income per common share was $0.15,$0.07, compared to basic and fully-dilutedfully diluted net incomeloss per common share of $0.16 and $0.15, respectively$0.06 for the twelve months ended December 31, 2017.2019.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve months ended December 31, 20182020 and 20172019 was 0.34%0.13% and 0.43%(0.12%), respectively. Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE for the twelve months ended December 31, 20182020 was 3.69%1.86%, compared to 4.02%(1.41%) for the twelve months ended December 31, 2017.2019.
Financial Condition
December 31, 20192021 compared to December 31, 20182020
Total assets increased by $588$560.9 million, or 11%, to $3.3$5.6 billion at December 31, 2019,2021, compared to $2.8$5.1 billion at December 31, 2018.2020. 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 increaseddecreased by $95.8$656.4 million to $168.3$118.9 million at December 31, 2019,2021, from $72.5$775.3 million at December 31, 2018.2020. 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”) which we usually originate with the intention of selling in the future and residential mortgage loans, both of which we also intend to sell in the future. Total SBA loans held for sale were $5.2 million and $3.0 million at both December 31, 2019, a decrease of $2.4 million, compared to $5.4 million at2021 and December 31, 2018.2020. Residential mortgage loans held for sale totaled $10.3amounted to $8.5 million at December 31, 2019,2021, a decrease of $10.5$41.8 million, versus $20.9compared to $50.4 million at December 31, 2018.2020. 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, 2019.
Loans Receivable
The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $38.2 million at December 31, 2019. 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, 2018. A $25.4 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 $25.4 million at December 31, 2019 that amounted to $28.0 million.
Loans increased $310.9 million, or 22%, to $1.7 billion at December 31, 2019, versus $1.4 billion at December 31, 2018. This growth was the result of an increase in loan demand in all loan categories driven by the successful execution of our relationship banking strategy which focuses on customer service.
Investment Securities
Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities classified as available-for-sale consist primarily of U.S. Government agency Small Business Administration (“SBA”) bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Available-for-sale securities totaled $539.0 million at December 31, 2019 as compared to $321.0 million at December 31, 2018. The $218.0 million increase was primarily due to the purchase of securities totaling $338.5 million partially offset by sales, paydowns, maturities, and calls of securities totaling $122.7 million by during 2019. At December 31, 2019, the portfolio had a net unrealized loss of $1.7 million compared to a net unrealized loss of $5.7 million at December 31, 2018. The $4.0 million decrease in the unrealized loss of the investment portfolio was driven by a decrease in market interest rates which drove an increase in value of the securities held in our portfolio during 2019.
Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds, CMO’s and MBS’s. The fair value of securities held-to-maturity totaled $653.1 million and $747.3 million at December 31, 2019 and December 31, 2018, respectively. The $94.2 million decrease was primarily due to paydowns, maturities, and calls of securities held in the portfolio totaling $116.5 million partially offset by an increase in the value of securities classified as held-to-maturity of $22.5 million during the year ended December 31, 2019.
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.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, 20192021 and December 31, 2018.2020. 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, 20192021 and December 31, 2018,2020, the investment in FHLB stock totaled $2.6$3.4 million and $5.6$2.9 million, respectively. The $3.0 million decrease$471,000 increase was due to a lowerhigher required investment in FHLB stock during 2019.2021. At both December 31, 20192021 and December 31, 2018,2020, 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 $1.7$360,000 at December 31, 2021 from $1.2 million at December 31, 2019 from $6.2 million at December 31, 2018.2020. The decrease was primarily the result of the dispositionvaluation adjustments and dispositions totaling $1.2 million offset by additions of a single OREO property totaling $4.9 million$360,000 during 2019.2021.
Operating Leases – Right of Use Asset
Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new lease accounting standard published by the FASB. ASC 842 represents a significant modification to the accounting treatment for leases, with the most significant change being that most leases, including operating leases, will now be capitalized on the balance sheet. Under the previous guidance (ASC 840), FASB permitted operating leases to be reported only in the footnotes of corporate financial statements. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to twelve months in length.
The right-of-use asset is valued as the initial amount of the lease liability obligation adjusted for any initial direct costs, prepaid or accrued rent, and any lease incentives. At December 31, 2019,2021 and 2020, the balance of the operating lease right-of-use asset was $64.8 million.$75.6 million and $72.9 million, respectively.
Goodwill
Goodwill amounted to $5.0 million at both December 31, 2019In connection with the review of our financial condition in light of the COVID-19 pandemic, we evaluated our assets, including goodwill and December 31, 2018. We completed an annualother intangibles for potential impairment test for goodwill as of July 31, 2019 and 2018. Future impairment testing will be conducted as of July 31 on an annualinterim basis unless a triggering event occurs inat the interim that would suggest impairment, in which case it would be tested asend of the date of the triggering event. During the year ended December 31, 2019 and 2018, thereeach quarter during 2020. Goodwill was no goodwill impairment recorded. There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair value. As of July 31, 2019, the fair value of the Reporting Unit exceeded its carrying value by 21%. The determination of the fair value of the Reporting Unit incorporates assumptions that marketplace participants would use in their estimates of fair value of the Reporting Unit in a change of control transaction, as prescribed by ASC Topic 820.
To arrive at a conclusion of fair value, we utilize both the Income and Market Approach and then apply weighting factors to each result. Weighting factors represent our best business judgment of the weightings a market participant would utilize in arriving at a fair value for the reporting unit. In performing our analyses, we also made numerous assumptions with respect to industry performance, business, economic and market conditions and various other matters, many of which cannot be predicted and are beyond our control. With respect to financial projections, projections reflect the best currently available estimates and judgments as to the expected future financial performance of the Reporting Unit.
Premises and Equipment
The balance of premises and equipment increased to $117.0 million at December 31, 2019 from $87.7 million at December 31, 2018. The $29.3 million increase was primarily due to premises and equipment expenditures of $35.7 million less depreciation and amortization expenses of $6.5 million. New stores were opened in Lumberton, NJ, Feasterville, PA, and New York City during 2019 bringing the total store count to twenty-nine. We ended the year with stores under construction in Northfield, NJ and Bensalem, PA. Northfield was opened in January 2020 with Bensalem scheduled to be completed by mid-2020.
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 $606.3 million to $3.0 billion at December 31, 2019, from $2.4 billion at December 31, 2018. The increase was primarily the result of significant growth in demand deposit balances. We constantly focus our efforts on the growth of deposit balances through the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction. This strategy has also allowed us to build a stable core-deposit base and nearly eliminate our dependence upon the more volatile sources of funding found in brokered and internet certificates of deposit.
Short-term Borrowings
As of December 31, 2019, we had no short-term borrowings with the FHLB compared to $91.4 million at December 31, 2018. The short-term borrowings were paidwritten off in 2019 as a result of growth in deposit balances.
Operating Lease Liability Obligation
Accounting Standards Codification Topic 842, also knownan interim test completed as ASC 842 and ASU 2016-02, is the new lease accounting standard published by the FASB. ASC 842 representsof September 30, 2020. This was a significant modification to the accounting treatment for leases, with the most significant change being that most leases, including operating leases, will now be capitalizedcomplete write-off of all goodwill on the balance sheet. Under the previous guidance (ASC 840), FASB permitted operating leases to be reported only in the footnotes of corporate financial statements. Under ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than or equal to twelve months in length.
The operating lease liability obligation is calculated as the present value of the lease payments, using the discount rate specified in the lease, or if that is not available, our incremental borrowing rate. At December 31, 2019,There was no goodwill on the balance of the operating lease liability obligation was $68.9 million.
Shareholders’ Equity
Total shareholders’ equity increased $4.0 million to $249.2 millionsheet at December 31, 2019 compared to $245.2 million at December 31, 2018. The increase was primarily due to $4.6 million decrease in accumulated other comprehensive losses associated with an increase in the market value of investments in the portfolio, stock based compensation of $2.6 million,2021 and stock option exercises of $261,000, partially offset by a $3.5 million net loss during the year ended December 31, 2019.2020.
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. TheInvestment securities portfolio consistsavailable 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)(“CMO”), agency mortgage-backed securities (MBS)(“MBS”), corporate bonds, 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),(“SBIC”) and Small Business Administration (SBA)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. Our ALCO committee monitorsThe other two securities transferred from available-for sale to held-to-maturity were FNMA agency mortgage-backed securities.
After completion of these analyses and reviews allconsideration 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 purchases.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 andavailable for sale at fair value, investment securities held-to-maturity, and equity securities at December 31, 2019, 2018,2021, 2020, and 20172019 is as follows:
At December 31, | At December 31, | |||||||||||||||||||||||
(dollars in thousands) | 2019 | 2018 | 2017 | 2021 | 2020 | 2019 | ||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
Investment securities available for sale | ||||||||||||||||||||||||
U.S. Government agencies | $ | 38,743 | $ | - | $ | - | $ | 25,671 | $ | 32,312 | $ | 38,743 | ||||||||||||
Collateralized mortgage obligations | 329,492 | 197,812 | 327,972 | 375,570 | 218,232 | 329,492 | ||||||||||||||||||
Agency mortgage-backed securities | 98,953 | 39,105 | 55,664 | 446,740 | 149,325 | 98,953 | ||||||||||||||||||
Municipal securities | 4,064 | 20,807 | 15,142 | 6,596 | 8,201 | 4,064 | ||||||||||||||||||
Corporate bonds | 69,499 | 62,583 | 62,670 | 232,395 | 119,118 | 69,499 | ||||||||||||||||||
Asset-backed securities | - | 6,433 | 13,414 | |||||||||||||||||||||
Trust preferred securities | - | - | 725 | |||||||||||||||||||||
Total amortized cost of securities | $ | 540,751 | $ | 326,740 | $ | 475,587 | ||||||||||||||||||
Amortized cost of investment securities available for sale | $ | 1,086,972 | $ | 527,188 | $ | 540,751 | ||||||||||||||||||
Total fair value of investment securities | $ | 539,042 | $ | 321,014 | $ | 464,430 | ||||||||||||||||||
Fair value of investment securities available for sale | $ | 1,075,366 | $ | 528,508 | $ | 539,042 | ||||||||||||||||||
Held to maturity | ||||||||||||||||||||||||
Investment securities held to maturity | ||||||||||||||||||||||||
U.S. Government agencies | $ | 94,913 | $ | 107,390 | $ | 112,605 | $ | 66,438 | $ | 82,093 | $ | 94,913 | ||||||||||||
Collateralized mortgage obligations | 416,177 | 500,690 | 215,567 | 400,424 | 363,363 | 416,177 | ||||||||||||||||||
Agency mortgage-backed securities | 133,752 | 153,483 | 143,041 | 1,193,430 | 369,480 | 133,752 | ||||||||||||||||||
Other securities | - | - | 1,000 | |||||||||||||||||||||
Total amortized cost of securities | $ | 644,842 | $ | 761,563 | $ | 472,213 | ||||||||||||||||||
Amortized cost of investment securities held to maturity | $ | 1,660,292 | $ | 814,936 | $ | 644,842 | ||||||||||||||||||
Total fair value of investment securities | $ | 653,109 | $ | 747,323 | $ | 463,799 | ||||||||||||||||||
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 compared to $1.1 billion at December 31, 2018, and $947.8 million at December 31, 2017.2019. Investment securities represented 35%49% of total assets at December 31, 20192021 and 39%27% of total assets at December 31, 2018.2020. We evaluate our investment securities portfolio on a continual basis in light of the interest rate environment and changing market conditions and when appropriate, take necessary actions to improve and enhance our overall positioning. We consider the portfolio to be well structured and of high quality. At December 31, 2019, 94%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. During 2019maturity and 2018, we designated a portion of ourequity securities portfolio as held to maturity based our intent and ability to hold those securities until they mature.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 gainslosses in the total investment securities portfolio were $6.6$24.5 million at December 31, 20192021 compared to net unrealized lossesgains of $20.0$23.4 million at December 31, 2018.2020. The increasedecrease was a result of a decreasean increase in market interest rates in 2019.2021. The comparable amounts for the securities classified as available for sale wereportfolio had unrealized losses of $1.7$11.6 million at December 31, 20192021 and unrealized lossesgains of $5.7$1.3 million at December 31, 2018.
No single issuer2020. The held to maturity portfolio had unrealized losses of securities (excluding government agencies and Goldman Sachs corporate bonds) in the portfolio exceeded more than 10% of shareholders’ equity$12.9 million at December 31, 20192021 and unrealized gains of $22.0 million at December 31, 2018.2020.
We held ninefour U.S. Government agency securities, thirty-two27 collateralized mortgage obligations and seventeensixty-one agency mortgage-backed securities that were in an unrealized loss position at December 31, 2019.2021. Principal and interest payments of the underlying collateral for each of these securities carry minimal credit risk. Management found no evidence of OTTIother 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, 2019.2021.
At December 31, 2019,2021, the investment portfolio included seveneight municipal securities with a total market value of $4.1$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 Pennsylvania and New Jersey where fivesix municipal securities had a market value of $3.3$6.2 million. As of December 31, 2019,2021, management found no evidence of other than temporary impairment (“OTTI”)OTTI on any of the municipal securities held in the investment securities portfolio.
At December 31, 2019,2021, the investment portfolio included sevenfifteen 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. The sevenSeven of the fifteen corporate bonds are withissued 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.
Proceeds associated with the sale of securities available for sale in 2018 were $6.4 million. Gross losses of $67,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2018 amounted to $18,000. Included in the 2018 sales activity was the sale of one CDO security. Proceeds from the sale of the CDO security totaled $660,000. A gross loss of $66,000 was realized on this sale. The tax benefit applicable to the net losses for the twelve months ended December 31, 2018 amounted to $17,000. Management had previously stated that it did not intend to sell CDO securities prior to their maturity or the recovery of their cost bases, nor would it be forced to sell these securities prior to maturity or recovery of the cost bases. This statement was made over a period of several years where there was limited trading activity in the pooled trust preferred CDO market resulting in fair market value estimates well below the book values. During 2018, management received several inquiries regarding the availability of the remaining CDO security and noted an increased level of trading in this type of security. As a result of the increased activity and the level of bids received, management elected to sell the remaining CDO security resulting in a net loss of $66,000 during 2018.
Proceeds associated with the sale of securities available for sale in 2017 were $31.2 million. Gross gains of $652,000 and gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended December 31, 2017 amounted to $52,000. Included in the 2017 sales activity were the sales of two CDO securities. Proceeds from the sale of the CDO securities totaled $1.5 million. Gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for the twelve months ended December 31, 2017 amounted to $287,000. As a result of the increased activity and the level of bids received, management elected to sell two CDOs resulting in a net loss of $798,000 during 2017 which was offset by gains on sales of agency mortgage-backed securities, collateralized mortgage obligations and corporate bonds.
