REPUBLIC FIRST BANCORP INC - Annual Report: 2021 (Form 10-K)

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.  Forward-looking statements, which are statements other than statements of historical fact, can be identified by words such as “believes,” “expects,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “should,” “could,” “would,” “will,” “confident,” “may,” “can,” “potential,” “possible,” “proposed,” “target,” “pursue,” “outlook,” “maintain,” or similar expressions, or when we discuss our guidance, strategy, goals, vision, mission, opportunities, projections or intentions.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, and in addition to the “Risk Factors” discussed elsewhere in this Form 10-K or included in other documents that we file with the SEC from time to time, risks or uncertainties can arise with changes in or related to:

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s beliefs only as of the date hereof.  Except as required by applicable law or regulation, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.  Significant factors which could have an adverse effect on the operations and future prospects of the Company are detailed in the “Risk Factors” section included under Item 1A of Part I of this Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K that we will file hereafter, which could cause actual results to differ from those projected.  Readers should carefully review the risk factors included in this Annual Report on Form 10-K and in other documents the Company files from time to time with the SEC.

General

Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank, and is referred to as “Republic” or the “Bank” throughout this document.  Republic offers a variety of credit and depository banking services. Such services are offered to individuals and businesses primarily in the Greater Philadelphia, Southern New Jersey, and the New York City areas through offices and branches in Philadelphia, Bucks, Delaware, and Montgomery Counties in Pennsylvania, Atlantic, Burlington, Camden, and Gloucester Counties in New Jersey, and New York County in New York.

Historically, our primary objective had been to position ourselves as an alternative to the large financial institutions for commercial banking services in the Greater Philadelphia and Southern New Jersey region. However, in 2008, we made a strategic shift in our business approach, redirecting our efforts toward the creation of a major retail bank that would meet an important need in our existing marketplace. Focused on delivering high levels of customer service and satisfaction, driving innovation, developing a bold brand and creating shareholder value, Republic Bank sought to offer a banking experience that would turn customers into Fans. As other banks began to turn toward automation for growth, Republic Bank took a different approach and chose not only to embrace advances in technology, but to also define itself by the personal touch.

An important part of that strategic shift toward creating a retail and customer focused bank was the decision in 2010 to rebrand our stores from Republic First Bank to Republic Bank, which had been the name under which we had initially incorporated and operated from 1988-1996. In support of that rebrand, we also renovated and remodeled the majority of our existing branches, which we refer to and operate as stores.  Further, we embraced critical service changes that reframed the Republic Bank brand and experience in the eyes of the consumer to include expanded hours, absolutely free checking, free coin counting, no ATM surcharges, mobile banking and much more.

From a lending perspective, we also shifted away from our historic approach, which was primarily focused on business banking and isolated commercial lending transactions, in particular commercial real estate loans.  While restructuring our loan portfolio and deemphasizing the origination of commercial real estate loans, we also undertook a detailed review of our more significant credit relationships. This review allowed us to reduce exposure, enhance our allowance for loan loss methodology and commit to originate fewer commercial real estate loans in an effort to reduce our credit concentrations in that particular category.

With these significant changes implemented, Republic Bank was then well-positioned to execute an aggressive expansion plan which was given the title, “The Power of Red is Back.” To support this growth strategy, we issued $45 million of common stock through a private placement offering in April 2014, which provided the necessary capital to begin our aggressive expansion plan.

During 2016, we expanded our product offerings through the addition of a residential mortgage lending team. We acquired Oak Mortgage Company in July 2016, which has been fully integrated and is now a division of the Bank. The acquisition of Oak Mortgage allows us to provide our customers with opportunities in the residential lending market.

To strengthen our capital position and prepare for the next stage of growth and expansion, we issued $100 million of our common stock through a registered direct offering in December 2016.

Republic has also become one of the top small business lenders in its market as proven by its performance during 2020 and 2021 in the Paycheck Protection Program (“PPP”) authorized by the CARES Act. Republic originated nearly $1 billion in PPP loans to 7,650 local businesses providing critical funding during an unprecedented economic crisis caused by the COVID-19 pandemic. This culminated in Republic Bank being named “America’s #1 Bank for Service” by Forbes based on a survey conducted during 2020.

In August 2020, we issued $50 million of convertible preferred stock to strengthen our capital position and support our aggressive growth plan. As we expand our footprint we take all steps required to ensure that we do not lose focus on our commitment to extraordinary levels of customer service and satisfaction. In 2020, we expanded our store network by building our signature glass building at new locations in Northfield, New Jersey and Bensalem, Pennsylvania and in 2021 in Deptford, New Jersey. It is our goal to deliver best in class service across all delivery channels including not only our physical store locations, but online and mobile options as well. We continue to make investments in digital and technology tools as we strive to maintain our position as “America’s #1 Bank for Service”.

As of December 31, 2021, we had total assets of approximately $5.6 billion, total shareholders’ equity of approximately $324.2 million, total deposits of approximately $5.2 billion, net loans receivable of approximately $2.5 billion, and net income of $25.2 million with net income of $21.7 million available to common shareholders for the year ended December 31, 2021. We have one reportable segment: community banking. The community bank segment primarily encompasses the commercial loan and deposit activities of Republic, as well as residential mortgage and other consumer loan products in the area surrounding its stores. We provide banking services through the Bank, and do not presently engage in any activities other than traditional banking activities.

Republic Bank

Republic First Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania, and is subject to examination and comprehensive regulation by the Federal Deposit Insurance Corporation (the “FDIC”) and the Pennsylvania Department of Banking and Securities. Republic First Bank is a subsidiary of Republic First Bancorp, Inc. Republic First Bank does business under the name of Republic Bank. The deposits held by the Bank are insured, up to applicable limits, by the Deposit Insurance Fund of the FDIC.

Service Area / Market Overview

Our primary service area currently consists of Greater Philadelphia, Southern New Jersey, and New York City. We presently conduct our principal banking activities through 32 branch locations, which we refer to as “stores” throughout this document to reflect our retail-oriented approach to customer service and convenience. Thirteen of these stores are located in Philadelphia and the surrounding suburbs of Plymouth Meeting, Wynnewood, Abington, Media, Fairless Hills, Feasterville, and Bensalem in Pennsylvania. There are seventeen stores located in the Southern New Jersey market in Haddonfield, Voorhees, Glassboro, Marlton, Berlin, Washington Township, Moorestown, Sicklerville, Medford, Cherry Hill, Gloucester Township, Evesboro, Somers Point, Lumberton, Northfield, and Deptford. There are two stores located in New York City at 14^th Street & 5^th Avenue and 51^st Street & 3^rd Avenue. Our commercial lending activities extend beyond our primary service area, to include other counties in Pennsylvania, New Jersey, and New York as well as parts of Delaware, Maryland, and other out-of-market opportunities. Our residential lending activities also extend outside of our primary service area, to include other counties in Pennsylvania, New Jersey, and New York, in addition to other states such as Delaware and Florida.

As of June 30, 2021, the Corporation ranked 17^th out of 105 financial institutions with a 0.70% deposit market share in Philadelphia-Camden-Wilmington, PA-NJ-DE-MD Metropolitan Statistical Area with 30 stores according to data provided by FDIC Market Share Data.

Competition

We face substantial competition from other financial institutions in our service area.  Competitors include Wells Fargo, Capital One, Citizens, PNC, Santander, TD Bank, and Bank of America, as well as many regional and local community banks. In addition, we compete directly with savings banks, savings and loan associations, finance companies, credit unions, mortgage brokers, insurance companies, securities brokerage firms, mutual funds, money market funds, private lenders, non-bank lenders and other financial and non-financial institutions for deposits, commercial loans, mortgages and consumer loans, as well as other services.  Competition is based upon a number of factors, including the quality of services rendered, interest rates offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the convenience of facilities, locations and hours of operation, the availability of mobile and internet resources and, in the case of loans to larger commercial borrowers, applicable lending limits. Many of the institutions with which we compete have greater financial resources than we do and offer a wider range of deposit and lending products.

Our legal lending limit to one borrower was approximately $51.2 million at December 31, 2021.  Loans above this amount may be made if the excess over the lending limit is participated to other institutions.  We are subject to potential intensified competition from new branches of established banks in the area as well as new banks that could open in our market area.  There are banks and other financial institutions, which serve surrounding areas, and additional out-of-state financial institutions, which currently, or in the future, may compete in our market. We compete to attract deposits and loan applications both from customers of existing institutions and from customers new to our market and we anticipate a continued increase in competition in our service area.

We believe that an attractive niche exists serving small- to medium-sized business customers not adequately served by our larger competitors, and we will seek opportunities to build commercial relationships to complement our retail strategy.  We believe small to medium-sized businesses will continue to respond in a positive manner to the attentive and highly personalized service we provide.

Products and Services

We offer a range of competitively priced banking products and services, including consumer and commercial deposit accounts, which include checking accounts, interest-bearing demand accounts, money market accounts, certificates of deposit, savings accounts, sweep accounts, and individual retirement accounts. We also offer other traditional banking services, such as secured and unsecured commercial loans, real estate loans, construction and land development loans, automobile loans, home improvement loans, mortgages, home equity and overdraft lines of credit, lockbox services, and other products.  We attempt to offer a high level of personalized service to both our retail and commercial customers.