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, 2019.2021. 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, 2019 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Within One Year | One to Five Years | Five to Ten Years | Past Ten Years | No Specific Maturity | Total | 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 | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Fair value | Amortized Cost | Yield | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available for Sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government Agencies | $ | - | - | $ | 28,167 | 2.73 | % | $ | 10,138 | 3.33 | % | $ | - | - | $ | - | - | $ | 38,305 | $ | 38,743 | 2.89 | % | $ | - | - | $ | 24,928 | 0.93 | % | $ | - | - | $ | - | - | $ | - | - | $ | 24,928 | $ | 25,671 | 0.93 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | - | - | - | - | - | - | - | - | 331,438 | 2.27 | % | 331,438 | 329,492 | 2.27 | % | - | - | - | - | - | - | - | - | 371,549 | 1.66 | % | 371,549 | 375,570 | 1.66 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency mortgage-backed securities | - | - | - | - | - | - | - | - | 98,937 | 2.73 | % | 98,937 | 98,953 | 2.73 | % | - | - | - | - | - | - | - | - | 441,483 | 1.68 | % | 441,483 | 446,740 | 1.68 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Municipal securities | 792 | 4.13 | % | 2,694 | 2.07 | % | 596 | 3.29 | % | - | - | - | - | 4,082 | 4,064 | 2.65 | % | 737 | 4.14 | % | 346 | 4.10 | % | 5,857 | 2.97 | % | - | - | - | - | 6,940 | 6,596 | 3.16 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | 3,003 | 3.09 | % | 8,574 | 3.21 | % | 51,883 | 2.42 | % | 2,820 | 4.21 | % | - | - | 66,280 | 69,499 | 2.62 | % | 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 | $ | 3,795 | 3.31 | % | $ | 39,435 | 2.79 | % | $ | 62,617 | 2.58 | % | $ | 2,820 | 4.21 | % | $ | 430,375 | 2.38 | % | $ | 539,042 | $ | 540,751 | 2.45 | % | $ | 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 | $ | - | - | $ | 20,073 | 2.46 | % | $ | 75,028 | 2.45 | % | $ | - | - | $ | - | - | $ | 95,101 | $ | 94,913 | 2.45 | % | $ | 4 | 2.58 | % | $ | 67,983 | 2.47 | % | $ | - | - | $ | - | - | $ | - | - | $ | 67,987 | $ | 66,438 | 2.47 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | - | - | - | - | - | - | - | - | 422,987 | 2.40 | % | 422,987 | 416,177 | 2.40 | % | - | - | - | - | - | - | - | - | 396,228 | 1.77 | % | 396,228 | 400,424 | 1.77 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Agency mortgage-backed securities | - | - | - | - | - | - | - | - | 135,021 | 2.42 | % | 135,021 | 133,752 | 2.42 | % | - | - | - | - | - | - | - | - | 1,183,145 | 1.78 | % | 1,183,145 | 1,193,430 | 1.78 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total HTM securities | $ | - | - | $ | 20,073 | 2.46 | % | $ | 75,028 | 2.45 | % | $ | - | - | $ | 558,008 | 2.40 | % | $ | 653,109 | $ | 644,842 | 2.41 | % | $ | 4 | 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, 2019.2021. This security is a corporate bond.
The trust preferred securities held during 2018 and 2017 were pools of similar securities that are grouped into an asset structure commonly referred to as collateralized debt obligations (“CDOs”) which consist of the debt instruments of various banks, diversified by the number of participants in the security as well as geographically. The secondary market for these securities had become inactive, and therefore the securities were classified as a Level 3 securities. The fair value analysis did not reflect or represent the actual terms or prices at which any party could purchase the securities. The last trust preferred security was sold in 2018.
The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the yearyears ended December 31, 2019, 2018,2021, 2020, and 2017:2019:
Year Ended December 31, 2019 | Year Ended December 31, 2018 | Year Ended December 31, 2017 | ||||||||||||||||||||||
Level 3 Investments Only (dollars in thousands) | Trust Preferred Securities | Corporate Bonds | Trust Preferred Securities | Corporate Bonds | Trust Preferred Securities | Corporate Bonds | ||||||||||||||||||
Balance, January 1, | $ | - | $ | 3,069 | $ | 489 | $ | 3,086 | $ | 1,820 | $ | 2,971 | ||||||||||||
Unrealized gains (losses) | - | (250 | ) | 237 | (17 | ) | 1,006 | 115 | ||||||||||||||||
Paydowns | - | - | - | - | - | - | ||||||||||||||||||
Proceeds from sales | - | - | (660 | ) | - | (1,539 | ) | - | ||||||||||||||||
Realized losses | - | - | (66 | ) | - | (798 | ) | - | ||||||||||||||||
Impairment charges on Level 3 | - | - | - | - | - | - | ||||||||||||||||||
Balance, December 31, | $ | - | $ | 2,819 | $ | - | $ | 3,069 | $ | 489 | $ | 3,086 |
An independent, third party pricing service was used to estimate the current fair market value of the CDO previously held in the investment securities portfolio. The calculations used to determine fair value were based on the attributes of the trust preferred security, the financial condition of the issuers of the trust preferred security, and market based assumptions. The INTEX CDO Deal Model Library was utilized to obtain information regarding the attributes of the security and its specific collateral as of December 31, 2017. Financial information on the issuers was also obtained from Bloomberg, the FDIC, and S&P Global Market Intelligence. Both published and unpublished industry sources were utilized in estimating fair value. Such information includes loan prepayment speed assumptions, discount rates, default rates, and loss severity percentages.
(dollars in thousands) | 2021 | 2020 | 2019 | |||||||||
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 fair market valuation for the CDO was determined based on discounted cash flow analyses. The cash flows were primarily dependent on the estimated speeds at which the trust preferred security was expected to prepay, the estimated rates at which the trust preferred security were expected to defer payments, the estimated rates at which the trust preferred security were expected to default, and the severity of the related losses on the security.
Increases (decreases) in actual or expected issuer defaults tended to decrease (increase) the fair value of our senior and mezzanine tranches of CDOs. The values of our mezzanine tranches of CDOs were also affected by expected future interest rates. However, due to the structure of each security, timing of cash flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of our holdings were not quantifiably estimable.
The remaining Level 3 investment security classified as available for sale is a corporate bond that is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.
Loan Portfolio
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, construction and land developmentresidential mortgages, home improvement loans, commercial and industrial loans, owner occupied real estate loans, consumer and otherhome equity loans and residential mortgages.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 are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Republic’s commercial loans typically range between $250,000 and $5.0$5 million, but customers may borrow significantly larger amounts up to Republic’sour legal lending limit ofto a customer, which was approximately $38.2$51.2 million at December 31, 2019. Management has established an internal monitoring guideline for loan relationships in the amount of $25.4 million which approximates 10% of capital and reserves. Individual customers may have several loans often2021. Loans made to one individual customer, even if secured by different collateral.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 $25.4$34 million at December 31, 2019 that amounted to $28.02021. The internal monitoring guideline in place as of December 31, 2020 was $30 million. There were twoWe had no loan relationships in excess of $22.9 millionthat guideline at December 31, 2018 that amounted to $52.0 million on a combined basis.2020.
The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and the surrounding suburbs, Southern New Jersey, and New York City. In addition, we have loans to customers whose assets and businesses are concentrated in real estate. Repayment of our loans is in part dependent upon general economic conditions affecting our market place and specific industries in which our customers operate. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral varies but primarily includes residential, commercial and income-producing properties.
At December 31, 2019,2021, we had loan concentrations exceeding 10% of total loans for credits extended to lessors of nonresidential real estate in the aggregate amount of $345.2$509.2 million, which represented 20% of gross loans receivable, private households in the aggregate amount of $451.1 million which represented 26% of gross loans receivable, and lessors of residential real estate in the aggregate amount of $178.9 million, which represented 10% 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, 2019,2021, 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, | At December 31, | |||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Commercial real estate | $ | 613,631 | $ | 515,738 | $ | 433,304 | $ | 378,519 | $ | 379,259 | $ | 780,311 | $ | 705,748 | $ | 613,631 | $ | 515,738 | $ | 433,304 | ||||||||||||||||||||
Construction and land development | 121,395 | 121,042 | 104,617 | 61,453 | 29,861 | 216,008 | 142,821 | 121,395 | 121,042 | 104,617 | ||||||||||||||||||||||||||||||
Commercial and industrial | 223,906 | 200,423 | 173,343 | 174,744 | 145,113 | 252,376 | 200,188 | 223,906 | 200,423 | 173,343 | ||||||||||||||||||||||||||||||
Owner occupied real estate | 424,400 | 367,895 | 309,838 | 276,986 | 188,025 | 526,570 | 475,206 | 424,400 | 367,895 | 309,838 | ||||||||||||||||||||||||||||||
Consumer and other | 101,320 | 91,152 | 76,183 | 63,660 | 39,713 | 83,487 | 102,368 | 101,320 | 91,152 | 76,183 | ||||||||||||||||||||||||||||||
Residential mortgage | 263,444 | 140,364 | 64,764 | 9,682 | 408 | 536,332 | 395,174 | 263,444 | 140,364 | 64,764 | ||||||||||||||||||||||||||||||
Paycheck protection program | 119,039 | 636,637 | - | - | - | |||||||||||||||||||||||||||||||||||
Total loans | $ | 1,748,096 | $ | 1,436,614 | $ | 1,162,049 | $ | 965,044 | $ | 782,379 | $ | 2,514,123 | $ | 2,658,142 | $ | 1,748,096 | $ | 1,436,614 | $ | 1,162,049 | ||||||||||||||||||||
Deferred loan costs (fees) | 99 | (16 | ) | 229 | (72 | ) | (439 | ) | (6,758 | ) | (12,800 | ) | 99 | (16 | ) | 229 | ||||||||||||||||||||||||
Total loans, net of deferred loan fees | $ | 1,748,195 | $ | 1,436,598 | $ | 1,162,278 | $ | 964,972 | $ | 781,940 | $ | 2,507,365 | $ | 2,645,342 | $ | 1,748,195 | $ | 1,436,598 | $ | 1,162,278 |
Total loans, net of deferred loan costs, increased $311.6decreased $138 million, or 22%5%, to $1.7$2.5 billion at December 31, 2019,2021, versus $1.4$2.6 billion at December 31, 2018.2020. This growthdecrease was due to a $517.6 million reduction in PPP loans. Excluding the resultimpact of an increase inthe PPP loan demand across all loan categories driven by the successful execution of our relationship banking strategy which focuses on customer service.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 |
Total | 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 | $ | 53,008 | $ | 5,561 | $ | 15,991 | $ | 38,198 | $ | 952 | $ | - | $ | 113,710 | $ | 72,142 | $ | 2,649 | $ | 10,950 | $ | 35,433 | $ | 1,458 | $ | - | $ | 10,006 | $ | 132,638 | ||||||||||||||||||||||||||||||
1-5 years | 368,783 | 35,021 | 84,497 | 184,678 | 1,783 | - | 674,762 | 426,409 | 91,595 | 93,131 | 236,098 | 1,503 | 146 | 109,033 | 957,915 | |||||||||||||||||||||||||||||||||||||||||||||
After 5 years | 171,530 | 24,104 | 53,914 | 120,882 | 17,008 | 261,296 | 648,734 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
5-15 years | 239,941 | 39,771 | 28,174 | 142,022 | 9,492 | 29,804 | - | 489,204 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
15 years or more | 1,981 | 288 | 12,304 | 29,978 | - | 504,335 | - | 548,886 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total fixed rate | 593,321 | 64,686 | 154,402 | 343,758 | 19,743 | 261,296 | 1,437,206 | $ | 740,473 | $ | 134,303 | $ | 144,559 | $ | 443,531 | $ | 12,453 | $ | 534,285 | $ | 119,039 | $ | 2,128,643 | |||||||||||||||||||||||||||||||||||||
Adjustable rate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1 year or less | $ | 9,377 | $ | 34,615 | $ | 54,159 | $ | 4,033 | $ | 767 | $ | - | $ | 102,951 | $ | 21,099 | $ | 33,488 | $ | 51,709 | $ | 9,568 | $ | 2,899 | $ | - | $ | - | $ | 118,763 | ||||||||||||||||||||||||||||||
1-5 years | 10,382 | 21,963 | 10,437 | 16,897 | 3,550 | - | 63,229 | 15,480 | 47,372 | 48,821 | 11,332 | 886 | - | - | 123,891 | |||||||||||||||||||||||||||||||||||||||||||||
After 5 years | 551 | 131 | 4,908 | 59,712 | 77,260 | 2,148 | 144,710 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
5-15 years | 3,149 | 791 | 6,770 | 3,472 | 18,643 | - | - | 32,825 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
15 years or more | 110 | 54 | 517 | 58,667 | 48,606 | 2,047 | - | 110,001 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Total adjustable rate | 20,310 | 56,709 | 69,504 | 80,642 | 81,577 | 2,148 | 310,890 | 39,838 | 81,705 | 107,817 | 83,039 | 71,034 | 2,047 | - | 385,480 | |||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 613,631 | $ | 121,395 | $ | 223,906 | $ | 424,400 | $ | 101,320 | $ | 263,444 | $ | 1,748,096 | $ | 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, 2019, 82%2021, 85% of total loans were fixed rate compared to 77%89% at December 31, 2018.2020.
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) | 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
Loans accruing, but past due 90 days or more | $ | - | $ | - | $ | - | $ | 302 | $ | - | ||||||||||
Non-accrual loans: | ||||||||||||||||||||
Commercial real estate | 4,159 | 4,631 | 8,963 | 13,089 | 5,913 | |||||||||||||||
Construction and land development | - | - | - | - | 117 | |||||||||||||||
Commercial and industrial | 3,087 | 3,661 | 2,895 | 3,151 | 3,156 | |||||||||||||||
Owner occupied real estate | 3,337 | 1,188 | 2,136 | 1,546 | 2,894 | |||||||||||||||
Consumer and other | 1,062 | 861 | 851 | 808 | 542 | |||||||||||||||
Residential mortgage | 768 | - | - | - | - | |||||||||||||||
Total non-accrual loans | 12,413 | 10,341 | 14,845 | 18,594 | 12,622 | |||||||||||||||
Total non-performing loans(1) | 12,413 | 10,341 | 14,845 | 18,896 | 12,622 | |||||||||||||||
Other real estate owned | 1,730 | 6,223 | 6,966 | 10,174 | 11,313 | |||||||||||||||
Total non-performing assets(1) | $ | 14,143 | $ | 16,564 | $ | 21,811 | $ | 29,070 | $ | 23,935 | ||||||||||
Non-performing loans as a percentage of total loans, net of unearned income(1) | 0.71 | % | 0.72 | % | 1.28 | % | 1.96 | % | 1.44 | % | ||||||||||
Non-performing assets as a percentage of total assets | 0.42 | % | 0.60 | % | 0.94 | % | 1.51 | % | 1.66 | % |
(1) Non-performing loans are comprised of (i) loans that are on non-accrual basis and (ii) accruing loans that are 90 days or more past due. Non-performing assets are composed of non-performing loans and other real estate owned.