We also maintain a Small Business Lending team that specializes in the origination of loans guaranteed by the U.S. Small Business Administration (“SBA”) to provide credit to small businesses throughout our service area. This team has consistently been one of the top lenders under the SBA program in our region. For the last several years they have been ranked as one of the top SBA lenders in the tri-state market of Pennsylvania, New Jersey and Delaware based on the dollar volume of loan originations.

We are currently members of the STAR™ and PLUS™ automated teller (ATM) networks, and Allpoint – America’s Largest Surcharge Free ATM Network, which enable us to provide our customers with free access to more than 55,000 ATMs worldwide. We currently have 34 proprietary ATMs located in our store network.

Our lending activities generally are focused on small- and medium-sized businesses within the communities that we serve. Commercial real estate loans represent the largest category within our loan portfolio, amounting to approximately 31% of total loans outstanding at December 31, 2021. Repayment of these loans is, in part, dependent on general economic conditions affecting our customers and various businesses within the community. As a lender, we are subject to credit risk. Economic and financial conditions could have an adverse effect on the ability of our borrowers to repay their loans. To manage the challenges that the economic environment may present we have adopted a conservative loan classification system, continually review and enhance our allowance for credit loss methodology, and perform a comprehensive review of our loan portfolio on a regular basis.  

As a result of the addition of Oak Mortgage Company in 2016, we are able to offer residential mortgage loan products to customers throughout our footprint. Our residential mortgage lending activities also extend to geographies outside of our primary service area. A majority of the residential loans originated are currently sold on the secondary market shortly after closing. Oak Mortgage follows the established underwriting policies and guidelines of third-party vendors with whom loans are being sold to maintain compliance, but credit risk still exists in the portfolio. Repayment of residential loans held in the portfolio is, in part, dependent on general economic conditions affecting our customers.  

Although management follows established underwriting policies and closely monitors loans through Republic’s loan review officer, credit risk is still inherent in the portfolio. The majority of Republic’s loan portfolio is collateralized with real estate or other collateral; however, a portion of the commercial portfolio is unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit unsecured financing.  Republic originates both fixed and variable rate commercial loans with terms typically ranging from one to five years. Variable rate loans are generally tied to the national prime rate of interest.

Store Expansion Plans and Growth Strategy

During 2021, we opened a new store in Deptford, New Jersey utilizing our distinctive glass prototype building. The Bank anticipates the continuation of its expansion strategy in 2022. However, as previously announced, the pace of new store openings has and will continue to slow as we deal with the challenging nature of the pandemic, other economic headwinds, including inflation, and the current interest rate environment which may result in compression of the net interest margin. Relocation of other existing store locations may also occur in the future as we continue to enhance our brand and focus on constantly improving the customer experience. The opening or relocation of any store is subject to regulatory approval.

Securities Portfolio 

We maintain an investment securities portfolio.  We purchase investment securities that are in compliance with our investment policies, which are approved annually by our Board of Directors.  The investment policies address such issues as permissible investment categories, credit quality, maturities and concentrations.  At December 31, 2021 and 2020, approximately 95% and 91%, respectively, of the aggregate dollar amount of the investment securities consisted of either U.S. government debt securities or U.S. government agency issued mortgage-backed securities and commercial mortgage obligations. Credit risk associated with these U.S. government debt securities and the U.S. government agency mortgage-backed securities and commercial mortgage obligations is minimal, with risk-based capital weighting factors of 0% and 20%, respectively. The remainder of the securities portfolio consists of municipal securities, corporate bonds, and preferred stock.

Supervision and Regulation

General

Republic, a Pennsylvania state-chartered bank, is not a member of the Federal Reserve System (“Federal Reserve”) and, consequently, is subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking and Securities. Our bank holding company is subject to supervision and regulation by the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). We are subject to extensive requirements and restrictions under federal and state law, including restrictions on the types and amounts of loans that may be originated and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various federal and state consumer laws and regulations also affect the operations of Republic. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the Federal Reserve attempting to control the money supply and credit availability in order to influence market interest rates and the national economy.

The following discussion summarizes certain banking laws and regulations that affect us and Republic. The discussion is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on the Company and the Bank.

Regulation of Republic

Powers and Activities.  The Pennsylvania Banking Code of 1965 (“Banking Code”) contains detailed provisions governing the organization, lending and deposit-taking activities, borrowings, investment authority, branching, payment of dividends, and rights and responsibilities of directors, officers, employees and depositors of Pennsylvania banks. The Banking Code delegates extensive rulemaking power and administrative discretion to the Pennsylvania Department of Banking and Securities in its supervision and regulation of state-chartered banks.

Under federal law, all state-chartered FDIC-insured banks are generally limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations.

The FDIC is also authorized to permit state banks to engage in state authorized activities and investments not permissible for national banks (other than non-subsidiary equity investments) if they meet applicable capital requirements and it is determined that such activities or investments do not pose a risk to the FDIC Deposit Insurance Fund.

Capital Adequacy. Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets ratio of 8%, and a 4% Tier 1 capital to total assets leverage ratio.

For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain non-cumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt.

Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions, such as ours, that have exercised an opt-out election regarding the treatment of accumulated other comprehensive income, up to 45% of net unrealized gains on available for sale equity securities with readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

In determining the amount of risk-weighted assets for calculating risk-based capital ratios, all assets, including certain off-balance sheet assets, are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one-to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements.

In assessing an institution’s capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions where deemed necessary.

Institutions that have less than $10 billion in total consolidated assets and meet other qualifying criteria may elect to use the optional community bank leverage ratio framework, which requires maintaining a leverage ratio of greater than 8.5% for calendar year 2021 and 9% thereafter, to satisfy the regulatory capital requirements, including the risk-based requirements. Eligible institutions may opt in and out of the community bank leverage ratio framework on their quarterly call reports. Republic did not elect to follow the community bank leverage ratio as of December 31, 2021.

Republic is also subject to capital requirements promulgated by the Pennsylvania Department of Banking and Securities, which generally incorporate federal leverage and risk-based capital requirements.

At December 31, 2021, Republic exceeded all regulatory capital requirements.

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0% or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity Tier 1 ratio of less than 4.5%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after such status is triggered.

Republic is considered “well capitalized” under the FDIC’s prompt corrective action rules.

Transactions with Related Parties. Transactions between a bank and its affiliates are limited by Sections 23A and 23B of the Federal Reserve Act, applicable to FDIC-insured state non-member banks by Section 18(j) of the Federal Deposit Insurance Act (“FDIA”), and its implementing regulations. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies that are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. In addition, loans or other extensions of credit by the institution to its affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.

Republic’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act, applicable to FDIC-insured state nonmember banks by Section 18(j) of the FDIA, and Regulation O of the Federal Reserve, generally applicable to FDIC-supervised institutions by Section 337.3 of the FDIC Rules and Regulations. Among other things, these provisions generally require that extensions of credit to insiders:

•     be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and

•     not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by Republic’s Board of Directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.

Loans to One Borrower Limitations. In accordance with the Banking Code, a Pennsylvania bank, with certain limited exceptions, may not lend to a single borrower, on an unsecured basis, an amount that together with all other indebtedness to that borrower would exceed 15% of its capital accounts, which is defined in the Banking Code as the aggregate of capital, surplus, undivided profits, capital securities and reserve for loan losses of the institution.

Regulatory Restrictions on Dividends. Dividend payments by Republic to the Company are subject to the Banking Code and the FDIA. Under the Banking Code, no dividends may be paid except from “accumulated net earnings” (generally, undivided profits). Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under the Banking Code, Republic would be limited to $83.5 million of dividends payable plus an additional amount equal to its net profit for 2022, up to the date of any such dividend declaration. However, dividends would be further limited to maintain capital ratios as discussed in “Capital Adequacy.”

Federal regulatory authorities have adopted standards for the maintenance of adequate levels of regulatory capital by banks. Adherence to such standards further limits the ability of Republic to pay dividends to us.

Federal Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the FDIC. The general maximum deposit insurance amount is $250,000 per depositor.

Assessments for most insured depository institutions are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of failure within three years. The assessment range (inclusive of possible adjustments) for institutions of Republic’s size is 1.5 basis points to 30 basis points of total assets less tangible equity.

The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Republic. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of the Bank’s deposit insurance.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), every insured depository institution, including Republic, has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and to merge with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance. Republic’s latest FDIC CRA rating, dated August 12, 2020, was “Outstanding.”

Federal Home Loan Bank System. Republic is a member of the Federal Home Loan Bank (“FHLB”) of Pittsburgh, which is one of eleven regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. As a member of the FHLB of Pittsburgh, Republic is required to acquire and hold a specified amount of shares of capital stock in the FHLB. As of December 31, 2021, Republic was in compliance with this requirement.

Holding Company Regulation

General. As a bank holding company, we are subject to examination, regulation, and periodic reporting under the BHC Act, as administered by the Federal Reserve. We are required to obtain the prior approval of the Federal Reserve to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve approval would be required for us to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.

Activities. A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve has determined by regulation to be closely related to banking are: (1) making or servicing loans; (2) performing certain data processing services; (3) providing securities brokerage services; (4) acting as fiduciary, investment or financial advisor; (5) leasing personal or real property under certain conditions; (6) making investments in corporations or projects designed primarily to promote community welfare; and (7) acquiring a savings association.

The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository institutions subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. We have not elected to become a “financial holding company.”

Consolidated Capital Requirements. Bank holding companies with consolidated assets of $3 billion or more are subject to consolidated regulatory capital requirements that are as stringent as those applicable to subsidiary depository institutions. We are in compliance with the bank holding company capital requirements, and the capital conservation buffer, as of December 31, 2021.

Source of Strength. The Federal Reserve’s policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks where necessary.

Dividends. The Federal Reserve has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.

Under the prompt corrective action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. Federal Reserve guidance provides for consultation with and nonobjection by the Federal Reserve prior to the payment of dividends, and stock redemptions or repurchases, under certain circumstances. These regulatory policies could affect our ability to pay dividends, repurchase shares of our common stock or otherwise engage in capital distributions.

Dividend Policy. We have not paid any cash dividends on our common stock, and have no current plans to pay any cash dividends in the foreseeable future. We paid $3.5 million and $923,000 in preferred stock dividends during the years ended December 31, 2021 and 2020, respectively. See Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for more information.

Pennsylvania Holding Company Regulation. In addition to the federal holding company regulation, as a Pennsylvania incorporated bank holding company, we are also subject to various restrictions on our activities as set forth in Pennsylvania law.

Federal Securities Laws

Our common stock is registered with the SEC under the Exchange Act. We are, therefore, subject to information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporation information. We have policies, procedures and systems designed to ensure compliance with these regulations.

Legislative and Regulatory Changes 

We are heavily regulated by regulatory agencies at the federal and state levels. We, like most of our competitors, have faced and expect to continue to face increased regulation and regulatory and political scrutiny, which creates significant uncertainty for us as well as the financial services industry in general.

Future Legislative and Regulatory Developments

It is conceivable that compliance with current or future legislative and regulatory initiatives could require us to change certain business practices, impose significant additional costs on us, limit the products that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value of assets that we hold or otherwise adversely affect our business, results of operations, or financial condition. The extent of changes imposed by any future regulatory initiatives could make it more difficult for us to comply in a timely manner, which could further limit our operations, increase compliance costs or divert management attention or other resources. The long-term impact of legislative and regulatory initiatives on our business practices and revenues will depend upon the successful implementation of our strategies, consumer behavior, and competitors’ responses to such initiatives, all of which are difficult to predict. Additionally, we may pursue, through appropriate avenues, legislative and regulatory advocacy to provide our input on possible legislative and regulatory developments.

Profitability, Monetary Policy and Economic Condition

In addition to being affected by general economic conditions, the earnings and growth of Republic will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking and Securities, the FDIC, and the Federal Reserve. An important function of the Federal Reserve is to regulate the supply of money and other credit conditions in order to manage interest rates. The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of Republic cannot be determined.

Employees

As of December 31, 2021, we had a total of 556 employees, including 525 full-time employees.

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:

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above, or other factors, could materially and adversely affect our business, financial condition, results of operations and prospects.

Risks Related to our Lending Activities

We are subject to credit risk in connection with our lending activities, and our financial condition and results of operations may be negatively impacted by economic conditions and other factors that adversely affect our borrowers.

Our financial condition and results of operations are affected by the ability of our borrowers to repay their loans, and in a timely manner.  Lending money is a significant part of our banking business.  Borrowers, however, do not always repay their loans.  The risk of non-payment is assessed through our underwriting and loan review procedures based on several factors including credit risks of a particular borrower, changes in economic conditions, the duration of the loan, and in the case of a collateralized loan, uncertainties as to the future value of the collateral and other factors.  Despite our efforts, we do and will experience loan losses, and our financial condition and results of operations will be adversely affected. Our non-performing assets were approximately $12.5 million at December 31, 2021. Our allowance for loan losses was approximately $19.0 million at December 31, 2021. Our loans between 30-89 days delinquent totaled $9.6 million at December 31, 2021.

Our concentration of commercial real estate loans could result in increased loan losses and costs of compliance.

At December 31, 2021, commercial real estate loans totaled $780.3 million, or 31.0% of our loan portfolio. Given their larger balances and the complexity of the underlying collateral, commercial real estate loans generally have more risk than the single-family residential loans that we originate. Because the repayment of commercial real estate loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. If we foreclose on these loans, our holding period for the collateral typically is longer than for a single-family residential property because there are fewer potential purchasers of the collateral. In addition, commercial real estate loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to single-family residential loans. Accordingly, charge-offs on commercial real estate loans may be larger on a per loan basis than those incurred by our single-family residential real estate or consumer loan portfolios.

The commercial real estate market is cyclical and poses risks of loss to us because of the concentration of commercial real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a concentration.  Banking regulators have been giving and continue to give commercial real estate lending greater scrutiny, and banks with larger commercial real estate loan portfolios are expected by their regulators to implement improved underwriting, internal controls, risk management policies and portfolio stress-testing practices to manage risks associated with commercial real estate lending.  In addition, commercial real estate lenders are making greater provisions for credit losses and accumulating higher capital levels as a result of commercial real estate lending exposures.  Additional losses or regulatory requirements related to our commercial real estate loan concentration could materially adversely affect our business, financial condition and results of operations.

Our allowance for credit losses may not be adequate to absorb actual loan losses, and we may be required to make further provisions for credit losses and charge off additional loans in the future, which could materially and adversely affect our business.

We maintain an allowance for credit losses, established through a provision for credit losses accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio.  If our allowance for credit losses is inadequate, it may have a material adverse effect on our financial condition and results of operations.

The determination of the allowance for credit losses involves a high degree of subjectivity and judgment and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for credit losses. Increases in nonperforming loans have a significant impact on our allowance for credit losses.  Our allowance for credit losses may not be adequate to absorb actual loan losses. If trends in the real estate markets were to deteriorate, we could experience increased delinquencies and credit losses, particularly with respect to real estate construction and land acquisition and development loans and one-to four-family residential mortgage loans. As a result, we may have to make provisions for credit losses and charge off loans in the future, which could materially adversely affect our financial condition and results of operations. 

In addition to our internal processes for determining loss allowances, bank regulatory agencies periodically review our allowance for credit losses and may require us to increase the provision for credit losses or recognize further loan charge-offs, based on judgments that differ from those of our management.  Any increases in our allowance for credit losses will result in a decrease in net income and capital, and may have a material adverse effect on our financial condition, results of operations and cash flows.

Our mortgage banking revenue and the value of our mortgage servicing rights can be volatile.

In 2021, we originated $579.8 million residential mortgage loans and sold $398.7 million of those loans to investors in the secondary market. The residential mortgage business is highly competitive, and highly susceptible to changes in market interest rates, consumer confidence levels, employment statistics, the capacity and willingness of secondary market purchasers to acquire and hold or securitize loans, and other factors beyond our control.

Because we sell a substantial number of the mortgage loans we originate, the profitability of our mortgage banking business also depends in large part on our ability to originate a high volume of loans and sell them in the secondary market at a gain. In fact, as rates rise, we expect (1) the demand for mortgage loans to fall thereby reducing loan origination volume and (2) increasing industry-wide competitive pressures reducing our pricing margins, both of which would reduce our mortgage revenues. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (1) the existence of an active secondary market and (2) our ability to profitably sell loans or securities into that market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations.

Our ability to originate and sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by government-sponsored entities (“GSEs”) and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. We are highly dependent on these purchasers continuing their mortgage purchasing programs. Additionally, because the largest participants in the secondary market are Ginnie Mae, Fannie Mae and Freddie Mac, GSEs whose activities are governed by federal law, any future changes in laws that significantly affect the activity of these GSEs could, in turn, adversely affect our operations. In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. government. The federal government has for many years considered proposals to reform Fannie Mae and Freddie Mac, but the results of any such reform, and their impact on us, are difficult to predict. To date, no reform proposal has been enacted.

We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition.

We sell a large portion of the mortgage loans that we originate. When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to purchasers, guarantors and insurers, including the GSEs, about the mortgage loans and the manner in which they were originated. Whole loan sale agreements require that we repurchase or substitute mortgage loans or indemnify buyers against losses in the event we breach these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan, resulting in these mortgage loans being placed on our books and subjecting us to the risk of a potential default. A subsequent sale of a repurchased mortgage loan could be at a significant discount to the unpaid principal balance. The Company maintains a reserve for repurchased loans. If repurchase and indemnity demands increase and such demands are valid claims and are in excess of our provision for potential losses, our liquidity, results of operations and financial condition may be adversely affected.

We may be exposed to environmental liabilities with respect to real estate that we have or had title to in the past.

A significant portion of our loan portfolio is secured by real property. In the course of our business, we may foreclose, accept deeds in lieu of foreclosure, or otherwise acquire real estate in connection with our lending activities. We also acquire real estate in connection with our store expansion plans and growth strategy. As a result, we could become subject to environmental liabilities with respect to these properties.  We may become responsible to a governmental agency or third parties for property damage, personal injury, investigation and clean-up costs incurred by those parties in connection with environmental contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical releases at a property. The costs associated with environmental investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.  Although we have policies and procedures to perform an environmental review before acquiring title to any real property, these may not be sufficient to detect all potential environmental hazards.  If we were to become subject to significant environmental liabilities, it could materially and adversely affect us.