At December 31, | ||||||||||||||||||||
(dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||
Loans accruing, but past due 90 days or more | $ | 323 | $ | 612 | $ | - | $ | - | $ | - | ||||||||||
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 | 861 | 851 | |||||||||||||||
Residential mortgage | 701 | 701 | 768 | - | - | |||||||||||||||
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 | 360 | 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, 2019,2021, 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 $2.4 million,$822 thousand, or 15%6%, to $14.1$13.2 million at December 31, 2019,2021, compared to $16.6$14.0 million at December 31, 2018. An increase in non-performing2020. Non-performing loans was driven by additionsof $12.9 million at December 31,2021 were equivalent to non-performing loans of $6.4 million during 2019, offset by payments of $1.8 million, charge-offs of $1.4 million and transfers to other real estate owned of $1.2 million.at December 31, 2020. The reduction in other real estate owned was the result of the disposition of four OREO properties for a single OREO property totaling $4.9 million.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, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Interest income that would have been recorded had the loans been in accordance with their original terms | $ | 548 | $ | 498 | $ | 590 | $ | 1,024 | $ | 765 | $ | 700 | $ | 718 | $ | 548 | $ | 498 | $ | 590 | ||||||||||||||||||||
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 yearthree-year period to determine loss rates consistent with the loan categories depicted in the allowance for loan loss table below.
The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively.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 make assessments regardingmay require the adequacy andCompany to recognize additions to the methodology employed inallowance based on their determination.judgments about information available to them at the time of their examination.
A detailed analysis of our allowance for loan losses for the years ended December 31, 2019, 2018, 2017, 2016, and 2015indicated is as follows:
For the Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | 2021 | 2020 | 2019 | 2018 | 2017 | ||||||||||||||||||||||||||||||
Balance at beginning of period | $ | 8,615 | $ | 8,599 | $ | 9,155 | $ | 8,703 | $ | 11,536 | $ | 12,975 | $ | 9,266 | $ | 8,615 | $ | 8,599 | $ | 9,155 | ||||||||||||||||||||
Charge-offs: | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | - | 1,603 | - | - | 2,624 | 311 | - | - | 1,603 | - | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | 60 | 260 | - | - | - | - | - | ||||||||||||||||||||||||||||||
Commercial and industrial | 1,356 | 151 | 1,366 | 143 | 408 | 61 | 333 | 1,356 | 151 | 1,366 | ||||||||||||||||||||||||||||||
Owner occupied real estate | - | 465 | 157 | 1,052 | 133 | - | 48 | - | 465 | 157 | ||||||||||||||||||||||||||||||
Consumer and other | 126 | 219 | 53 | 11 | - | 117 | 107 | 126 | 219 | 53 | ||||||||||||||||||||||||||||||
Residential mortgage | - | - | - | 10 | - | - | 67 | - | - | - | ||||||||||||||||||||||||||||||
Paycheck Protection Program | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Total charge-offs | 1,482 | 2,438 | 1,576 | 1,276 | 3,425 | 489 | 555 | 1,482 | 2,438 | 1,576 | ||||||||||||||||||||||||||||||
Recoveries: | ||||||||||||||||||||||||||||||||||||||||
Commercial real estate | - | 50 | 54 | 6 | 4 | 33 | - | - | 50 | 54 | ||||||||||||||||||||||||||||||
Construction and land development | - | - | - | - | 5 | - | 3 | - | - | - | ||||||||||||||||||||||||||||||
Commercial and industrial | 217 | 81 | 64 | 163 | 49 | 462 | 48 | 217 | 81 | 64 | ||||||||||||||||||||||||||||||
Owner occupied real estate | 2 | 20 | - | - | - | 64 | 1 | 2 | 20 | - | ||||||||||||||||||||||||||||||
Consumer and other | 9 | 3 | 2 | 2 | 34 | 169 | 12 | 9 | 3 | 2 | ||||||||||||||||||||||||||||||
Residential mortgage | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||
Paycheck Protection Program | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
Total recoveries | 228 | 154 | 120 | 171 | 92 | 728 | 64 | 228 | 154 | 120 | ||||||||||||||||||||||||||||||
Net charge-offs | 1,254 | 2,284 | 1,456 | 1,105 | 3,333 | |||||||||||||||||||||||||||||||||||
Net (recoveries) charge-offs | (239 | ) | 491 | 1,254 | 2,284 | 1,456 | ||||||||||||||||||||||||||||||||||
Provision for loan losses | 1,905 | 2,300 | 900 | 1,557 | 500 | 5,750 | 4,200 | 1,905 | 2,300 | 900 | ||||||||||||||||||||||||||||||
Balance at end of period | $ | 9,266 | $ | 8,615 | $ | 8,599 | $ | 9,155 | $ | 8,703 | $ | 18,964 | $ | 12,975 | $ | 9,266 | $ | 8,615 | $ | 8,599 | ||||||||||||||||||||
Average loans outstanding(1) | $ | 1,544,904 | $ | 1,340,117 | $ | 1,090,851 | $ | 936,492 | $ | 820,820 | $ | 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 | 0.08 | % | 0.17 | % | 0.13 | % | 0.12 | % | 0.41 | % | (0.01% | ) | 0.02 | % | 0.08 | % | 0.17 | % | 0.13 | % | ||||||||||||||||||||
Provision for loan losses | 0.12 | % | 0.17 | % | 0.08 | % | 0.17 | % | 0.06 | % | 0.22 | % | 0.18 | % | 0.12 | % | 0.17 | % | 0.08 | % | ||||||||||||||||||||
Allowance for loan losses | 0.60 | % | 0.64 | % | 0.79 | % | 0.98 | % | 1.06 | % | 0.74 | % | 0.55 | % | 0.60 | % | 0.64 | % | 0.79 | % | ||||||||||||||||||||
Allowance for loan losses to: | ||||||||||||||||||||||||||||||||||||||||
Total loans, net of unearned income | 0.53 | % | 0.60 | % | 0.74 | % | 0.95 | % | 0.99 | % | 0.79 | % | 0.49 | % | 0.53 | % | 0.60 | % | 0.74 | % | ||||||||||||||||||||
Total non-performing loans | 74.65 | % | 83.31 | % | 57.93 | % | 48.45 | % | 68.95 | % | 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 in the amount of $1.9$5.8 million in 20192021 compared to a $2.3$4.2 million provision in 2018.2020. The decreaseincrease 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 during 2019 was driven a decrease in the allowance required for loans individually evaluatedloan losses were adjusted to account for impairment. this uncertainty.
The ratio of non-performing assets to total assets declined to 0.42%0.24% as of December 31, 20192021 compared to 0.60%0.28% as of December 31, 2018.2020. Net (recoveries) charge-offs as a percentage of average loans outstanding declined to 0.08%(0.01%) for the year ended December 31, 20192021 from 0.17%0.02% for the year ended December 31, 2018.2020.
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 as compared to 83% at December 31, 2018 and 58% at December 31, 2017. The decrease in the coverage ratio during 2019 was mainly driven by the decrease in the allowance required for loans individually evaluated for impairment.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, 2019.2021.
Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain anthe adequacy of the allowance for loan losses that it determines is adequate to absorb inherent losses in the loan portfolio.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 $3.6$403,000 at December 31, 2021 compared to $1.1 million at December 31, 2019 compared to $4.4 million at December 31, 2018. This decrease was primarily driven by full charge-offs during 2019.
2020. Our charge-off policy is reviewed on an annual basis and updated as necessary. During the twelve months ended December 31, 2019,2021, 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, 2019.2021. 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.
Management is unable to determine in which loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The allocation is based on management’s evaluation of historical charge-off experience and adjusted for several qualitative factors. The entire allowance for loan losses is available to absorb loan losses in any loan category.
The allocation of the allowance for loan losses for the past five years is as follows:
At December 31, | ||||||||||||||||||||||||||||||||||||||||
2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Amount | % of Loans | Amount | % of Loans | Amount | % of Loans | Amount | % of Loans | Amount | % of Loans | ||||||||||||||||||||||||||||||
Commercial real estate | $ | 3,043 | 35.1 | % | $ | 2,462 | 35.9 | % | $ | 3,774 | 37.3 | % | $ | 3,254 | 39.2 | % | $ | 2,393 | 40.0 | % | ||||||||||||||||||||
Construction and land development | 688 | 6.9 | % | 777 | 8.4 | % | 725 | 9.0 | % | 557 | 6.4 | % | 338 | 5.3 | % | |||||||||||||||||||||||||
Commercial and industrial | 931 | 12.8 | % | 1,754 | 14.0 | % | 1,317 | 14.9 | % | 2,884 | 18.1 | % | 2,932 | 20.8 | % | |||||||||||||||||||||||||
Owner occupied real estate | 2,292 | 24.3 | % | 2,033 | 25.6 | % | 1,737 | 26.7 | % | 1,382 | 28.7 | % | 2,030 | 28.1 | % | |||||||||||||||||||||||||
Consumer and other | 590 | 5.8 | % | 577 | 6.3 | % | 573 | 6.5 | % | 588 | 6.6 | % | 295 | 5.5 | % | |||||||||||||||||||||||||
Residential mortgage | 1,705 | 15.1 | % | 894 | 9.8 | % | 392 | 5.6 | % | 58 | 1.0 | % | 14 | 0.3 | % | |||||||||||||||||||||||||
Unallocated | 17 | - | 118 | - | 81 | - | 432 | - | 701 | - | ||||||||||||||||||||||||||||||
Total allowance for loan losses | $ | 9,266 | 100 | % | $ | 8,615 | 100 | % | $ | 8,599 | 100 | % | $ | 9,155 | 100 | % | $ | 8,703 | 100 | % |
The allowance for loan losses is an amount that represents management’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for loan losses is dependent, to a great extent, on the general economy and other conditions that may be beyond our control, the estimate of the allowance for loan losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component relates to impaired loans. For such loans, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers the remainder of the portfolio and is based on historical loss experience adjusted for several qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. These qualitative risk factors include:
1. Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.
2. National, regional and local economic and business conditions as well as the condition of various segments.
3. Nature and volume of the portfolio and terms of loans.
4. Experience, ability and depth of lending management and staff.
5. Volume and severity of past due, classified and nonaccrual loans as well as other loan modifications.
6. Quality of our loan review system, and the degree of oversight by our Board of Directors.
7. Existence and effect of any concentration of credit and changes in the level of such concentrations.
8. Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
At December 31, | |||||||||||||||||||||||||||||||||||
2021 | 2020 | 2019 | 2018 | 2017 | |||||||||||||||||||||||||||||||
(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 | % | 948 | 5.4 | % | 688 | 6.9 | % | 777 | 8.4 | % | 725 | 9.0 | % | ||||||||||||||||||||
Commercial and industrial | 2,856 | 10.1 | % | 1,367 | 7.5 | % | 931 | 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 | 629 | 3.3 | % | 723 | 3.9 | % | 590 | 5.8 | % | 577 | 6.3 | % | 573 | 6.5 | % | ||||||||||||||||||||
Residential mortgage | 4,922 | 21.3 | % | 3,025 | 14.9 | % | 1,705 | 15.1 | % | 894 | 9.8 | % | 392 | 5.6 | % | ||||||||||||||||||||
Paycheck Protection Program | - | 4.7 | % | - | 24.0 | % | - | - | % | - | - | % | - | - | % | ||||||||||||||||||||
Unallocated | 53 | - | 144 | - | 17 | - | 118 | - | 81 | - | |||||||||||||||||||||||||
Total allowance for loan losses | $ | 18,964 | 100 | % | $ | 12,975 | 100 | % | $ | 9,266 | 100 | % | $ | 8,615 | 100 | % | $ | 8,599 | 100 | % |
We also provide specific reserves for impaired loans to the extent the estimated realizable value of the underlying collateral is less than the loan balance, when the collateral is the only source of repayment. Also, we estimate and recognize reserve allocations on loans identified as “internally classified accruing loans” based upon any factor that might impact loss estimates. Those factors include but are not limited to the impact of economic conditions on the borrower and management’s potential alternative strategies for loan or collateral disposition. An unallocated allowance is established for losses that have not been identified through the formulaic and other specific components of the allowance as described above. Management has identified several factors that impact credit losses that are not considered in either the formula or the specific allowance segments. These factors consist of macro and micro economic conditions, industry and geographic loan concentrations, changes in the composition of the loan portfolio, changes in underwriting processes and trends in problem loan and loss recovery rates. The impact of the above is considered in light of management’s conclusions as to the overall adequacy of underlying collateral and other factors.
The majority of our loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. We attempt to evaluate larger loans individually, on the basis of our loan review process, which scrutinizes loans on a selective basis and other available information. Even if all commercial purposeloans could be reviewed, information on potential problems might not be available. Our portfolio of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. 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, 2019,2021, management identified a total of oneno troubled debt restructurings in the loan portfolio. One troubled debt restructuring in the loan portfolio in the amount of $6.2 million. Five troubled debt restructurings in the amount of $7.8$4.5 million werewas identified as of December 31, 2018.2020.
The following table presents our impaired loans at December 31, 2019, 2018,2021, 2020, and 2017:2019:
(dollars in thousands) | December 31, | December 31, | ||||||||||||||||||||||
2019 | 2018 | 2017 | 2021 | 2020 | 2019 | |||||||||||||||||||
Impaired loans without a valuation allowance | $ | 12,862 | $ | 10,602 | $ | 15,270 | $ | 4,415 | $ | 12,842 | $ | 12,862 | ||||||||||||
Impaired loans with a valuation allowance | 6,020 | 7,428 | 9,446 | 14,005 | 5,127 | 6,020 | ||||||||||||||||||
Total impaired loans | $ | 18,882 | $ | 18,030 | $ | 24,716 | $ | 18,420 | $ | 17,969 | $ | 18,882 | ||||||||||||
Valuation allowance related to impaired loans | $ | 556 | $ | 1,473 | $ | 2,790 | $ | 2,743 | $ | 591 | $ | 556 | ||||||||||||
Total nonaccrual loans | 12,413 | 10,341 | 14,845 | 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 | - | - | - | 323 | 612 | - |
For the years ended December 31, 2019, 2018,2021, 2020, and 2017,2019, the average recorded investment in impaired loans was approximately $18.1$15.1 million, $22.8$19.6 million, and $25.4$18.1 million, respectively. Republic earned $386,000, $451,000,$113,000, $478,000, and $607,000$386,000 of interest income on impaired loans (internally classified accruing loans) in 2019, 2018,2021, 2020, and 2017,2019, 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 $852,000,$451,000, or 5%3%, during the year ended December 31, 2019. This increase was primarily loans determined to be impaired during 2019.2021. The valuation allowance related to impaired loans decreasedincreased to $556,000 at December 31, 2019 compared to $1.5$2.7 million at December 31, 2018.2021 compared to $591,000 at December 31, 2020. At December 31, 20192021 and 2018,2020, internally classified accruing loans totaled approximately $2.3$6.1 million and $3.7$1.8 million, respectively.
The following table presents our 30 to 89 days past due loans at December 31, 2019, 2018,2021, 2020, and 2017:2019:
(dollars in thousands) | December 31, | December 31, | ||||||||||||||||||||||
2019 | 2018 | 2017 | 2021 | 2020 | 2019 | |||||||||||||||||||
30 to 59 days past due | $ | 112 | $ | 1,135 | $ | 1,113 | $ | 4,851 | $ | 2,321 | $ | 112 | ||||||||||||
60 to 89 days past due | 1,823 | 1,574 | - | 4,706 | 938 | 1,823 | ||||||||||||||||||
Total loans 30 to 89 days past due | $ | 1,935 | $ | 2,709 | $ | 1,113 | $ | 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 at December 31, 2019 were $3.0increased by $1.2 billion an increase of $606.3 million or 25% from total deposits of $2.4to $5.2 billion at December 31, 2018. 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, 2019, 2018,2021, 2020, and 20172019 are as follows:
(dollars in thousands) | At December 31, | |||||||||||
2019 | 2018 | 2017 | ||||||||||
Demand deposits, non-interest bearing | $ | 661,431 | $ | 519,056 | $ | 438,500 | ||||||
Demand deposits, interest bearing | 1,352,360 | 1,042,561 | 807,736 | |||||||||
Money market & savings deposits | 761,793 | 676,993 | 700,322 | |||||||||
Time deposits | 223,579 | 154,257 | 116,737 | |||||||||
Total deposits | $ | 2,999,163 | $ | 2,392,867 | $ | 2,063,295 |
In general, Republic pays higher interest rates on time deposits compared to other deposit categories. Republic’s various deposit liabilities may fluctuate from period-to-period, reflecting customer behavior and strategies to optimize net interest income. The increase in total deposits to $3.0 billion at December 31, 2019 from $2.4 billion at December 31, 2018 was primarily the result of a $452.2 million increase in demand deposits, which reflects the success of our strategy based on a high level of customer service and satisfaction, which drives the gathering of low-cost core deposits. This strategy has also allowed us to eliminate our dependence on the more volatile source of funding in brokered and internet based certificates of deposit.
(dollars in thousands) | At December 31, | |||||||||||
2021 | 2020 | 2019 | ||||||||||
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, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(dollars in thousands) | Average Balance |
Rate | Average Balance |
Rate | Average Balance |
Rate | ||||||||||||||||||
Demand deposits: | ||||||||||||||||||||||||
Non-interest bearing | $ | 555,385 | $ | 488,995 | $ | 372,171 | ||||||||||||||||||
Interest bearing | 1,184,530 | 1.32 | % | 918,508 | 0.87 | % | 687,586 | 0.44 | % | |||||||||||||||
Money market & savings deposits | 705,445 | 0.98 | % | 697,135 | 0.70 | % | 629,464 | 0.50 | % | |||||||||||||||
Time deposits | 190,567 | 2.02 | % | 128,892 | 1.23 | % | 110,952 | 1.12 | % | |||||||||||||||
Total deposits | $ | 2,635,927 | 1.00 | % | $ | 2,233,530 | 0.65 | % | $ | 1,800,173 | 0.41 | % |
For the Years Ended December 31, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
(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 | % |
The remainingTime deposits in excess of the FDIC insurance limit, by maturity, of certificates of deposit for $100,000 or more as of December 31, 2019 is2021 are as follows:
(dollars in thousands) | ||||||||
Maturity: | ||||||||
3 months or less | $ | 24,262 | $ | 9,758 | ||||
3 to 6 months | 68,026 | 27,828 | ||||||
6 to 12 months | 51,984 | 10,342 | ||||||
Over 12 months | 41,623 | 7,229 | ||||||
Total | $ | 185,895 | $ | 55,157 |
The following is a summaryOther Borrowings
As part of the remaining maturityCARES Act, the Federal Reserve Bank of time deposits, which includes certificatesPhiladelphia 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 deposits of $100,000 or more, as ofthe PPPLF program at December 31, 2019:2021 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.
(dollars in thousands) | ||||
Maturity: | ||||
2020 | $ | 170,562 | ||
2021 | 50,079 | |||
2022 | 1,130 | |||
2023 | 1,071 | |||
2024 | 737 | |||
Thereafter | - | |||
Total | $ | 223,579 |
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 $329.9$549.8 million and $286.4$428.9 million and standby letters of credit of approximately $17.2$18.0 million and $13.9$16.6 million at December 31, 20192021 and 2018,2020, respectively. Commitments often expire without being drawn upon. The $329.9Of the $549.8 million of commitments to extend credit at December 31, 2019,2021, 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
Contractual Obligations and Other CommitmentsCommitments
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2019:2021:
(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 | $ | 99,355 | $ | 7,221 | $ | 11,385 | $ | 10,028 | $ | 70,721 | ||||||||||
Branch construction commitments | 5,300 | 5,300 | - | - | - | |||||||||||||||
Remaining contractual maturities of time deposits | 225,175 | 172,158 | 51,209 | 1,808 | - | |||||||||||||||
Subordinated debt | 11,375 | 34 | - | - | 11,341 | |||||||||||||||
Director and Officer retirement plan obligations | 1,111 | 672 | 103 | 104 | 232 | |||||||||||||||
Loan commitments | 329,874 | 144,236 | 48,068 | 34,690 | 102,880 | |||||||||||||||
Standby letters of credit | 17,211 | 16,279 | 932 | - | - | |||||||||||||||
Total | $ | 689,401 | $ | 345,900 | $ | 111,697 | $ | 46,630 | $ | 185,174 |
(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 | 17 | - | - | 11,324 | |||||||||||||||
Director and Officer retirement plan obligations | 1,072 | 747 | 127 | 116 | 82 | |||||||||||||||
Loan commitments | 549,765 | 228,262 | 95,111 | 99,330 | 127,062 | |||||||||||||||
Standby letters of credit | 17,975 | 16,374 | 1,545 | 56 | - | |||||||||||||||
Total | $ | 901,587 | $ | 427,171 | $ | 139,118 | $ | 117,963 | $ | 217,335 |
As of December 31, 2019,2021, we had entered into non-cancelable lease agreements for our main office and operations center, seventeentwenty current and pending retail branch facilities, five loan offices, one storage facility, and thirteenseventeen equipment leases expiring on various dates through DecemberAugust 31, 2058.2059. The leases are accounted for as operating leases. The minimum rental payments required under these leases are $99.4$115.9 million through the year 2058.2059.
We have retirement plan agreements with certain directors and officers. At December 31, 2019,2021, 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, 2019.2021. Amounts shown in the table include both estimated maturities and instruments scheduled to re-price, including prime basedprime-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 | Interest Rate Sensitivity Gap | Interest Rate Sensitivity Gap | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2021 | 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 | 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 | $ | 301,719 | $ | 96,337 | $ | 121,419 | $ | 163,180 | $ | 116,077 | $ | 167,639 | $ | 357,490 | $ | 1,323,861 | $ | 1,322,292 | $ | 276,925 | $ | 116,927 | $ | 169,875 | $ | 294,886 | $ | 293,449 | $ | 461,205 | $ | 1,242,319 | $ | 2,855,586 | $ | 2,831,048 | ||||||||||||||||||||||||||||||||||||
Loans receivable | 401,153 | 73,232 | 148,363 | 248,266 | 208,621 | 358,606 | 300,688 | 1,738,929 | 1,731,876 | 490,543 | 109,678 | 198,110 | 363,088 | 327,698 | 517,135 | 482,149 | 2,488,401 | 2,475,944 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 702,872 | $ | 169,569 | $ | 269,782 | $ | 411,446 | $ | 324,698 | $ | 526,245 | $ | 658,178 | $ | 3,062,790 | $ | 3,054,168 | $ | 767,468 | $ | 226,605 | $ | 367,985 | $ | 657,974 | $ | 621,147 | $ | 978,340 | $ | 1,724,468 | $ | 5,343,987 | $ | 5,306,992 | ||||||||||||||||||||||||||||||||||||
Cumulative totals | $ | 702,872 | $ | 872,441 | $ | 1,142,223 | $ | 1,553,669 | $ | 1,878,367 | $ | 2,404,612 | $ | 3,062,790 | $ | 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) | $ | 1,352,360 | $ | - | $ | - | $ | - | $ | - | $ | - | - | $ | 1,352,360 | $ | 1,352,360 | $ | 2,283,779 | $ | - | $ | - | $ | - | $ | - | $ | - | - | $ | 2,283,779 | $ | 2,283,779 | ||||||||||||||||||||||||||||||||||||||
Savings accounts(1) | 216,793 | - | - | - | - | - | - | 216,793 | 216,793 | 529,155 | - | - | - | - | - | - | 529,155 | 529,155 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Money market accounts(1) | 545,000 | - | - | - | - | - | - | 545,000 | 545,000 | 775,941 | - | - | - | - | - | - | 775,941 | 775,941 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Time deposits | 32,414 | 72,487 | 65,661 | 50,079 | 1,130 | 1,808 | - | 223,579 | 224,095 | 31,987 | 66,461 | 67,582 | 24,591 | 2,682 | 4,642 | - | 197,945 | 197,764 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Subordinated debt | 11,265 | - | - | - | - | - | - | 11,265 | 8,540 | 11,278 | - | - | - | - | - | - | 11,278 | 8,644 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,157,832 | $ | 72,487 | $ | 65,661 | $ | 50,079 | $ | 1,130 | $ | 1,808 | - | $ | 2,348,997 | $ | 2,346,788 | $ | 3,632,140 | $ | 66,461 | $ | 67,582 | $ | 24,591 | $ | 2,682 | $ | 4,642 | - | $ | 3,798,098 | $ | 3,795,283 | ||||||||||||||||||||||||||||||||||||||
�� | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cumulative totals | $ | 2,157,832 | $ | 2,230,319 | $ | 2,295,980 | $ | 2,346,059 | $ | 2,347,189 | $ | 2,348,997 | 2,348,997 | $ | 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 | $ | (1,454,960 | ) | $ | 97,082 | $ | 204,121 | $ | 361,367 | $ | 323,568 | $ | 524,437 | 658,178 | $ | (2,864,672 | ) | $ | 160,144 | $ | 300,403 | $ | 633,383 | $ | 618,465 | $ | 973,698 | 1,724,468 | ||||||||||||||||||||||||||||||||||||||||||||
Cumulative GAP | $ | (1,454,960 | ) | $ | (1,357,878 | ) | $ | (1,153,757 | ) | $ | (792,390 | ) | $ | (468,822 | ) | $ | 55,615 | 713,793 | $ | (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 | 32.57 | % | 39.12 | % | 49.75 | % | 66.22 | % | 80.03 | % | 102.37 | % | 130.39 | % | 21.13 | % | 26.88 | % | 36.17 | % | 53.29 | % | 69.62 | % | 95.30 | % | 140,70 | % | ||||||||||||||||||||||||||||||||||||||||||||
Cumulative GAP/ Total earning assets | (47.50 | )% | (44.33 | )% | (37.67 | )% | (25.87 | )% | (15.31 | )% | 1.82 | % | 23.31 | % | (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, 20192021 and reflects the changes to NPV as a result of immediate and sustained changes in interest rates as indicated (dollars in thousands):
Change in Interest Rates in | Net Portfolio Value | NPV as a % of Portfolio Value of Assets | ||||||||||||||||||||||||||||||||||||||||
Basis Points (Rate Shock) | Amount | $ Change | % Change | NPV Ratio | Change (in Basis Points) | |||||||||||||||||||||||||||||||||||||
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 | $ | 498,587 | $ | (28,681 | ) | (5.44 | )% | 17.04 | % | 120 | $ | 613,466 | $ | (247,864 | ) | (28.78 | )% | 13.24 | % | (171 | ) | |||||||||||||||||||||
+300 | 533,717 | 6,449 | 1.22 | % | 17.60 | % | 176 | 729,994 | (131,336 | ) | (15.25 | )% | 14.95 | % | (105 | ) | ||||||||||||||||||||||||||
+200 | 555,758 | 28,490 | 5.40 | % | 17.72 | % | 188 | 821,199 | (40,131 | ) | (4.66 | )% | 16.00 | % | (25 | ) | ||||||||||||||||||||||||||
+100 | 560,188 | 32,920 | 6.24 | % | 17.29 | % | 145 | 873,457 | 12,127 | 1.41 | % | 16.25 | % | 85 | ||||||||||||||||||||||||||||
Static | 527,268 | - | 0.00 | % | 15.84 | % | - | 861,330 | - | 0.00 | % | 15.40 | % | - | ||||||||||||||||||||||||||||
-100 | 464,134 | (63,134 | ) | (11.97 | )% | 13.65 | % | (219) | 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 tabletables shows the NII model as of December 31, 2019 (dollars in thousands):2021 and December 31, 2020:
(dollars in thousands) | December 31, 2021 | |||||||||||||||||||||||||
Change in Interest Rates in Basis Points(1) | Net Interest Income | $ Change | % Change | Net Interest Income | $ Change | % Change | ||||||||||||||||||||
+400 | $ | 81,477 | (2,125 | ) | (2.54 | )% | $ | 132,228 | (1,165 | ) | (0.9 | )% | ||||||||||||||
+300 | 83,011 | (591 | ) | (0.71 | )% | 133,136 | (257 | ) | (0.2 | )% | ||||||||||||||||
+200 | 84,132 | 530 | 0.63 | % | 133,693 | 300 | 0.2 | % | ||||||||||||||||||
+100 | 84,782 | 1,180 | 1.41 | % | 134,169 | 77 | 0.6 | % | ||||||||||||||||||
Static | 83,602 | - | 0.00 | % | 133,393 | - | 0.0 | % | ||||||||||||||||||
-100 | 80,201 | (3,401 | ) | (4.06 | )% | 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 | % | |||||||||
-100 | 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 wholly judgmental.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 sponsored two outstanding issues of corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the Corporation more commonly known as trust preferred securities. The subsidiary trusts are not consolidated for financial reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
OnIn December 27, 2006, Republic Capital Trust II (Trust II)(“Trust II”) issued $6.0 million of trust preferred securities to investors and $0.2 million of common securities to us.the Company. Trust II purchased $6.2 million of our floating rate junior subordinated debentures of the Company due 2037, and wethe Company used the proceeds to call the securities of Republic Capital Trust I (Trust I)(“Trust I”). The debentures purchased bysupporting Trust II have a variable interest rate, adjustable quarterly, at 1.73% over the 3-month LIBOR. WeLIBOR rate. The Company may redeemcall the debenturessecurities on any interest payment date after five years without a prepayment penalty.