Risks Related to Accounting and Disclosure Matters

We are required to make significant estimates and assumptions in the preparation of our financial statements, including our allowance for loan losses, and our estimates and assumptions may not be accurate.

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or “GAAP,” require our management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of income and expense during the reporting periods.  These estimates and assumptions are subject to substantial risk and uncertainty.  Materially different results may occur as circumstances change and additional information becomes known.  The critical estimates are made by management in determining, among other things, the allowance for loan losses and the realization of deferred income taxes.  If our underlying estimates and assumptions prove to be incorrect, our financial condition and results of operations may be materially adversely affected.

Our assets as of December 31, 2021 included a deferred tax asset and we may not be able to realize the full amount of such asset.

We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 2021, the net deferred tax asset was $14.2 million, compared to a balance of $12.0 million at December 31, 2020.

We regularly review our deferred tax assets for recoverability to determine whether it is more likely than not (i.e. likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded.  These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.

Based on the analysis of the available positive and negative evidence, we determined that a valuation allowance should not be recorded as of December 31, 2021. We used projections of future taxable income, exclusive of reversing temporary timing differences and carryforwards, as a factor to project recoverability of the deferred tax asset balance. There can be no assurance as to when or whether we will be in a position to fully recapture the benefits of our deferred tax asset.  Further discussion on the analysis of our deferred tax asset can be found in the “Provision (Benefit) for Income Taxes” section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our failure to maintain an effective system of internal control over financial reporting and disclosure controls and procedures related to the structure and operations of our corporate governance may result in current and potential shareholders losing confidence in our financial reporting and disclosures and could subject us to regulatory scrutiny.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial reporting.

As part of our ongoing monitoring of internal and disclosure controls for the year ended December 31, 2021, we discovered material weaknesses in our internal and disclosure controls that required remediation.  See “Item 9A. Controls and Procedures.”  Effective internal controls and disclosure controls and procedures are necessary for us to provide reliable financial reports and disclosures to shareholders, to prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports and disclosures or prevent fraud, our business may be adversely affected, our reputation and operating results could be harmed could and our current and potential shareholders and customers could lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business.

Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal control over financial reporting, are subject to lapses in judgment and breakdowns resulting from human failures.  Controls can also be circumvented by collusion or improper management override.  Because of such limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected and that information may not be reported on a timely basis.  If our controls are not effective, it could have a material adverse effect on our financial condition, results of operations, and market for our common stock, and could subject us to regulatory scrutiny.

Management concluded there were deficiencies in the Company’s internal control over financial reporting that represented material weaknesses in the Company’s internal control over financial reporting as of December 31, 2021, including from a failure to maintain an effective control environment, which resulted in deficiencies in the communication of certain relevant information to the Board of Directors of the Company, including information related to branch expenditures. While the material weaknesses did not result in a misstatement of the Company’s financial statements, effective internal controls and disclosure controls and procedures are necessary for us to provide reliable financial reports and disclosures to shareholders, to prevent fraud and to operate successfully as a public company. If we cannot provide reliable financial reports and disclosures or prevent fraud, our business may be adversely affected, our reputation and operating results could be harmed and our current and potential shareholders and customers could lose confidence in our financial reporting and disclosure required under the Exchange Act, which could adversely affect our business. For more information, see “Item 9A: Disclosure Controls and Procedures.”

Continued delays in the filing of our periodic reports with the SEC could impact our listing on Nasdaq, which would materially and adversely affect our stock price, financial condition and/or results of operations.

As a result of an independent review concerning related party transactions, the Company’s internal controls, and the associated financial statement and disclosure implications, and the evaluation of such independent review by the Company’s Audit Committee and management and by the Company’s independent registered public accounting firm in connection with the audit of the Company’s financial statements as of an for the year ended December 31, 2021, we were unable to file this Annual Report on Form 10-K with the SEC on a timely basis. We have not filed our Quarterly Reports on Forms 10-Q for the quarters ended March 31, 2022 and June 30, 2022, which were due in May 2022 and August 2022, respectively. Nasdaq Listing Rule 5250(c)(1) requires listed companies to timely file all required periodic financial reports with the SEC. If we are not able to file our delinquent Quarterly Reports on Form 10-Q, our common stock may be subject to delisting by Nasdaq.

Risks Related to our Business

Our results of operations may be materially and adversely affected by other-than-temporary impairment charges relating to our investment portfolio.

In prior years we recorded other-than-temporary impairment charges for certain bank pooled trust preferred securities, and we may be required to record future impairment charges on our investment securities if they suffer declines in value that we determine are other-than-temporary. Numerous factors, including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing information for investment securities, adverse changes in the business climate, adverse regulatory actions or unanticipated changes in the competitive environment, could have a negative effect on our investment portfolio in future periods. If an impairment charge is significant enough, it could affect the Bank’s ability to pay dividends, which could materially adversely affect us. Significant impairment charges could also negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized” for regulatory purposes.

A significant percentage of our assets is invested in securities, which typically have a lower yield than our loan portfolio.

Our results of operations depend substantially on our net interest income. At December 31, 2021, 50.7% of our assets were invested in investment securities and cash and cash equivalents. These investments yield substantially less than the loans we hold in our portfolio. While we intend to invest a greater proportion of our assets in loans with the goal of increasing our net interest income, we may not be able to increase originations of loans that are acceptable to us. Further, at December 31, 2021, $1.7 billion, or 60.7%, of our securities portfolio was designated as held to maturity. As a result, we are unable to sell these securities to respond to changes in interest rates that may occur in the future.

Unfavorable economic and financial market conditions may adversely affect our financial position and results of operations.

Economic pressure on consumers and businesses, the impact of inflation, any resulting lack of confidence in the financial markets, the ongoing impact of COVID-19 and the responses thereto, risks related to the conflict between Ukraine and Russia, including, but not limited to, the impact from, and compliance with, economic sanctions, and concerns surrounding the long term fiscal position of the United States may adversely affect our business, financial condition, results of operations and stock price. A worsening of current economic conditions would likely exacerbate the adverse effects of market conditions on us and others in the industry. In particular, we may face the following risks in connection with these events:

Our business is concentrated in and dependent upon the continued growth and welfare of our primary market area.

Our primary service area consists of Greater Philadelphia, Southern New Jersey, and New York City.  Our success depends upon the business activity, population, income levels, deposits and real estate activity in this area.  Although our customers’ businesses and financial interests may extend well beyond this area, adverse economic conditions that affect our primary service area could reduce our growth rate, affect the ability of our customers to repay their loans to us, and generally adversely affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.

A transition away from the London Interbank Offered Rate ("LIBOR") as a reference rate for financial instruments could negatively affect our income and expenses and the value of various financial instruments.

LIBOR is used extensively in the United States and globally as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which may stop reporting such information after 2021. On July 27, 2017, the United Kingdom's Financial Conduct Authority ("FCA") announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. On November 30, 2020, to facilitate an orderly LIBOR transition, the OCC, the FDIC, and the Federal Reserve Board jointly announced that entering into new contracts using LIBOR as a reference rate after December 31, 2021 would create a safety and soundness risk. On March 5, 2021, the FCA announced that all LIBOR settings will either cease to be provided by any administrator or no longer be representative immediately after December 31, 2021, in the case of 1-week and 2-month LIBOR, and immediately after June 30, 2023, in the case of the remaining LIBOR settings. In the United States, efforts to identify a set of alternative U.S. dollar reference interest rates are ongoing, and the Alternative Reference Rate Committee ("ARRC") has recommended the use of a Secured Overnight Funding Rate ("SOFR"). SOFR is different from LIBOR in that it is a backward-looking secured rate rather than a forward-looking unsecured rate.

There are operational issues, which may create a delay in the transition to SOFR or other substitute indices, leading to uncertainty across the industry. These consequences cannot be entirely predicted and could have an adverse impact on the market value for or value of LIBOR-linked securities, loans, derivatives over loans and other financial obligations or extensions of credit.

Risks Related to Market Interest Rates

Our net interest income, net income and results of operations are sensitive to fluctuations in interest rates.

Our net income depends on the net income of Republic, and Republic is dependent primarily upon its net interest income, which is the difference between the interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings.

Our results of operations will be affected by changes in market interest rates and other economic factors beyond our control.  If our interest-earning assets have longer effective maturities than our interest-bearing liabilities, the yield on our interest-earning assets generally will adjust more slowly than the cost of our interest-bearing liabilities, and, as a result, our net interest income generally will be adversely affected by material and prolonged increases in interest rates, and positively affected by comparable declines in interest rates.  Conversely, if liabilities re-price more slowly than assets, net interest income would be adversely affected by declining interest rates, and positively affected by increasing interest rates.  At any time, our assets and liabilities will reflect interest rate risk of some degree.

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A decline in interest rates generally results in increased prepayments of loans and mortgage-backed and related securities as borrowers refinance their debt to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Furthermore, an inverted interest rate yield curve, where short-term interest rates (which are usually the rates at which financial institutions borrow funds) are higher than long-term interest rates (which are usually the rates at which financial institutions lend funds for fixed-rate loans) can reduce a financial institution’s net interest margin and create financial risk for financial institutions that originate longer-term, fixed-rate mortgage loans.

In addition to affecting interest income and expense, changes in interest rates also can affect the value of our interest-earning assets, comprising fixed and adjustable-rate instruments, as well as the ability to realize gains from the sale of such assets.  Generally, the value of fixed-rate instruments fluctuates inversely with changes in interest rates, and changes in interest rates may therefore have a material adverse effect on our results of operations.

Risks Related to our Business Strategy

Potential acquisitions may disrupt our business and dilute shareholder value.

We regularly evaluate opportunities to acquire and invest in banks and in other complementary businesses. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could involve a number of additional risks, including the risks of:

We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and maintain our market value.

We may not be able to manage our growth, which may adversely impact our financial results.

As part of our retail growth strategy, we may expand into additional communities or attempt to strengthen our position in our current markets by opening new stores and acquiring existing branches of other financial institutions.  To the extent that we undertake additional stores openings and acquisitions, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. Other effects of engaging in such growth strategies may include potential diversion of our management’s time and attention and general disruption to our business.

As part of our retail strategy, we plan to open new stores in our primary service area, including Southern New Jersey, the Greater Philadelphia area, and New York City. We may not, however, be able to identify attractive locations on terms favorable to us, obtain regulatory approvals, or hire qualified management to operate new stores.  In addition, the organizational and overhead costs may be greater than we anticipate.  New stores may take longer than expected to reach profitability, or may not become profitable.  The additional costs of starting new stores may adversely impact our financial results.

Our ability to manage growth successfully will depend on whether we can continue to fund our growth while maintaining cost controls, as well as on factors beyond our control, such as national and regional economic conditions and interest rate trends.  If we are not able to control costs, such growth could adversely impact our earnings and financial condition.

Our retail strategy relies heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.

In recent years, we have been successful in attracting new and talented employees to our management team.   We believe that our ability to successfully execute our growth strategy will require us to retain and attract additional management experienced in banking and financial services, and familiar with the communities in our market.  Our ability to retain executive officers, the current management team, branch managers and loan officers of Republic will continue to be important to the successful implementation of our strategy.  It is also critical, as we grow, to be able to attract and retain additional members of the management team and qualified loan officers with the appropriate level of experience and knowledge about our market areas to implement the community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and results of operations.

If we want to, or are compelled to, raise additional capital in the future, that capital may not be available to us when it is needed or on terms that are favorable to us or current shareholders.

Federal banking regulators require us, and Republic, to maintain capital to support our operations.  Regulatory capital ratios are defined and required ratios are established by laws and regulations promulgated by banking regulatory agencies.  At December 31, 2021, our regulatory capital ratios were above “well capitalized” levels under current bank regulatory guidelines. To be “well capitalized,” banking companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Common Equity Tier 1 ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, and a total risk-based capital ratio of at least 10%. Regulators, however, may require us, or Republic, to maintain higher regulatory capital ratios. 

We may need to raise additional capital in the future to provide us with sufficient capital resources to meet our commitments and business needs. We may also at some point need to raise additional capital to support our continued growth. Our ability to raise additional capital in the future will depend on conditions in the capital markets at that time, which are outside of our control, on our financial performance and on other factors. Accordingly, we may not be able to raise additional capital on terms and time frames acceptable to us, or at all.  If we cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient amounts may adversely affect our operations, financial condition and results of operations.  Our ability to raise capital could also be impaired by factors that are nonspecific to us, such as disruption of the financial markets or negative news and expectations about the prospects for the financial services industry.  If we raise capital through the issuance of additional shares of our common stock or other securities, we would dilute the ownership interests of existing shareholders, and could dilute the per share book value and earnings per share of our common stock.  Furthermore, a capital raise through issuance of additional shares may have an adverse impact on our stock price.

Risks Related to Laws and Regulations

We are subject to numerous governmental regulations and to comprehensive examination and supervision by regulators, which could have an adverse impact on our operations and could restrict the scope of our operations.         

Both the Company and Republic operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Board of Governors of the Federal Reserve System, the FDIC and the Pennsylvania Department of Banking and Securities (“PDB”). We are subject to federal and state regulations governing virtually all aspects of our activities, including lines of business, capital, liquidity, investments, payment of dividends, and others. Regulations that apply to us are generally intended to provide protection for depositors and customers rather than investors.

We are subject to extensive regulation and supervision under federal and state laws and regulations. See Item 1. Business - Supervision and Regulation. The requirements and limitations imposed by such laws and regulations limit the manner in which we conduct our business, undertake new investments and activities and obtain financing.  Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is within our control. Compliance with these rules could impose additional costs on banking entities and their holding companies.  Management has reviewed the new standards and will continue to evaluate all options and strategies to ensure ongoing compliance with the new standards, notwithstanding Republic’s current status as well-capitalized.

New programs and proposals may subject us and other financial institutions to additional restrictions, oversight and costs that may have an adverse impact on our business, financial condition, results of operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied or enforced. We cannot predict the substance or impact of future legislation, regulation or the application thereof. Compliance with such current and potential regulation and scrutiny may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner.

Any change in regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations. Further, changes in accounting standards can be both difficult to predict and involve judgment and discretion in their interpretation by us and our independent accounting firm. These changes could materially impact, potentially even retroactively, how we report our financial condition and results of operations.

Risks Related to Competition

We face significant competition in our market from other banks and financial institutions.

The banking and financial services industry in our market area is highly competitive.  Many of our competitors have substantially greater resources and higher lending limits than we have and offer certain services that we do not or cannot provide. We may not be able to compete effectively in our markets, which could adversely affect our results of operations.  The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems, and consolidation among financial service providers.  Larger institutions have greater access to capital markets, with higher lending limits and a broader array of services.  Competition may require increases in deposit rates and decreases in loan rates, and adversely impact our net interest margin. Competition also makes it increasingly difficult and costly to attract and retain qualified employees. Our profitability depends upon our continued ability to successfully compete in our market area.

The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks, such as financial technology companies, securities companies and specialty finance companies to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

Risks Related to Operational Matters

We may not have the resources to effectively implement new technologies, which could adversely affect our competitive position and results of operations.

The financial services industry is constantly undergoing technological changes with frequent introductions of new technology-driven products and services.  In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs.  Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand in our market. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.  If we are unable to do so, our competitive position and results of operations could be adversely affected.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors. 

Employee or customer errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee or customer errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

We maintain a system of internal controls and insurance coverage to mitigate operational risks, including data processing system failures and errors, and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, these security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.

Risks Related to our Common Stock

There may be future sales of our common stock, which may materially and adversely affect the market price of our common stock.

We are not restricted from issuing additional shares of our common or preferred stock, including securities that are convertible into or exchangeable or exercisable for shares of our common stock. Our issuance of shares of common stock, preferred stock or securities convertible into or exchangeable or exercisable for our common stock in the future will dilute the ownership interests of our existing shareholders.

Additionally, the sale of substantial amounts of our common stock, whether directly by us or by existing common shareholders in the secondary market, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our common stock could, in turn, materially and adversely affect the market price of our common stock. 

Risks Related to Governance Matters

Our governing documents, Pennsylvania law, and current policies of our Board of Directors contain provisions, which may reduce the likelihood of a change in control transaction, which may otherwise be available and attractive to shareholders.

Our articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more difficult or expensive or may discourage a tender offer, change in control or takeover attempt that is opposed by our Board of Directors.  In particular, the articles of incorporation and bylaws: classify our Board of Directors into three groups, so that shareholders elect only approximately one-third of the Board each year; permit shareholders to remove directors only for cause and only upon the vote of the holders of at least 75% of the voting shares; require our shareholders to give us advance notice to nominate candidates for election to the Board of Directors or to make shareholder proposals at a shareholders’ meeting; require the vote of the holders of at least 75% of our voting shares for shareholder amendments to our bylaws; require the vote of the holders of at least 75% of our voting shares to approve certain business combinations; and restrict the holdings and voting rights of shareholders who would acquire more than 10% of our outstanding common stock without the approval of two-thirds of our Board of Directors.  These provisions of our articles of incorporation and bylaws could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of our shareholders may consider such proposals desirable.  Such provisions could also make it more difficult for third parties to remove and replace the members of our Board of Directors.  Moreover, these provisions could diminish the opportunities for shareholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also prevent increases in the trading price of our common stock that could result from takeover attempts or speculation. 

In addition, anti-takeover provisions in Pennsylvania and federal law could make it more difficult for a third party to acquire control of us. These provisions could adversely affect the market price of our common stock and could reduce the amount that shareholders might receive if we are sold.  For example, Pennsylvania and federal law may restrict a third party’s ability to obtain control of us and may prevent shareholders from receiving a premium for their shares of our common stock.  

Our business could be impacted by a potential proxy contest for the election of directors at our 2022 Annual Meeting of Shareholders.

In December 2021, Driver Management Company LLC (together with its affiliates, the "Activist Investor"), announced the nomination of three candidates for election to our Board of Directors at our 2022 Annual Meeting of Shareholders. A proxy contest with the Activist Investor for the election of directors could result in us incurring substantial costs, including proxy solicitation, public relations, and legal fees. Further, such a proxy contest could divert the attention of our Board of Directors, management, and employees, and may disrupt the momentum in our business and operations, as well as our ability to execute our strategic plan. The actions of the Activist Investor may also create perceived uncertainties as to the future direction of our business or strategy, which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel, and may impact our relationship with investors, vendors, and other third parties. A proxy contest could also impact the market price and the volatility of our common stock.