On June 28, 2007, Republic Capital Trust III (Trust III),(“Trust III”) issued $5.0 million of trust preferred securities to one investorinvestors and $0.2 million common securities to us.the Company. Trust III purchased $5.2 million of our floating rate junior subordinated debentures of the Company due 2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month LIBOR. We have3-month LIBOR rate. The Company has the ability to redeemcall the debenturessecurities on any interest payment date without a prepayment penalty.
On June 10, 2008, Republic First Bancorp Capital Trust IV (Trust IV) issued $10.8 million of convertible trust preferred securities as part of our strategic capital plan. The securities were purchased by investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp, and as of December 5, 2016, our chairman. The investor group also included a family trust of Harry D. Madonna, chairman, president and chief executive officer of Republic Bank, and Theodore J. Flocco, Jr., who has been elected by the shareholders to our Board of Directors and serves as the Chairman of our Audit Committee. Trust IV also issued $0.3 million of common securities to us. Trust IV purchased $11.1 million of our fixed rate junior subordinated convertible debentures due 2038, which paid interest at an annual rate of 8.0% and were considered redeemable on any interest payment date (a) at any time on or after June 13, 2013 if the closing price of our common stock for 20 trading days in the period of 30 consecutive trading days ending on the trading day prior to the mailing of the notice of redemption exceeds 120% of the then-applicable conversion price, or (b) on or after June 30, 2018, without a prepayment penalty. The trust preferred securities of Trust IV were convertible into approximately 1.7 million shares of our common stock, which is subject to customary adjustments. One independent director converted $240,000 of trust preferred securities into 37,000 shares of common stock in 2017. On January 31, 2018, we notified the existing holders of its intent to fully redeem these securities in accordance with the Optional Redemption terms included in the Indenture Agreement. The remaining securities were redeemed on March 31, 2018 at a price equal to the outstanding principal amount. After redemption of the remaining securities, Trust IV was dissolved.
Deferred issuance costs included in subordinated debt were $76,000$63,000 and $82,000$70,000 at December 31, 20192021 and December 31, 2018,2020, respectively. Amortization of deferred issuance costs were $6,000,was $7,000, $6,000, and $29,000 for$6,000 in each of the years ended December 31, 2021, 2020, and 2019, 2018, and 2017, respectively. Deferred issuance costs in the amount of $467,000 were recorded against additional paid in capital during the first quarter of 2018 as a result of the conversion of trust preferred securities into common stock in accordance with ASC 470-20.
Shareholders’ equity as of December 31, 2019 totaled approximately $249.22021 was $324.2 million compared to approximately $245.2$308.1 million as of December 31, 2018.2020. The book value per share of our common stock increased to $4.23$4.68 as of December 31, 2019,2021, based upon 58,842,77858,943,153 shares outstanding, from $4.17$4.41 as of December 31, 2018,2020, based upon 58,789,22858,859,778 shares outstanding at December 31, 2018. Outstanding shares are adjusted for treasury stock and deferred compensation plan shares.2020.
Regulatory Capital Requirements
We are required to comply with certain “risk-based” capital adequacy guidelines issued by the FRBFederal 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 capital conservation buffer, which is composed of common equity Tier 1 capital, began on January 1, 2016 at the 0.625% level and was phased in over a three year period (increasing by that amount on each January 1, until it reached 2.5% on January 1, 2019). Implementation of the deductions and other adjustments to common equity Tier 1 capital began on January 1, 2015 and were phased-in over a three-year period.
The following table shows the required capital ratios with the conservation buffer over the phase-in period.
Basel III Community Banks Minimum Capital Ratio Requirements | ||||||||||||||||
2016 | 2017 | 2018 | 2019 | |||||||||||||
Common equity tier 1 capital (CET1) | 5.125 | % | 5.750 | % | 6.375 | % | 7.000 | % | ||||||||
Tier 1 capital (to risk weighted assets) | 6.625 | % | 7.250 | % | 7.875 | % | 8.500 | % | ||||||||
Total capital (to risk-weighted assets) | 8.625 | % | 9.250 | % | 9.875 | % | 10.500 | % |
The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.
Management believes that the Company and Republic met, as of December 31, 20192021 and 2018,2020, all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if all such requirements were currently in effect.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, 20192021 and 2018:2020:
(dollars in thousands) |
Actual | Minimum Capital Adequacy |
Minimum Capital Adequacy with Capital Buffer | To Be Well Capitalized Under Prompt Corrective Action Provisions | 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 | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2019: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2021: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Total risk based capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | $ | 252,307 | 11.94 | % | $ | 169,016 | 8.00 | % | $ | 221,833 | 10.50 | % | $ | 211,270 | 10.00 | % | $ | 347,030 | 11.43 | % | $ | 242,787 | 8.00 | % | $ | 318,658 | 10.50 | % | $ | 303,484 | 10.00 | % | ||||||||||||||||||||||||||||||||
Company | 261,759 | 12.37 | % | 169,251 | 8.00 | % | 222,141 | 10.50 | % | - | - | % | 360,175 | 11.83 | % | 243,591 | 8.00 | % | 319,713 | 10.50 | % | - | - | % | ||||||||||||||||||||||||||||||||||||||||
Tier one risk based capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | 243,041 | 11.50 | % | 126,762 | 6.00 | % | 179,579 | 8.50 | % | 169,016 | 8.00 | % | 328,066 | 10.81 | % | 182,091 | 6.00 | % | 257,962 | 8.50 | % | 242,787 | 8.00 | % | ||||||||||||||||||||||||||||||||||||||||
Company | 252,493 | 11.93 | % | 126,938 | 6.00 | % | 179,829 | 8.50 | % | - | - | % | 341,211 | 11.21 | % | 182,693 | 6.00 | % | 258,816 | 8.50 | % | - | - | % | ||||||||||||||||||||||||||||||||||||||||
CET 1 risk based capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | 243,041 | 11.50 | % | 95,071 | 4.50 | % | 147,889 | 7.00 | % | 137,325 | 6.50 | % | 328,066 | 10.81 | % | 136,568 | 4.50 | % | 212,439 | 7.00 | % | 197,265 | 6.50 | % | ||||||||||||||||||||||||||||||||||||||||
Company | 241,493 | 11.41 | % | 95,203 | 4.50 | % | 148,094 | 7.00 | % | - | - | % | 281,886 | 9.26 | % | 137,020 | 4.50 | % | 213,142 | 7.00 | % | - | - | % | ||||||||||||||||||||||||||||||||||||||||
Tier one leveraged capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | 245,158 | 7.54 | % | 128,935 | 4.00 | % | 128,935 | 4.00 | % | 161,169 | 5.00 | % | 322,097 | 5.85 | % | 224,247 | 4.00 | % | 224,247 | 4.00 | % | 280,309 | 5.00 | % | ||||||||||||||||||||||||||||||||||||||||
Company | 249,168 | 7.83 | % | 129,058 | 4.00 | % | 129,058 | 4.00 | % | - | - | % | 324,242 | 6.08 | % | 224,656 | 4.00 | % | 224,656 | 4.00 | % | - | - | % | ||||||||||||||||||||||||||||||||||||||||
At December 31, 2018: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
At December 31, 2020: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total risk based capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | $ | 231,610 | 13.26 | % | $ | 139,722 | 8.00 | % | $ | 172,489 | 9.875 | % | $ | 174,652 | 10.00 | % | $ | 298,291 | 12.36 | % | $ | 193,062 | 8.00 | % | $ | 253,394 | 10.50 | % | $ | 241,327 | 10.00 | % | ||||||||||||||||||||||||||||||||
Company | 262,964 | 15.03 | % | 140,009 | 8.00 | % | 172,824 | 9.875 | % | - | - | % | 326,554 | 13.50 | % | 193,498 | 8.00 | % | 253,967 | 10.50 | % | - | - | % | ||||||||||||||||||||||||||||||||||||||||
Tier one risk based capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | 222,995 | 12.77 | % | 104,791 | 6.00 | % | 137,539 | 7.875 | % | 139,722 | 8.00 | % | 285,316 | 11.82 | % | 144,796 | 6.00 | % | 205,128 | 8.50 | % | 193,062 | 8.00 | % | ||||||||||||||||||||||||||||||||||||||||
Company | 254,349 | 14.53 | % | 105,007 | 6.00 | % | 137,821 | 7.875 | % | - | - | % | 313,579 | 12.96 | % | 145,124 | 6.00 | % | 205,592 | 8.50 | % | - | - | % | ||||||||||||||||||||||||||||||||||||||||
CET 1 risk based capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | 222,995 | 12.77 | % | 78,594 | 4.50 | % | 111,341 | 6.375 | % | 113,524 | 6.50 | % | 285,316 | 11.82 | % | 108,597 | 4.50 | % | 168,929 | 7.00 | % | 156,863 | 6.50 | % | ||||||||||||||||||||||||||||||||||||||||
Company | 243,349 | 13.90 | % | 78,755 | 4.50 | % | 111,570 | 6.375 | % | - | - | % | 254,254 | 10.51 | % | 108,843 | 4.50 | % | 169,311 | 7.00 | % | - | - | % | ||||||||||||||||||||||||||||||||||||||||
Tier one leveraged capital | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Republic | 222,995 | 8.21 | % | 108,685 | 4.00 | % | 108,685 | 4.00 | % | 135,857 | 5.00 | % | 287,114 | 7.44 | % | 153,414 | 4.00 | % | 153,414 | 4.00 | % | 191,767 | 5.00 | % | ||||||||||||||||||||||||||||||||||||||||
Company | 254,349 | 9.35 | % | 108,800 | 4.00 | % | 108,800 | 4.00 | % | - | - | % | 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.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 such ratios. The ALCO committee is responsible for managing theour liquidity position and interest sensitivity. That committee’s primary objective is to maximize net interest income while configuring Republic’s interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. The ALCO committee meets on a quarterly basis or more frequently if deemed necessary.
Our target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $168.3$118.9 million at December 31, 2019,2021, compared to $72.5$775.3 million at December 31, 2018.2020. Loan maturities and repayments are another source of asset liquidity. At December 31, 2019,2021, Republic estimated that more than $100$115 million of loans would mature or repay in the six-month period ending June 30, 2020.2022. 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, 2019,2021, we had outstanding commitments (including unused lines of credit and letters of credit) of $347.1$567.8 million. Certificates of deposit scheduled to mature in one year totaled $170.6$166.0 million at December 31, 2019.2021. 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 FHLB.Federal Home Loan Bank (“FHLB”) of Pittsburgh. We have establishedmaintain a line of credit with the FHLB of Pittsburgh. Our maximum borrowing capacity with the FHLB was $860.5 million$1.3 billion at December 31, 2019.2021. As of December 31, 2019,2021, we had no outstanding overnight borrowings. At December 31, 2019,2021, 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. As of December 31, 2018, we had outstanding overnight borrowings of $91.4 million at an interest rate of 2.65%. At December 31, 2018, FHLB had issued a letter on Republic’s behalf, totaling $100.0 million against our available credit. We also establishedmaintain a contingency line of credit of $10.0 million with ACBBAtlantic 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, 20192021 and December 31, 2018.2020. 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%.
VariableVariable 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"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'sentity’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.
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”.
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 76.77.
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 Independent Registered Public Accounting Firmthe 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 sheetssheet of Republic First Bancorp, Inc. (the “Company”) and subsidiaries as of December 31, 2019 and 2018,2020, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the threetwo years in the period ended December 31, 2019,2020, 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, 2019 and 2018,2020, and the results of their operations and their cash flows for each of the threetwo years in the period ended December 31, 20192020, 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, 2019, 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 March 16, 2020 expressed an unqualified opinion thereon.
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 since 2013.from 2013 to 2021.