Item 1B:  Unresolved Staff Comments

None.

Item 2:  Description of Properties

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

Item 3:  Legal Proceedings

The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the normal course of business. While any litigation involves an element of uncertainty, management is of the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and Republic.

On March 8, 2022, George E. Norcross, III, Gregory B. Braca, and Philip Norcross filed a complaint in the Court of Common Pleas of Philadelphia County (Commerce Program) against the Company and Company directors Vernon W. Hill II, Theodore J. Flocco, Jr., Brian Tierney, and Barry Spevak. The complaint seeks, among other things, declaratory and injunctive relief enjoining the Company and the individual defendants from implementing any amendments to the Company’s executive employment agreements until after the Company’s 2022 annual meeting of shareholders or taking any other actions outside the ordinary course of business, including executing or extending any related party agreements or any agreements obligating the incurrence of expenses related to the opening of new branches and the renovation of existing branches, without the affirmative vote of a majority of independent directors.

On March 29, 2022, George E. Norcross, III filed suit in the Philadelphia Court of Common Pleas to compel the Company to make available for inspection the books and records as is required under Pennsylvania law.

As of the date of this filing, Mr. Norcross has filed papers with the Court dismissing the actions without prejudice.

On September 19, 2022, a complaint was filed in the Court of Common Pleas in Philadelphia, Pennsylvania against the Company and its current Interim Chief Executive Officer and director and two other current directors.  The plaintiffs, the former Chairman of the Board and Chief Executive Officer of the Company and a former director of the Company, allege defamation, defamation per se and false light against the three individual defendants and a breach of the plaintiff’s employment agreement by the Company. The complaint seeks certain reimbursement payments and compensatory and punitive damages. The matter is in its early stages and, accordingly, the Company is still assessing the potential outcomes and materiality of the matter.  The Company plans to defend itself vigorously in this matter.

Item 4:  Mine Safety Disclosures

Not applicable.

PART II

Item 5:  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Shares of the Company’s class of common stock are listed on the Nasdaq Global Market under the symbol “FRBK.” As of October 18, 2022, there were approximately 100 registered shareholders of Republic First Bancorp, Inc. common stock.  Most shares are held in “nominee” or “street name” and accordingly, the number of beneficial owners of those shares is not known or included in the previous number.

Dividend Policy

The Company has not paid any cash dividends on its common stock and has no plans to pay cash dividends on its common stock during 2022.  The Company paid $3.5 million during 2021 and $923,000 in non-cumulative preferred stock dividends during 2020. The Company’s ability to pay dividends depends primarily on receipt of dividends from the Company’s subsidiary, Republic. Dividend payments from Republic are subject to legal and regulatory limitations. The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.

Item 6:  [Reserved]

Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the results of operations and financial condition should be read in conjunction with and the consolidated financial statements and the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled, “Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in the forward-looking statements.

Executive Summary

2021 was an incredibly successful year for Republic Bank and the “Power of Red is Back” expansion campaign. We grew assets, loans, and deposits resulting in dramatic improvement in profitability during the year. Earnings improved by nearly 400% year over year as a result of our ongoing effort to drive revenue growth at a greater rate than expense growth.

Financial Highlights

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.

Non-GAAP Based Financial Measures

Our selected financial data contains a non-GAAP financial measure calculated using non-GAAP amounts. This measure is tangible book value per common share. Tangible book value per share adjusts the numerator by the amount of Goodwill and Other Intangible Assets (as a reduction of Shareholders’ Equity). Management uses non-GAAP measures to present historical periods comparable to the current period presentation. Management believes the use of non-GAAP measures provides additional clarity when assessing our financial results and use of equity. Disclosures of this type should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.

The following table provides a reconciliation of tangible book value per common share as of December 31, 2021 and December 31, 2020.

Critical Accounting Policies, Judgments and Estimates

In reviewing and understanding our financial information, you are encouraged to read the significant accounting policies used in preparing the consolidated financial statements. These policies are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. The accounting and financial reporting policies conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including those related to the allowance for loan losses and deferred income taxes.  Management bases its estimates on historical experience and various other factors and assumptions that are believed to be reasonable under the circumstances. These form the basis for making judgments on the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We have identified the policies related to the allowance for loan losses and deferred income taxes as being critical.

Allowance for Loan Losses – The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans.  The reserve for unfunded lending commitments would represent management’s estimate of losses inherent in its unfunded loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary.  The allowance for credit losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.

The allowance for credit losses is an amount that represents management’s estimate of known and inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for credit losses is dependent, to a great extent, on the general economy and other conditions that may be beyond Republic’s control, the estimate of the allowance for credit losses could differ materially in the near term.

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are categorized as impaired.  For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan.  The general component covers non-classified loans and is based on historical loss experience adjusted for several qualitative factors.  An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.

In estimating the allowance for credit losses, management considers current economic conditions, past loss experience, composition of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors.  These qualitative risk factors include:

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status and the probability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, and the borrower’s prior payment record.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value.  The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. 

For commercial, consumer, and residential loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

As a result of the changes in economic conditions related to the COVID-19 pandemic, we increased the qualitative factors for certain components of the allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, relatively low loan-to-value ratios on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP should help mitigate potential future period losses. We will continue to closely monitor all key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic continues to unfold.

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of (i) December 30, 2020 or (ii) 60 days after the President declared a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law which amended certain sections of the CARES Act. This amendment extended the period to suspend the requirements under TDR accounting guidance to the earlier of (i) January 1, 2022 or (ii) 60 days after the President declared a termination of the national emergency related to the COVID-19 pandemic. As of December 31, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the COVID pandemic have resumed contractual payments. At December 31, 2020, twenty-one customers with outstanding balance of $16 million, were deferring loan payments. At December 31, 2020, deferrals were comprised of the following categories: 90 day deferrals amounted to eight customers with outstanding balances of $3 million and second deferrals amounted to thirteen customers with outstanding balances of $13 million.

The general component of the allowance calculation includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified as special mention, substandard, doubtful, or loss are rated pass.

In addition, federal and state regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Management believes the level of the allowance for loan losses at December 31, 2021 was adequate.

The Company adopted CECL effective January 1, 2022. Our implementation process included, among other things, assessment and documentation of governance and reporting processes and related internal controls; model development, documentation and validation; and the incorporation of qualitative adjustments for model limitations. ASU 2016-13 lists several credit loss methods that are acceptable such as a discounted cash flow method, loss-rate method and probability of default/loss given default (“PD/LGD”). We contracted with a third-party vendor to assist us in the application of ASU 2016-13 and utilize various methodologies such as Vintage, Cohort, and Weighted Average Remaining Maturity to estimate the allowance for credit losses. CECL and the resulting impact are discussed in more detail throughout the document.

Income Taxes – Management makes estimates and judgments to calculate various tax liabilities and determine the recoverability of various deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are inherently subjective. Historically, management’s estimates and judgments to calculate the deferred tax accounts have not required significant revision.

In evaluating our ability to recover deferred tax assets, management considers available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. Any reduction in estimated future taxable income may require management to record a valuation allowance against the deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on future earnings.

Results of Operations

For the year ended December 31, 2021 as compared to the year ended December 31, 2020

We reported net income of $25.2 million, or $0.33 per diluted share, for the twelve months ended December 31, 2021 compared to net income of $5.1 million, or $0.07 per diluted share, for the twelve months ended December 31, 2020. Earnings in 2021 were positively impacted by the Company’s focus on driving revenue growth and limiting expense growth through cost control initiatives.

Net interest income for the twelve months ended December 31, 2021 increased $37.4 million to $129.2 million as compared to $91.8 million for the twelve months ended December 31, 2020. Growth in net interest income was a result of an increase in interest income of $32.9 million and a reduction in interest expense of $4.5 million. The increase in interest income of $32.9 million, or 29%, was driven by an increase in average interest-earning assets, primarily investment securities and loans receivable. Interest expense decreased $4.5 million, or 20%, primarily due to a decrease in the rate on average interest-bearing liabilities. The net interest margin increased by 18 basis points to 2.69% during the twelve months ended December 31, 2021 compared to 2.51% during the twelve months ended December 31, 2020.

We recorded a loan loss provision of $5.8 million, an increase of $1.6 million for the twelve months ended December 31, 2021 compared to a provision of $4.2 million during the twelve months ended December 31, 2020. The increase was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment, the nature of and concentration in certain credit types within the loan portfolio and loan growth for the period.

Non-interest income decreased $3.5 million to $32.7 million during the twelve months ended December 31, 2021 as compared to $36.2 million during the twelve months ended December 31, 2020. The decrease was primarily driven by a decrease in mortgage banking income and gains on the sale of investment securities partially offset by an increase in service fees on deposit accounts and gains on the sale of SBA loans during the twelve months ended December 31, 2021.

Non-interest expenses increased $5.1 million to $122.5 million during the twelve months ended December 31, 2021 as compared to $117.4 million during the twelve months ended December 31, 2020. The increase was primarily driven by higher salaries, employee benefits, occupancy, and equipment expenses associated with our expansion strategy, offset by a goodwill impairment charge of $5.0 million in 2020.