Philadelphia, Pennsylvania
March 16, 202011, 2021
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2019 and 2018
(Dollars in thousands, except per share data)
December 31, 2019 | December 31, 2018 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 41,928 | $ | 35,685 | ||||
Interest bearing deposits with banks | 126,391 | 36,788 | ||||||
Cash and cash equivalents | 168,319 | 72,473 | ||||||
Investment securities available for sale, at fair value | 539,042 | 321,014 | ||||||
Investment securities held to maturity, at amortized cost (fair value of $653,109 and $747,323, respectively) | 644,842 | 761,563 | ||||||
Restricted stock, at cost | 2,746 | 5,754 | ||||||
Mortgage loans held for sale, at fair value | 10,345 | 20,887 | ||||||
Other loans held for sale | 3,004 | 5,404 | ||||||
Loans receivable (net of allowance for credit losses of $9,266 and $8,615, respectively) | 1,738,929 | 1,427,983 | ||||||
Premises and equipment, net | 116,956 | 87,661 | ||||||
Other real estate owned, net | 1,730 | 6,223 | ||||||
Accrued interest receivable | 9,934 | 9,025 | ||||||
Operating lease right-of-use asset | 64,805 | - | ||||||
Goodwill | 5,011 | 5,011 | ||||||
Other assets | 35,627 | 30,299 | ||||||
Total Assets | $ | 3,341,290 | $ | 2,753,297 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Demand – non-interest bearing | $ | 661,431 | $ | 519,056 | ||||
Demand – interest bearing | 1,352,360 | 1,042,561 | ||||||
Money market and savings | 761,793 | 676,993 | ||||||
Time deposits | 223,579 | 154,257 | ||||||
Total Deposits | 2,999,163 | 2,392,867 | ||||||
Short-term borrowings | - | 91,422 | ||||||
Accrued interest payable | 1,630 | 558 | ||||||
Other liabilities | 11,208 | 12,002 | ||||||
Operating lease liability | 68,856 | - | ||||||
Subordinated debt | 11,265 | 11,259 | ||||||
Total Liabilities | 3,092,122 | 2,508,108 | ||||||
Shareholders’ Equity | ||||||||
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares issued and outstanding | - | - | ||||||
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,371,623 as of December 31, 2019 and 59,318,073 as of December 31, 2018; shares outstanding 58,842,778 as of December 31, 2019 and 58,789,228 as of December 31, 2018 | 594 | 593 | ||||||
Additional paid in capital | 272,039 | 269,147 | ||||||
Accumulated deficit | (12,216 | ) | (8,716 | ) | ||||
Treasury stock at cost (503,408 shares as of December 31, 2019 and December 31, 2018) | (3,725 | ) | (3,725 | ) | ||||
Stock held by deferred compensation plan (25,437 shares as of December 31, 2019 and December 31, 2018) | (183 | ) | (183 | ) | ||||
Accumulated other comprehensive loss | (7,341 | ) | (11,927 | ) | ||||
Total Shareholders’ Equity | 249,168 | 245,189 | ||||||
Total Liabilities and Shareholders’ Equity | $ | 3,341,290 | $ | 2,753,297 |
(See notes to consolidated financial statements)
��
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of OperationsConsolidated Balance Sheets
For the Years Ended December 31, 2019, 2018,2021 and 20172020
(Dollars in thousands, except per share data)
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Interest income | ||||||||||||
Interest and fees on taxable loans | $ | 72,808 | $ | 62,502 | $ | 48,993 | ||||||
Interest and fees on tax-exempt loans | 1,689 | 1,543 | 1,101 | |||||||||
Interest and dividends on taxable investment securities | 27,459 | 26,677 | 19,643 | |||||||||
Interest and dividends on tax-exempt investment securities | 337 | 505 | 535 | |||||||||
Interest on federal funds sold and other interest-earning assets | 2,571 | 847 | 577 | |||||||||
Total interest income | 104,864 | 92,074 | 70,849 | |||||||||
Interest expense | ||||||||||||
Demand- interest bearing | 15,621 | 7,946 | 3,020 | |||||||||
Money market and savings | 6,796 | 4,898 | 3,160 | |||||||||
Time deposits | 3,850 | 1,588 | 1,238 | |||||||||
Other borrowings | 790 | 1,738 | 1,366 | |||||||||
Total interest expense | 27,057 | 16,170 | 8,784 | |||||||||
Net interest income | 77,807 | 75,904 | 62,065 | |||||||||
Provision for loan losses | 1,905 | 2,300 | 900 | |||||||||
Net interest income after provision for loan losses | 75,902 | 73,604 | 61,165 | |||||||||
Non-interest income | ||||||||||||
Loan and servicing fees | 1,568 | 1,401 | 1,614 | |||||||||
Mortgage banking income | 10,125 | 10,233 | 11,170 | |||||||||
Gain on sales of SBA loans | 3,187 | 3,105 | 3,378 | |||||||||
Service fees on deposit accounts | 7,541 | 5,476 | 3,904 | |||||||||
Gain (loss) on sale of investment securities | 1,103 | (67 | ) | (146 | ) | |||||||
Other non-interest income | 214 | 174 | 177 | |||||||||
Total non-interest income | 23,738 | 20,322 | 20,097 | |||||||||
Non-interest expenses | ||||||||||||
Salaries and employee benefits | 53,888 | 44,082 | 37,959 | |||||||||
Occupancy | 11,565 | 8,046 | 7,156 | |||||||||
Depreciation and amortization | 6,482 | 5,447 | 4,618 | |||||||||
Legal | 1,335 | 985 | 984 | |||||||||
Other real estate owned | 2,109 | 1,588 | 4,092 | |||||||||
Appraisal and other loan expenses | 1,829 | 1,840 | 1,878 | |||||||||
Advertising | 1,930 | 1,211 | 1,279 | |||||||||
Data processing | 5,220 | 3,855 | 3,134 | |||||||||
Insurance | 1,070 | 996 | 982 | |||||||||
Professional fees | 2,589 | 2,048 | 1,893 | |||||||||
Debit card processing | 2,467 | 1,868 | 1,264 | |||||||||
Regulatory assessments and costs | 1,228 | 1,675 | 1,367 | |||||||||
Taxes, other | 837 | 796 | 817 | |||||||||
Other operating expenses | 11,941 | 9,284 | 7,853 | |||||||||
Total non-interest expense | 104,490 | 83,721 | 75,276 | |||||||||
Income (loss) before benefit for income taxes | (4,850 | ) | 10,205 | 5,986 | ||||||||
Provision (benefit) for income taxes | (1,350 | ) | 1,578 | (2,919 | ) | |||||||
Net income (loss) | $ | (3,500 | ) | $ | 8,627 | $ | 8,905 | |||||
Net income (loss) per share | ||||||||||||
Basic | $ | (0.06 | ) | $ | 0.15 | $ | 0.16 | |||||
Diluted | $ | (0.06 | ) | $ | 0.15 | $ | 0.15 |
December 31, 2021 | December 31, 2020 | |||||||
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, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
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 | 325 | 85 | 337 | |||||||||
Interest on federal funds sold and other interest-earning assets | 453 | 514 | 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 | 253 | 367 | 790 | |||||||||
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 | 2,760 | 1,103 | |||||||||
Other non-interest income | 603 | 168 | 214 | |||||||||
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 | 844 | 459 | 2,109 | |||||||||
Appraisal and other loan expenses | 2,076 | 2,368 | 1,829 | |||||||||
Advertising | 673 | 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 | 916 | 837 | |||||||||
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 | 923 | - | |||||||||
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, 2019, 2018,2021, 2020, and 20172019
(Dollars in thousands)
Years Ended December 31, | ||||||||||||
2019 | 2018 | 2017 | ||||||||||
Net income (loss) | $ | (3,500 | ) | $ | 8,627 | $ | 8,905 | |||||
Other comprehensive , net of tax | ||||||||||||
Unrealized gain/(loss) on securities (pre-tax $5,120, $5,364, and $(646), respectively) | 4,284 | 3,927 | (413 | ) | ||||||||
Reclassification adjustment for securities losses (gains) (pre-tax $(1,103), $67 and $146, respectively) | (823 | ) | 49 | 94 | ||||||||
Net unrealized gains/(losses) on securities | 3,461 | 3,976 | (319 | ) | ||||||||
Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity (pre-tax $-, $(9,362), $-, respectively) | - | (6,855 | ) | - | ||||||||
Amortization of net unrealized holding losses during the period (pre-tax $1,658, $137, and $163, respectively) | 1,125 | 101 | 104 | |||||||||
Total other comprehensive income (loss) | 4,586 | (2,778 | ) | (215 | ) | |||||||
Total comprehensive income | $ | 1,086 | $ | 5,849 | $ | 8,690 |
Years Ended December 31, | ||||||||||||
2021 | 2020 | 2019 | ||||||||||
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, 2019, 2018,2021, 2020, and 20172019
(Dollars in thousands)
2019 | 2018 | 2017 | 2021 | 2020 | 2019 | |||||||||||||||||||
Cash flows from operating activities | ||||||||||||||||||||||||
Net (loss) income | $ | (3,500 | ) | $ | 8,627 | $ | 8,905 | |||||||||||||||||
Adjustments to reconcile net (loss) income to net cash provided by (used in) 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 | 1,905 | 2,300 | 900 | 5,750 | 4,200 | 1,905 | ||||||||||||||||||
Write down of other real estate owned | 286 | 563 | 3,000 | 722 | 31 | 286 | ||||||||||||||||||
Depreciation and amortization | 6,482 | 5,447 | 4,618 | 8,416 | 8,177 | 6,482 | ||||||||||||||||||
Deferred income taxes | 1,744 | 1,527 | (5,056 | ) | (452 | ) | 910 | 1,744 | ||||||||||||||||
Stock based compensation | 2,632 | 2,116 | 1,842 | 2,093 | 1,918 | 2,632 | ||||||||||||||||||
Loss (gain) on sale of investment securities | (1,103 | ) | 67 | 146 | ||||||||||||||||||||
Gain on sale or call of investment securities | (2 | ) | (2,760 | ) | (1,103 | ) | ||||||||||||||||||
Fair value adjustments on equity securities | 134 | - | - | |||||||||||||||||||||
Amortization of premiums on investment securities | 3,730 | 2,878 | 2,469 | 8,494 | 7,480 | 3,730 | ||||||||||||||||||
Accretion of discounts on retained SBA loans | (1,411 | ) | (1,332 | ) | (1,088 | ) | (937 | ) | (880 | ) | (1,411 | ) | ||||||||||||
Fair value adjustments on SBA servicing assets | 1,364 | 1,458 | 1,187 | 654 | 358 | 1,364 | ||||||||||||||||||
Proceeds from sales of SBA loans originated for sale | 46,951 | 42,726 | 42,269 | 29,121 | 25,470 | 46,951 | ||||||||||||||||||
SBA loans originated for sale | (41,364 | ) | (42,700 | ) | (37,062 | ) | (28,148 | ) | (23,708 | ) | (41,364 | ) | ||||||||||||
Gains on sales of SBA loans originated for sale | (3,187 | ) | (3,105 | ) | (3,378 | ) | (3,214 | ) | (1,741 | ) | (3,187 | ) | ||||||||||||
Proceeds from sales of mortgage loans originated for sale | 335,991 | 322,264 | 311,187 | 409,224 | 479,324 | 335,991 | ||||||||||||||||||
Mortgage loans originated for sale | (317,881 | ) | (291,870 | ) | (321,222 | ) | (363,762 | ) | (504,488 | ) | (317,881 | ) | ||||||||||||
Fair value adjustment for mortgage loans originated for sale | 454 | 513 | (846 | ) | 1,981 | (1,915 | ) | 454 | ||||||||||||||||
Gains on mortgage loans originated for sale | (8,117 | ) | (8,378 | ) | (8,128 | ) | (11,612 | ) | (12,981 | ) | (8,117 | ) | ||||||||||||
Amortization of intangible assets | - | - | 61 | |||||||||||||||||||||
Amortization of debt issuance costs | 6 | 6 | 29 | 7 | 6 | 6 | ||||||||||||||||||
Non-cash expense related to leases | 1,128 | - | - | 406 | 532 | 1,128 | ||||||||||||||||||
Increase in accrued interest receivable and other assets | (8,464 | ) | (5,047 | ) | (2,330 | ) | ||||||||||||||||||
Repayment of operating lease liabilities | (5,586 | ) | (4,935 | ) | (3,727 | ) | ||||||||||||||||||
Net decrease (increase) in accrued interest receivable and other assets | 275 | (7,845 | ) | (8,464 | ) | |||||||||||||||||||
Net increase in accrued interest payable and other liabilities | 1,687 | 1,570 | 1,513 | 3,886 | 12,053 | 5,414 | ||||||||||||||||||
Net cash provided by (used in) operating activities | 19,333 | 39,630 | (984 | ) | 82,626 | ) | (10,729 | ) | 19,333 | |||||||||||||||
Cash flows from investing activities | ||||||||||||||||||||||||
Purchase of investment securities available for sale | (338,500 | ) | (149,209 | ) | (165,065 | ) | (705,751 | ) | (284,015 | ) | (338,500 | ) | ||||||||||||
Purchase of equity securities | - | (9,039 | ) | - | ||||||||||||||||||||
Purchase of investment securities held to maturity | - | (123,265 | ) | (89,350 | ) | (1,117,256 | ) | (402,554 | ) | - | ||||||||||||||
Proceeds from the sale of securities available for sale | 54,742 | 6,439 | 31,197 | - | 125,222 | 54,742 | ||||||||||||||||||
Proceeds from the paydown, maturity, or call of securities available for sale | 69,012 | 48,796 | 48,547 | 141,894 | 170,874 | 69,012 | ||||||||||||||||||
Proceeds from the paydown, maturity, or call of securities held to maturity | 116,486 | 63,565 | 37,315 | 269,761 | 232,238 | 116,486 | ||||||||||||||||||
Net redemption (purchase) of restricted stock | 3,008 | (3,836 | ) | (552 | ) | |||||||||||||||||||
Net increase in loans | (312,665 | ) | (275,587 | ) | (197,965 | ) | ||||||||||||||||||
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 | 495 | 499 | 466 | 744 | 5,072 | ||||||||||||||||||
Premises and equipment expenditures | (35,777 | ) | (18,161 | ) | (22,525 | ) | (12,686 | ) | (14,391 | ) | (35,777 | ) | ||||||||||||
Net cash used in investing activities | (438,622 | ) | (450,763 | ) | (357,899 | ) | (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 | 261 | 670 | 646 | 205 | 41 | 261 | ||||||||||||||||||
Net increase in demand, money market and savings deposits | 536,974 | 292,053 | 380,052 | 1,165,845 | 1,051,806 | 536,974 | ||||||||||||||||||
Net increase in time deposits | 69,322 | 37,519 | 5,573 | |||||||||||||||||||||
Increase (repayment) in short-term borrowings | (91,422 | ) | 91,422 | - | ||||||||||||||||||||
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 | - | 18 | - | |||||||||||||||||||||
Net cash provided by financing activities | 515,135 | 421,664 | 386,271 | 540,268 | 1,695,915 | 515,135 | ||||||||||||||||||
Net increase in cash and cash equivalents | 95,846 | 10,531 | 27,388 | |||||||||||||||||||||
Net (decrease) increase in cash and cash equivalents | (656,416 | ) | 606,981 | 95,846 | ||||||||||||||||||||
Cash and cash equivalents, beginning of year | 72,473 | 61,942 | 34,554 | 775,300 | 168,319 | 72,473 | ||||||||||||||||||
Cash and cash equivalents, end of year | $ | 168,319 | $ | 72,473 | $ | 61,942 | $ | 118,884 | $ | 775,300 | $ | 168,319 | ||||||||||||
Supplemental disclosures | ||||||||||||||||||||||||
Interest paid | $ | 25,985 | $ | 15,905 | $ | 8,935 | $ | 18,967 | $ | 23,822 | $ | 25,985 | ||||||||||||
Income taxes paid | $ | - | $ | - | $ | 75 | $ | 10,540 | $ | - | $ | - | ||||||||||||
Non-cash transfers from loans to other real estate owned | $ | 1,225 | $ | 315 | $ | 291 | ||||||||||||||||||
Conversion of subordinated debt to common stock | $ | - | $ | 10,094 | $ | 229 | ||||||||||||||||||
Transfer of available-for-sale securities to held-to-maturity securities | $ | - | $ | 230,094 | $ | - | ||||||||||||||||||
Non-cash transfers from loans receivable to other real estate owned | $ | 360 | $ | 233 | $ | 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’Shareholders’ Equity
For the Years Ended December 31, 2019, 2018,2021, 2020, and 20172019
(Dollars in thousands)
Common Stock | Additional Paid in Capital | Accumulated Deficit | Treasury Stock | Stock Held by Deferred Compensation Plan | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | 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, 2017 | $ | 573 | $ | 253,570 | $ | (27,888 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (7,294 | ) | $ | 215,053 | ||||||||||||||||||||||||||||||||||||||||||
Net income | 8,905 | 8,905 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (215 | ) | (215 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | 1,842 | 1,842 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of subordinated debt to common stock (36,922 shares) | 229 | 229 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Options exercised (197,975 shares) | 2 | 644 | 646 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2017 | 575 | 256,285 | (18,983 | ) | (3,725 | ) | (183 | ) | (7,509 | ) | 226,460 | |||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification due to the adoption of ASU 2018-02 | 1,640 | (1,640 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | 8,627 | 8,627 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | (2,778 | ) | (2,778 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | 2,116 | 2,116 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of subordinated debt to common stock (1,624,614 shares) | 16 | 10,078 | 10,094 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Options exercised (174,850 shares) | 2 | 668 | 670 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2018 | 593 | 269,147 | (8,716 | ) | (3,725 | ) | (183 | ) | (11,927 | ) | 245,189 | |||||||||||||||||||||||||||||||||||||||||||||||||
Balance January 1, 2019 | $ | - | $ | 593 | $ | 269,147 | $ | (8,716 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (11,927 | ) | $ | 245,189 | ||||||||||||||||||||||||||||||||||||||||
Net loss | (3,500 | ) | (3,500 | ) | (3,500 | ) | (3,500 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net of tax | 4,586 | 4,586 | 4,586 | 4,586 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock based compensation | 2,632 | 2,632 | 2,632 | 2,632 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Options exercised (53,550 shares) | 1 | 260 | 261 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Options exercised (53,550 shares) | 1 | 260 | 261 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance December 31, 2019 | $ | 594 | $ | 272,039 | $ | (12,216 | ) | $ | (3,725 | ) | $ | (183 | ) | $ | (7,341 | ) | $ | 249,168 | - | 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-bankone-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 charteredstate-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 Counties. On July 28, 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, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and Florida. On January 1, 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 sponsorship of 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 creditloan losses carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, 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 that the Company invests in. Note 4 – - Loans Receivable discusses the types of lending that 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 ninety90 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. The amounts of those balances for the reserve computation periods that include December 31, 2019 and 2018 were approximately $57.2 million and $51.4 million, respectively. These requirements were satisfied through the restriction of vault cash and a balance held by Effective March 26, 2020, the Federal Reserve Bankannounced 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 Philadelphia.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
Treasury Stock
Stock 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,by Deferred Compensation Plan
Accumulated Other Comprehensive Loss
Total Shareholders’ Equity
Balance January 1, 2019
Net loss
Other comprehensive income, 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.tax
Stock based compensation
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 reportedOptions exercised (53,550 shares)
Balance December 31, 2019
Net income
Other comprehensive income, net of tax as a separate component
Preferred stock dividends (1)
Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of otheroffering costs of $1,675
Stock based compensation
Return of short swing profit
Options exercised (17,000 shares)
Balance December 31, 2020
Net income
Other comprehensive income until realized. Realized gains and losses on the saleloss, net of investment securities are reported in the consolidated statements of income and determined using the adjusted cost of the specific security sold on the trade date.tax
Preferred stock dividends (2)
Stock based compensation
Options exercised (83,375 shares)
Balance December 31, 2021
|
|
(2) | Dividends per share of |
(See notes to consolidated financial statements)
Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. | Nature of |
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
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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
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 income 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 corporation-obligated mandatorily redeemable capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as trust preferred securities. The subsidiary trusts are not consolidated 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 2016-02
In February 2016, the FASB issued ASU No. 2016-02, Leases. From the Company’s perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. From the landlord perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease is treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.