Return on average assets and average equity were 0.50% and 7.92%, respectively, during the twelve months ended December 31, 2021 compared to 0.13% and 1.86%, respectively, for the twelve months ended December 31, 2020.

Average Balances and Net Interest Income

Historically, our earnings have depended primarily upon Republic’s net interest income, which is the difference between interest earned on interest‑earning assets and interest paid on interest‑bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest‑earning assets and interest‑bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, a non-GAAP measure, using a rate of 21% in 2021, 21% in 2020, and 21% in 2019.

Average Balances and Net Interest Income

⁽¹⁾ Yields on investments are calculated based on amortized cost.

⁽²⁾ Net interest income and net interest margin are presented on a tax-equivalent basis, a Non-GAAP measure.  Net interest income has been increased over the financial statement amount by $532, $585, and $539 in 2021, 2020, and 2019, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.

Rate/Volume Analysis of Changes in Net Interest Income

Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates. Net interest income and net interest margin are presented on a tax equivalent basis.

Net Interest Income and Net Interest Margin

Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the twelve months ended December 31, 2020 increased by $14.1 million, or 18%, over twelve months ended December 31, 2019. Interest income on interest-earning assets totaled $115.5 million for the twelve months ended December 31, 2020, an increase of $10.1 million, compared to $105.4 million for the twelve months ended December 31, 2019. The increase in interest income was the result of an increase in average interest-earning balances, primarily loans receivable during 2020, offset by a decrease in the average yield on interest-earning assets. Loan growth was driven by continued success with our expansion strategy driving new customer relationships, in addition to our participation in the PPP loan program. Origination fees paid by the SBA on PPP loans are also recognized as interest income over the life of the loans.  We recognized approximately $6.8 million of origination fees related to PPP loans during the twelve-month period ended December 31, 2020. Growth in loan balances and corresponding interest income helped offset the decline in interest income driven by a lower rate environment, including interest income associated with the investment securities portfolio. A decline in mortgage interest rates resulted in a sharp increase in prepayment speeds on mortgage-backed securities held in our portfolio which caused acceleration in the amortization of premiums related to those investments.

Total interest expense for the twelve months ended December 31, 2021 decreased $4.5 million, or 20%, to $18.6 million from $23.1 million for the twelve months ended December 31, 2020. Interest expense on deposits decreased by $4.4 million, or 19%, for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 due to lower interest rates, which was partially offset by an increase in deposit balances during 2021. Interest expense on other borrowings decreased by $114,000 for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 due to a 10 basis point decrease in the average rate on other borrowings and an $8.1 million decrease in the average balance.

Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 2.52% during the twelve months ended December 31, 2021 versus 2.26% during the twelve months ended December 31, 2020. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. For the twelve months ended December 31, 2021 and 2020, the fully tax-equivalent net interest margin was 2.69% and 2.51%, respectively. The improvement in the net interest margin was primarily the result of the increase in interest income and a decline in the cost of funds.

Provision for Loan Losses

We recorded a provision for loan losses of $5.8 million, an increase of $1.6 million, for the twelve months ended December 31, 2021 compared to a $4.2 million provision for the twelve months ended December 31, 2020. The provision recorded for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020 was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment, the nature of and concentration in certain credit types within the loan portfolio and loan growth for the period.

Non-performing assets as a percentage of total assets declined to 0.24% as of December 31, 2021 compared to 0.28% as of December 31, 2020. This is the seventh consecutive year that this ratio has declined. Net (recoveries) charge-offs as a percentage of average loans also declined during 2021.

Non-Interest Income 

Total non-interest income for the twelve months ended December 31, 2021 decreased by $3.5 million, or 10%, compared to the twelve months ended December 31, 2020. Mortgage banking income totaled $12.0 million for the twelve months ended December 31, 2021, a decrease of $5.6 million, compared to $17.6 million for the twelve months ended 2020. A decrease in the volume of residential mortgage loans originated, which was primarily due to higher market interest rates, which led to a decline in refinancing activity, which drove the decrease in mortgage banking income. We recognized gains of $2,000 on the sale or call of securities during the twelve months ended December 31, 2021, a decrease of $2.8 million, compared to gains of $2.8 million on the sales or calls of securities for the twelve months ended December 31, 2020. For the twelve months ended December 31, 2021, service fees on deposit accounts totaled $14.0 million, which represents an increase of $2.9 million compared to the twelve months ended December 31, 2020. This increase was driven by growth in customer deposit accounts and transaction volume as we continue with our growth and expansion strategy. Gains on the sale of SBA loans totaled $3.2 million for the twelve months ended December 31, 2021, an increase of $1.5 million, compared to $1.7 million for the twelve months ended December 31, 2020. Loan and servicing fees totaled $3.0 million for the twelve months ended December 31, 2021, which represents an increase of $39,000 compared to the twelve months ended December 31, 2020.

Non-Interest Expenses

Non-interest expenses increased by $5.1 million, or 4%, for the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020. An explanation of changes of non-interest expenses for certain categories is presented in the following paragraphs.

Salary expenses and employee benefits for the twelve months ended December 31, 2021 increased by $3.0 million, or 5%, compared to the twelve months ended December 31, 2020. The increase was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores. There were 32 stores open as of December 31, 2021 compared to 31 stores open at December 31, 2020. 

Occupancy expense, including depreciation and amortization expense, increased by $1.3 million, or 6%, for the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020, also as a result of our continuing growth and expansion strategy.

Other real estate owned expenses totaled $844,000 during the twelve months ended December 31, 2021, an increase of $385,000, when compared to the twelve months ended December 31, 2020. This increase was a result of higher costs to carry foreclosed assets during the twelve months ended December 31, 2020.

No goodwill impairment was booked during the twelve months ended December 31, 2021. Goodwill impairment totaled $5.0 million during the twelve months ended December 31, 2020 related to the purchase of Oak Mortgage Company in 2016. During the third quarter of 2020 a goodwill impairment analysis was completed, which concluded that a write-off was required. All goodwill on the balance sheet was written off as a result of this one-time, non-cash charge.

All other non-interest expenses for the twelve months ended December 31, 2021 increased $5.4 million compared to the twelve months ended December 31, 2020. Increases in expenses related to data processing, professional fees, regulatory assessments and costs, other taxes, and legal were mainly associated with our growth strategy.

One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of non-interest expenses to average assets. For purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the twelve months ended December 31, 2021, the ratio was 2.41% compared to 2.97% for the twelve months ended December 31, 2020, respectively. The decrease in this ratio was mainly due to the increase in average assets and the goodwill impairment charge recognized in 2020, which did not recur in 2021.

Another productivity measure utilized by management is the operating efficiency ratio. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio was 76% for the twelve months ended December 31, 2021, compared to 92% for the twelve months ended December 31, 2020. The decrease for the twelve months ended December 31, 2021 versus the twelve months ended December 31, 2020 was due to net interest income and non-interest income increasing at a faster rate than non-interest expenses.

Provision (Benefit) for Income Taxes

We recorded a provision for income taxes of $8.5 million for the twelve months ended December 31, 2021 compared to a provision for income taxes of $1.4 million for the twelve months ended December 31, 2020. The effective tax rates for both the twelve-month period ended December 31, 2021 and 2020 was 25% and 22%.

The Company evaluates the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.

In assessing the need for a valuation allowance, the Company carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.

The Company is in a four-year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets has occurred over the last several years and is expected to continue. The Company has added fourteen store locations in the past five years and since the inception of the growth and expansion strategy in 2014, almost every new store location has met or exceeded growth expectations. The success of the expansion strategy, combined with the stabilization of interest rates and continued loan growth, are expected to continue to support improvement in profitability. As of December 31, 2021, the Company has no federal NOLs to carry forward, which would have potentially been at risk of expiring in the future.

Conversely, the effects of the COVID-19 pandemic to the local and global economy may result in a significant increase in future loan loss provisions and charge-offs. Rising interest rates and a downturn in the economy could significantly decrease the volume of mortgage loan originations and have a negative impact on asset quality.

Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), the Company believed that the positive evidence considered at December 31, 2021 outweighed the negative evidence and that it was more likely than not that all of the Company’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was not required at December 31, 2021.

The net deferred tax asset balance was $12.0 million as of December 31, 2020 and $12.6 million as of December 31, 2019. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability. 

Preferred Dividends

Preferred dividends of $3.5 million and $923,000 were declared and paid on preferred stock during the twelve months ended December 31, 2021 and 2020.

Net Income and Net Income per Common Share

The net income available to shareholders for the twelve months ended December 31, 2021 was $21.7 million, compared to net income of $4.1 million for the twelve months ended December 31, 2020. For the twelve months ended December 31, 2021 and 2020, basic net income per common share was $0.37 and $0.07, respectively, and diluted net income per common share was $0.33 and $0.07, respectively.

Return on Average Assets and Average Equity

Return on average assets (ROA) measures our net income in relation to our total average assets. The ROA for the twelve months ended December 31, 2021 was 0.50% compared to 0.13%, for the twelve months ended December 31, 2020.  Return on average equity (ROE) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing net income by average stockholders’ equity. The ROE for the twelve months ended December 31, 2021 was 7.92%, compared to 1.86% for the twelve months ended December 31, 2020.