In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provided lessees the option to apply the new leasing standard to all open leases as of the adoption date. Prior to this ASU issuance, a modified retrospective transition approach was required.
In December 2018, the FASB issued ASU 2018-20 "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which provided lessors a policy election to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Additionally, the update requires certain lessors to exclude from variable payments lessor costs paidStock Held by lessees directly to third parties.Deferred Compensation Plan
Accumulated Other Comprehensive Loss
Total Shareholders’ Equity
The Company adopted this ASU onBalance January 1, 2019. The Company recognized an ROU asset2019
Net loss
Other comprehensive income, net of $34.2 million and total operating lease liability obligations of $35.1 million at January 1, 2019. Capital ratios remained in compliance with the regulatory definition of well capitalized. There were no material changes to the recognition of operating lease expense in the consolidated statements of income. The Company adopted certain practical expedients available under the new guidance, which did not require it to (1) reassess whether any expired or existing contracts contain leases, (2) reassess the lease classification for any expired or existing leases, (3) reassess initial direct costs for any existing leases, and (4) evaluate whether certain sales taxes and other similar taxes are lessor costs. The Company elected the use-of-hindsight practical expedient. Additionally, the Company elected to apply the new lease guidance at the adoption date, rather than at the beginning of the earliest period presented.tax
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. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting dateStock based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company is currently evaluating the impact of this ASU, continuing its implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Calculations of expected losses under the new guidance were run parallel to the calculations under existing guidance to assess and evaluate the potential impact to the Company’s financial statements. The new model includes different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and considers expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Company's allowance for loan losses which will depend upon the nature and characteristics of the Company's loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. The Company expects an initial increase to the allowance for credit losses, in the range of 0% to 11% of thecompensation
Options exercised (53,550 shares)
Balance December 31, 2019 allowance for credit losses, or an incremental increase to the allowance for credit losses in the range of $0 up to approximately $1.0 million. When finalized, this one-time increase as a result of the adoption of ASU 2016-13 will be recorded,
Net income
Other comprehensive income, net of tax as an adjustment to retained earnings effective January 1, 2020. This estimate is subject to change
Preferred stock dividends (1)
Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675
Stock based on continuing refinement and validationcompensation
Return of the model and methodologies. For the Company, this update became effective January 1, 2020.short swing profit
ASU 2017-08
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities, which amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The ASU was effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities, including adoption in an interim period. If an entity early adopts the ASU in an interim period, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The adoption of ASU 2017-08 did not have a material impact on the consolidated financial statements.
ASU 2018-07
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). The ASU simplifies the accounting for share based payments granted to non-employees for goods and services. The ASU applies to all share based payment transactions in which a grantor acquires goods or services from non-employees to be used or consumed in a grantor’s own operations by issuing share based payment awards. With the amended guidance from ASU 2018-07, non-employees share based payments are measured with an estimate of the fair value of the equity of the business is obligated to issue at the grant date (the date that the business and the stock award recipient agree to the terms of the award). Compensation would be recognized in the same period and in the same manner as if the entity had paid cash for goods and services instead of stock. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU on January 1, 2019. The adoption of this ASU did not have a significant impact on the Company’s financial condition, results of operations, and consolidated financial statements.
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| 18 | 18 |
Options exercised (17,000 shares)
A summary of the amortized cost and market value of securities available for sale and securities held to maturity atBalance December 31, 2019 and 2018 is as follows:2020
At December 31, 2019 | ||||||||||||||||
(dollars in thousands) |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses |
Fair Value | ||||||||||||
U.S. Government agencies | $ | 38,743 | $ | 1 | $ | (439 | ) | $ | 38,305 | |||||||
Collateralized mortgage obligations | 329,492 | 2,368 | (422 | ) | 331,438 | |||||||||||
Agency mortgage-backed securities | 98,953 | 82 | (98 | ) | 98,937 | |||||||||||
Municipal securities | 4,064 | 18 | - | 4,082 | ||||||||||||
Corporate bonds | 69,499 | 79 | (3,298 | ) | 66,280 | |||||||||||
Total securities available for sale | $ | 540,751 | $ | 2,548 | $ | (4,257 | ) | $ | 539,042 | |||||||
U.S. Government agencies | $ | 94,913 | $ | 482 | $ | (294 | ) | $ | 95,101 | |||||||
Collateralized mortgage obligations | 416,177 | 7,603 | (793 | ) | 422,987 | |||||||||||
Agency mortgage-backed securities | 133,752 | 1,782 | (513 | ) | 135,021 | |||||||||||
Total securities held to maturity | $ | 644,842 | $ | 9,867 | $ | (1,600 | ) | $ | 653,109 |
At December 31, 2018 | ||||||||||||||||
(dollars in thousands) |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses |
Fair Value | ||||||||||||
Collateralized mortgage obligations | $ | 197,812 | $ | 567 | $ | (2,120 | ) | $ | 196,259 | |||||||
Agency mortgage-backed securities | 39,105 | 5 | (611 | ) | 38,499 | |||||||||||
Municipal securities | 20,807 | 64 | (232 | ) | 20,639 | |||||||||||
Corporate bonds | 62,583 | 87 | (3,396 | ) | 59,274 | |||||||||||
Asset-backed securities | 6,433 | - | (90 | ) | 6,343 | |||||||||||
Total securities available for sale | $ | 326,740 | $ | 723 | $ | (6,449 | ) | $ | 321,014 | |||||||
U.S. Government agencies | $ | 107,390 | $ | - | $ | (3,772 | ) | $ | 103,618 | |||||||
Collateralized mortgage obligations | 500,690 | 570 | (5,793 | ) | 495,467 | |||||||||||
Agency mortgage-backed securities | 153,483 | - | (5,245 | ) | 148,238 | |||||||||||
Total securities held to maturity | $ | 761,563 | $ | 570 | $ | (14,810 | ) | $ | 747,323 |
The following table presents investment securities by stated maturity at December 31, 2019. 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 | $ | 3,790 | $ | 3,795 | $ | - | $ | - | ||||||||
After 1 year to 5 years | 39,653 | 39,435 | 20,048 | 20,073 | ||||||||||||
After 5 years to 10 years | 65,863 | 62,617 | 74,865 | 75,028 | ||||||||||||
After 10 years | 3,000 | 2,820 | - | - | ||||||||||||
Collateralized mortgage obligations | 329,492 | 331,438 | 416,177 | 422,987 | ||||||||||||
Agency mortgage-backed securities | 98,953 | 98,937 | 133,752 | 135,021 | ||||||||||||
Total | $ | 540,751 | $ | 539,042 | $ | 644,842 | $ | 653,109 |
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties.
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. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of December 31, 2019 and December 31, 2018. 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 otherincome
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.tax
Preferred stock dividends (2)
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 endedStock based compensation
Options exercised (83,375 shares)
Balance December 31, 2019, 2018, and 2017.2021
At December 31, 2019 and 2018, investment securities in the amount of approximately $847.1 million and $710.7 million, respectively, were pledged as collateral for public deposits and certain other deposits as required by law.
| Dividends per share of
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(2) | Dividends per share of
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(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 |
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 |
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 860revises 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) | 2021 | 2020 | 2019 | |||||||||
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) | 2021 | 2020 | 2019 | |||||||||
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 |
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
|
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, 2019 and 2018:
(dollars in thousands) | December 31, 2019 | December 31, 2018 | ||||||
Commercial real estate | $ | 613,631 | $ | 515,738 | ||||
Construction and land development | 121,395 | 121,042 | ||||||
Commercial and industrial | 223,906 | 200,423 | ||||||
Owner occupied real estate | 424,400 | 367,895 | ||||||
Consumer and other | 101,320 | 91,152 | ||||||
Residential mortgage | 263,444 | 140,364 | ||||||
Total loans receivable | 1,748,096 | 1,436,614 | ||||||
Deferred costs (fees) | 99 | (16 | ) | |||||
Allowance for loan losses | (9,266 | ) | (8,615 | ) | ||||
Net loans receivable | $ | 1,738,929 | $ | 1,427,983 |
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, and residential mortgages. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.
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, 2021 | December 31, 2020 | ||||||
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. |
|
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, | ||||||||||||||||||||||||
2021 | 2020 | 2019 | ||||||||||||||||||||||
(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, 2021 | December 31, 2020 | ||||||
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.
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, 2019, 2018, and 2017:
(dollars in thousands) | Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate |
Consumer and Other |
Residential Mortgage |
Unallocated |
Total | ||||||||||||||||||||||||
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 | 581 | (89 | ) | 316 | 257 | 130 | 811 | (101 | ) | 1,905 | ||||||||||||||||||||||
Ending balance | $ | 3,043 | $ | 688 | $ | 931 | $ | 2,292 | $ | 590 | $ | 1,705 | $ | 17 | $ | 9,266 | ||||||||||||||||
Year ended December, 2018 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning Balance: | $ | 3,774 | $ | 725 | $ | 1,317 | $ | 1,737 | $ | 573 | $ | 392 | $ | 81 | $ | 8,599 | ||||||||||||||||
Charge-offs | (1,603 | ) | - | (151 | ) | (465 | ) | (219 | ) | - | - | (2,438 | ) | |||||||||||||||||||
Recoveries | 50 | - | 81 | 20 | 3 | - | - | 154 | ||||||||||||||||||||||||
Provisions (credits) | 241 | 52 | 507 | 741 | 220 | 502 | 37 | 2,300 | ||||||||||||||||||||||||
Ending balance | $ | 2,462 | $ | 777 | $ | 1,754 | $ | 2,033 | $ | 577 | $ | 894 | $ | 118 | $ | 8,615 | ||||||||||||||||
Year ended December, 2017 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Beginning Balance: | $ | 3,254 | $ | 557 | $ | 2,884 | $ | 1,382 | $ | 588 | $ | 58 | $ | 432 | $ | 9,155 | ||||||||||||||||
Charge-offs | - | - | (1,366 | ) | (157 | ) | (53 | ) | - | - | (1,576 | ) | ||||||||||||||||||||
Recoveries | 54 | - | 64 | - | 2 | - | - | 120 | ||||||||||||||||||||||||
Provisions (credits) | 466 | 168 | (265 | ) | 512 | 36 | 334 | (351 | ) | 900 | ||||||||||||||||||||||
Ending balance | $ | 3,774 | $ | 725 | $ | 1,317 | $ | 1,737 | $ | 573 | $ | 392 | $ | 81 | $ | 8,599 |
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, 2019 and 2018:
(dollars in thousands) |
Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate |
Consumer and Other |
Residential Mortgage |
Unallocated |
Total | ||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 265 | $ | - | $ | 23 | $ | 268 | $ | - | $ | - | $ | - | $ | 556 | ||||||||||||||||
Collectively evaluated for impairment | 2,778 | 688 | 908 | 2,024 | 590 | 1,705 | 17 | 8,710 | ||||||||||||||||||||||||
Total allowance for loan losses | $ | 3,043 | $ | 688 | $ | 931 | $ | 2,292 | $ | 590 | $ | 1,705 | $ | 17 | $ | 9,266 | ||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||
Loans evaluated individually | $ | 10,331 | $ | - | $ | 3,087 | $ | 3,634 | $ | 1,062 | $ | 768 | $ | - | $ | 18,882 | ||||||||||||||||
Loans evaluated collectively | 603,300 | 121,395 | 220,819 | 420,766 | 100,258 | 262,676 | - | 1,729,214 | ||||||||||||||||||||||||
Total loans receivable | $ | 613,631 | $ | 121,395 | $ | 223,906 | $ | 424,400 | $ | 101,320 | $ | 263,444 | $ | - | $ | 1,748,096 |
(dollars in thousands) |
Commercial Real Estate | Construction and Land Development | Commercial and Industrial | Owner Occupied Real Estate |
Consumer and Other |
Residential Mortgage |
Unallocated |
Total | ||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 295 | $ | - | $ | 867 | $ | 217 | $ | 94 | $ | - | $ | - | $ | 1,473 | ||||||||||||||||
Collectively evaluated for impairment | 2,167 | 777 | 887 | 1,816 | 483 | 894 | 118 | 7,142 | ||||||||||||||||||||||||
Total allowance for loan losses | $ | 2,462 | $ | 777 | $ | 1,754 | $ | 2,033 | $ | 577 | $ | 894 | $ | 118 | $ | 8,615 | ||||||||||||||||
Loans receivable: | ||||||||||||||||||||||||||||||||
Loans evaluated individually | $ | 10,947 | $ | - | $ | 3,662 | $ | 2,560 | $ | 861 | $ | - | $ | - | $ | 18,030 | ||||||||||||||||
Loans evaluated collectively | 504,791 | 121,042 | 196,761 | 365,335 | 90,291 | 140,364 | - | 1,418,584 | ||||||||||||||||||||||||
Total loans receivable | $ | 515,738 | $ | 121,042 | $ | 200,423 | $ | 367,895 | $ | 91,152 | $ | 140,364 | $ | - | $ | 1,436,614 |
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, 2019 and 2018:
December 31, 2019 | December 31, 2018 | |||||||||||||||||||||||
(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 | $ | 6,186 | $ | 6,192 | $ | - | $ | 6,332 | $ | 6,337 | $ | - | ||||||||||||
Construction and land development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | 2,719 | 2,989 | - | �� | 1,655 | 5,418 | - | |||||||||||||||||
Owner occupied real estate | 2,127 | 2,275 | - | 1,905 | 2,013 | - | ||||||||||||||||||
Consumer and other | 1,062 | 1,375 | - | 710 | 1,082 | - | ||||||||||||||||||
Residential mortgage | 768 | 768 | - | - | - | - | ||||||||||||||||||
Total | $ | 12,862 | $ | 13,599 | $ | - | $ | 10,602 | $ | 14,850 | $ | - | ||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial real estate | $ | 4,145 | $ | 4,667 | $ | 265 | $ | 4,615 | $ | 5,498 | $ | 295 | ||||||||||||
Construction and land development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | 368 | 383 | 23 | 2,007 | 2,195 | 867 | ||||||||||||||||||
Owner occupied real estate | 1,507 | 1,521 | 268 | 655 | 704 | 217 | ||||||||||||||||||
Consumer and other | - | - | - | 151 | 158 | 94 | ||||||||||||||||||
Residential mortgage | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 6,020 | $ | 6,571 | $ | 556 | $ | 7,428 | $ | 8,555 | $ | 1,473 | ||||||||||||
Total: | ||||||||||||||||||||||||
Commercial real estate | $ | 10,331 | $ | 10,859 | $ | 265 | $ | 10,947 | $ | 11,835 | $ | 295 | ||||||||||||
Construction and land development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | 3,087 | 3,372 | 23 | 3,662 | 7,613 | 867 | ||||||||||||||||||
Owner occupied real estate | 3,634 | 3,796 | 268 | 2,560 | 2,717 | 217 | ||||||||||||||||||
Consumer and other | 1,062 | 1,375 | - | 861 | 1,240 | 94 | ||||||||||||||||||
Residential mortgage | 768 | 768 | - | - | - | - | ||||||||||||||||||
Total | $ | 18,882 | $ | 20,170 | $ | 556 | $ | 18,030 | $ | 23,405 | $ | 1,473 |
The following table presents additional information regarding the Company’s impaired loans for the years ended December 31, 2019, 2018, and 2017:
Years Ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | 2017 | ||||||||||||||||||||||
(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 | $ | 6,463 | $ | 289 | $ | 10,429 | $ | 288 | $ | 9,579 | $ | 366 | ||||||||||||
Construction and land development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | 2,144 | 5 | 3,341 | 52 | 2,270 | 37 | ||||||||||||||||||
Owner occupied real estate | 1,908 | 38 | 2,275 | 58 | 1,894 | 58 | ||||||||||||||||||
Consumer and other | 909 | 20 | 658 | 21 | 801 | 21 | ||||||||||||||||||
Residential mortgage | 461 | 2 | - | - | 26 | 1 | ||||||||||||||||||
Total | $ | 11,885 | $ | 354 | $ | 16,703 | $ | 419 | $ | 14,570 | $ | 483 | ||||||||||||
With an allowance recorded: | ||||||||||||||||||||||||
Commercial real estate | $ | 4,281 | $ | 1 | $ | 3,076 | $ | - | $ | 6,490 | $ | 14 | ||||||||||||
Construction and land development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | 838 | - | 1,862 | 6 | 2,517 | 68 | ||||||||||||||||||
Owner occupied real estate | 1,071 | 31 | 969 | 25 | 1,390 | 32 | ||||||||||||||||||
Consumer and other | 30 | - | 191 | 1 | 420 | 10 | ||||||||||||||||||
Residential mortgage | - | - | - | - | - | - | ||||||||||||||||||
Total | $ | 6,220 | $ | 32 | $ | 6,098 | $ | 32 | $ | 10,817 | $ | 124 | ||||||||||||
Total: | ||||||||||||||||||||||||
Commercial real estate | $ | 10,744 | $ | 290 | $ | 13,505 | $ | 288 | $ | 16,069 | $ | 380 | ||||||||||||
Construction and land development | - | - | - | - | - | - | ||||||||||||||||||
Commercial and industrial | 2,982 | 5 | 5,203 | 58 | 4,787 | 105 | ||||||||||||||||||
Owner occupied real estate | 2,979 | 69 | 3,244 | 83 | 3,284 | 90 | ||||||||||||||||||
Consumer and other | 939 | 20 | 849 | 22 | 1,221 | 31 | ||||||||||||||||||
Residential mortgage | 461 | 2 | - | - | 26 | 1 | ||||||||||||||||||
Total | $ | 18,105 | $ | 386 | $ | 22,801 | $ | 451 | $ | 25,387 | $ | 607 |
The total average recorded investment on the Company’s impaired loans for the years ended December 31, 2019, 2018, and 2017 were $18.1 million, $22.8 million, and $25.4 million, respectively, and the related interest income recognized for those dates was $386,000, $451,000, and $607,000, 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, 2019 and 2018:
(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, 2019 | ||||||||||||||||||||||||||||
Commercial real estate | $ | - | $ | 313 | $ | 4,159 | $ | 4,472 | $ | 609,159 | $ | 613,631 | $ | - | ||||||||||||||
Construction and land development | - | - | - | - | 121,395 | 121,395 | - | |||||||||||||||||||||
Commercial and industrial | - | 50 | 3,087 | 3,137 | 220,769 | 223,906 | - | |||||||||||||||||||||
Owner occupied real estate | - | 1,219 | 3,337 | 4,556 | 419,844 | 424,400 | - | |||||||||||||||||||||
Consumer and other | 112 | 241 | 1,062 | 1,415 | 99,905 | 101,320 | - | |||||||||||||||||||||
Residential mortgage | - | - | 768 | 768 | 262,676 | 263,444 | - | |||||||||||||||||||||
Total | $ | 112 | $ | 1,823 | $ | 12,413 | $ | 14,348 | $ | 1,733,748 | $ | 1,748,096 | $ | - |
(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, 2018 | ||||||||||||||||||||||||||||
Commercial real estate | $ | 339 | $ | 921 | $ | 4,631 | $ | 5,891 | $ | 509,847 | $ | 515,738 | $ | - | ||||||||||||||
Construction and land development | - | - | - | - | 121,042 | 121,042 | - | |||||||||||||||||||||
Commercial and industrial | 280 | - | 3,661 | 3,941 | 196,482 | 200,423 | - | |||||||||||||||||||||
Owner occupied real estate | - | 653 | 1,188 | 1,841 | 366,054 | 367,895 | - | |||||||||||||||||||||
Consumer and other | 214 | - | 861 | 1,075 | 90,077 | 91,152 | - | |||||||||||||||||||||
Residential mortgage | 302 | - | - | 302 | 140,062 | 140,364 | - | |||||||||||||||||||||
Total | $ | 1,135 | $ | 1,574 | $ | 10,341 | $ | 13,050 | $ | 1,423,564 | $ | 1,436,614 | $ | - |
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, 2019 and 2018:
(dollars in thousands) |
Pass | Special Mention |
Substandard |
Doubtful |
Total | |||||||||||||||
At December 31, 2019: | ||||||||||||||||||||
Commercial real estate | $ | 609,382 | $ | 90 | $ | 4,159 | $ | - | $ | 613,631 | ||||||||||
Construction and land development | 121,395 | - | - | - | 121,395 | |||||||||||||||
Commercial and industrial | 220,819 | - | 3,087 | - | 223,906 | |||||||||||||||
Owner occupied real estate | 418,997 | 1,770 | 3,633 | - | 424,400 | |||||||||||||||
Consumer and other | 100,258 | - | 1,062 | - | 101,320 | |||||||||||||||
Residential mortgage | 262,555 | 121 | 768 | - | 263,444 | |||||||||||||||
Total | $ | 1,733,406 | $ | 1,981 | $ | 12,709 | $ | - | $ | 1,748,096 |
(dollars in thousands) |
Pass | Special Mention |
Substandard |
Doubtful |
Total | |||||||||||||||
At December 31, 2018: | ||||||||||||||||||||
Commercial real estate | $ | 510,186 | $ | 921 | $ | 4,631 | $ | - | $ | 515,738 | ||||||||||
Construction and land development | 121,042 | - | - | - | 121,042 | |||||||||||||||
Commercial and industrial | 196,751 | 10 | 3,382 | 280 | 200,423 | |||||||||||||||
Owner occupied real estate | 364,032 | 1,303 | 2,560 | - | 367,895 | |||||||||||||||
Consumer and other | 90,291 | - | 861 | - | 91,152 | |||||||||||||||
Residential mortgage | 140,240 | 124 | - | - | 140,364 | |||||||||||||||
Total | $ | 1,422,542 | $ | 2,358 | $ | 11,434 | $ | 280 | $ | 1,436,614 |
The following table shows non-accrual loans by class as of December 31, 2019 and 2018:
(dollars in thousands) | December 31, 2019 | December 31, 2018 | ||||||
Commercial real estate | $ | 4,159 | $ | 4,631 | ||||
Construction and land development | - | - | ||||||
Commercial and industrial | 3,087 | 3,661 | ||||||
Owner occupied real estate | 3,337 | 1,188 | ||||||
Consumer and other | 1,062 | 861 | ||||||
Residential mortgage | 768 | - | ||||||
Total | $ | 12,413 | $ | 10,341 |
If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $548,000, $498,000, and $590,000, for 2019, 2018, and 2017, 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.
The following table summarizes information with regard to outstanding troubled debt restructurings at December 31, 2019 and 2018:
(dollars in thousands) | Number of Loans | Accrual Status | Non- Accrual Status | Total TDRs | ||||||||||||
December 31, 2019 | ||||||||||||||||
Commercial real estate | 1 | $ | 6,173 | $ | - | $ | 6,173 | |||||||||
Construction and land development | - | - | - | - | ||||||||||||
Commercial and industrial | - | - | - | - | ||||||||||||
Owner occupied real estate | - | - | - | - | ||||||||||||
Consumer and other | - | - | - | - | ||||||||||||
Residential mortgage | - | - | - | - | ||||||||||||
Total | 1 | $ | 6,173 | $ | - | $ | 6,173 | |||||||||
December 31, 2018 | ||||||||||||||||
Commercial real estate | 1 | $ | 6,316 | $ | - | $ | 6,316 | |||||||||
Construction and land development | - | - | - | - | ||||||||||||
Commercial and industrial | 3 | - | 1,224 | 1,224 | ||||||||||||
Owner occupied real estate | 1 | - | 242 | 242 | ||||||||||||
Consumer and other | - | - | - | - | ||||||||||||
Residential mortgage | - | - | - | - | ||||||||||||
Total | 5 | $ | 6,316 | $ | 1,466 | $ | 7,782 |
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.
There were no loan modifications made during the twelve months ended December 31, 2019 and 2018 that met the criteria of a TDR.
After a loan is determined to be a TDR, we continue to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the year ended December 31, 2019. There were three TDRs that subsequently defaulted during the year ended December 31, 2018.
There was one residential mortgage in the process of foreclosure as of December 31, 2019. There were no residential mortgages in the process of foreclosure at December 31, 2018. There was no other real estate owned relating to residential real estate at December 31, 2019 and 2018.
6. | Other Real Estate Owned
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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, 2021 | December 31, 2020 | December 31, 2019 | |||||||||
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
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A summary of premises and equipment is as follows:
(dollars in thousands) | December 31, 2021 | December 31, 2020 | ||||||
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.
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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.
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The following is a breakdown, by contractual maturities of the Company’s time deposits for the years 2022 through 2026.
(dollars in thousands) | 2022 | 2023 | 2024 | 2025 | 2026 | 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.
(dollars in thousands) | 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
Certificates of Deposit | $ | 170,562 | $ | 50,079 | $ | 1,130 | $ | 1,071 | $ | 737 | $ | - | $ | 223,579 |
Certificates of deposit of $250,000 or more totaled $146.8 million and $104.6 million at December 31, 2019 and 2018, respectively.
Deposits of related parties totaled $103.0 million and $102.7 million at December 31, 2019 and 2018, respectively. Brokered deposits totaled $1.0 million and $18.6 million at December 31, 2019 and 2018 respectively. Overdrafts totaled $540,000 and $277,000 at December 31, 2019 and 2018, respectively.
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The provision (benefit) for income taxes for the years ended December 31, 2021, 2020, and 2019 consists of the following:
(dollars in thousands) | 2021 | 2020 | 2019 | |||||||||
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) | 2021 | 2020 | 2019 | |||||||||
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) | 2021 | 2020 | ||||||
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.
The Company
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. 113 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.
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.
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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.
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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.
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. 117 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:
118 The following table presents an analysis of the activity in the SBA servicing assets for the years ended December 31, 2021, 2020, and 2019:
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:
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:
119 The table below presents additional quantitative information about Level 3 assets measured at fair value (dollars in thousands):
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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