Results of Operations

For the year ended December 31, 2020 as compared to the year ended December 31, 2019

We reported net income of $5.1 million, or $0.07 per diluted share, for the twelve months ended December 31, 2020 compared to a net loss of $3.5 million, or $0.06 per diluted share, for the twelve months ended December 31, 2019. Earnings in 2020 were positively impacted by our participation in the PPP program and the Company’s focus on cost control initiatives and revenue growth.

Net interest income for the twelve months ended December 31, 2020 increased $14.0 million to $91.8 million as compared to $77.8 million for the twelve months ended December 31, 2019. Growth in net interest income of $14.0 million was a result of an increase in interest income of $10.1 million and a reduction in interest expense of $3.9 million. The increase in interest income of $10.1 million, or 10%, was driven by an increase in average interest-earning assets, primarily loans receivable, offset by a decrease in the rate of average interest-earning assets. Interest expense decreased $3.9 million, or 15%, primarily due to a decrease in the rate on average interest-bearing liabilities. The net interest margin decreased by 34 basis points to 2.51% during the twelve months ended December 31, 2020 compared to 2.85% during the twelve months ended December 31, 2019.

We recorded a loan loss provision of $4.2 million, an increase of $2.3 million for the twelve months ended December 31, 2020 compared to a provision of $1.9 million during the twelve months ended December 31, 2019. The increase was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment caused by the impact of the COVID-19 pandemic.

Non-interest income increased $12.5 million to $36.2 million during the twelve months ended December 31, 2020 as compared to $23.7 million during the twelve months ended December 31, 2019. The increase was primarily driven by an increase in mortgage banking income, higher loan and servicing fees, an increase in service fees on deposit accounts, and gains on sale of investment securities during the twelve months ended December 31, 2020.

Non-interest expenses increased $12.9 million to $117.4 million during the twelve months ended December 31, 2020 as compared to $104.5 million during the twelve months ended December 31, 2019. The increase was primarily driven by a one-time charge for goodwill impairment and higher salaries, employee benefits, occupancy, and equipment expenses associated with the addition of new stores related to our expansion strategy.

Return on average assets and average equity were 0.13% and 1.86%, respectively, during the twelve months ended December 31, 2020 compared to (0.12%) and (3.41%), respectively, for the twelve months ended December 31, 2019.

Net Interest Income and Net Interest Margin

Net interest income, on a fully tax-equivalent basis for the twelve months ended December 31, 2020 increased by $14.1 million, or 18%, over twelve months ended December 31, 2019. Interest income on interest-earning assets totaled $115.5 million for the twelve months ended December 31, 2020, an increase of $10.1 million, compared to $105.4 million for the twelve months ended December 31, 2019. The increase in interest income was the result of an increase in average interest-earning balances, primarily loans receivable during 2020, offset by a decrease in the average yield on interest-earning assets. Loan growth was driven by continued success with our expansion strategy driving new customer relationships, in addition to our participation in the PPP loan program. Origination fees paid by the SBA on PPP loans are also recognized as interest income over the life of the loans. We recognized approximately $6.8 million of origination fees related to PPP loans during the twelve-month period ended December 31, 2020. Growth in loan balances and corresponding interest income helped offset the decline in interest income driven by a lower rate environment, including interest income associated with the investment securities portfolio. A decline in mortgage interest rates resulted in a sharp increase in prepayment speeds on mortgage-backed securities held in our portfolio which caused acceleration in the amortization of premiums related to those investments.

Total interest expense for the twelve months ended December 31, 2020 decreased $3.9 million, or 15%, to $23.1 million from $27.1 million for the twelve months ended December 31, 2019. Interest expense on deposits decreased by $3.5 million, or 13%, for the twelve months ended December 31, 2020 versus the twelve months ended December 31, 2019 due to lower rates offset by increases in average deposit balances. Lower interest rates were caused by actions taken by the Federal Reserve Bank during the first quarter of 2020 in response to the onset of the COVID-19 pandemic. Interest expense on other borrowings decreased by $423,000 for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 due primarily to a decrease in the average rate on other borrowings.

Our net interest rate spread on a fully tax-equivalent basis was 2.26% during the twelve months ended December 31, 2020 versus 2.54% during the twelve months ended December 31, 2019. For the twelve months ended December 31, 2020 and 2019, the fully tax-equivalent net interest margin was 2.51% and 2.85%, respectively. Compression in the net interest margin was primarily driven by a 70 basis point decrease in the yield on interest earning assets resulting from the lower interest rate environment and fixed rate 1.00% loans generated through PPP lending.

Provision for Loan Losses

We recorded a provision for loan losses of $4.2 million, an increase of $2.3 million, for the twelve months ended December 31, 2020 compared to a $1.9 million provision for the twelve months ended December 31, 2019. The provision recorded for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019 was primarily driven by the uncertainty surrounding the economic environment as a result of the impact of the COVID-19 pandemic. Qualitative factors in the calculation of the provision for loan losses were adjusted to account for this uncertainty. While the U.S. government has taken swift action to provide stimulus and implement programs to support the economy, the long-term impact of the effect on the economy remains uncertain.

Non-performing assets as a percentage of total assets declined to 0.28% as of December 31, 2020 compared to 0.42% as of December 31, 2019. This is the sixth consecutive year that this ratio has declined. Net charge-offs as a percentage of average loans also declined during 2020.

Non-Interest Income 

Total non-interest income for the twelve months ended December 31, 2020 increased by $12.5 million, or 53%, compared to the twelve months ended December 31, 2019. Mortgage banking income totaled $17.6 million for the twelve months ended December 31, 2020, an increase of $7.5 million, compared to $10.1 million for the twelve months ended 2019. An increase in the volume of residential mortgage loans due to a decline in interest rates drove the increase in mortgage banking income. Loan and servicing fees totaled $2.9 million for the twelve months ended December 31, 2020, which represents an increase of $1.4 million compared to the twelve months ended December 31, 2019. For the twelve months ended December 31, 2020, service fees on deposit accounts totaled $11.1 million, which represents an increase of $3.5 million compared to the twelve months ended December 31, 2019. This increase was driven by growth in customer deposit accounts and transaction volume as we continue with our growth and expansion strategy. We recognized gains of $2.8 million on the sale of securities during the twelve months ended December 31, 2020, an increase of $1.7 million, compared to gains of $1.1 million on the sales of securities for the twelve months ended December 31, 2019. Gains on the sale of SBA loans totaled $1.7 million for the twelve months ended December 31, 2020, a decrease of $1.4 million, versus $3.2 million for the twelve months ended December 31, 2019. Lower origination volumes related to SBA loans was caused by the effects of the COVID-19 pandemic.

Non-Interest Expenses

Non-interest expenses increased by $12.9 million, or 12%, for the twelve months ended December 31, 2020, compared to the twelve months ended December 31, 2019. An explanation of changes of non-interest expenses for certain categories is presented in the following paragraphs.

Salary expenses and employee benefits for the twelve months ended December 31, 2020 increased by $2.4 million, or 4%, compared to the twelve months ended December 31, 2019. The increase was primarily driven by annual merit increases along with increased staffing levels related to our growth strategy of adding and relocating stores. There were 31 stores open as of December 31, 2020 compared to 29 stores open at December 31, 2019. The increase was also a result of higher commissions paid to residential mortgage lenders as a result of growth in the volume of mortgage loan originations.

Occupancy expense, including depreciation and amortization expense, increased by $4.2 million, or 23%, for the twelve months ended December 31, 2020 compared to the twelve months ended December 31, 2019, also as a result of our continuing growth and expansion strategy. The full year impact of the two new stores opened in New York City during 2019 was recognized in 2020.

Other real estate owned expenses totaled $459,000 during the twelve months ended December 31, 2020, a decrease of $1.7 million, when compared to the twelve months ended December 31, 2019. This decrease was a result of lower costs to carry foreclosed assets during the twelve months ended December 31, 2020.

Goodwill impairment totaled $5.0 million during the twelve months ended December 31, 2020. During the third quarter of 2020 a goodwill impairment analysis was completed, which concluded that a write-off was required. All goodwill on the balance sheet, which was related to the acquisition of Oak Mortgage Company in 2016, was written off as a result of this one-time, non-cash charge for goodwill impairment.

All other non-interest expenses for the twelve months ended December 31, 2020 increased $3.0 million compared to the twelve months ended December 31, 2019. Increases in expenses related to data processing, debit card processing, professional fees, and regulatory assessments and costs were mainly associated with our growth strategy.

For the twelve months ended December 31, 2020, the ratio was 2.97% compared to 2.71% for the twelve months ended December 31, 2019, respectively. The increase in this ratio was mainly due to our growth and expansion strategy.

The efficiency ratio was 91.69% for the twelve months ended December 31, 2020, compared to 102.90% for the twelve months ended December 31, 2019. The decrease for the twelve months ended December 31, 2020 versus the twelve months ended December 31, 2019 was due to net interest income and non-interest income increasing at a faster rate than non-interest expenses.

Provision (Benefit) for Income Taxes

We recorded a provision for income taxes of $1.4 million for the twelve months ended December 31, 2020 compared to a benefit of $1.4 million for the twelve months ended December 31, 2019. The effective tax rates for the twelve-month periods ended December 31, 2020 and 2019 were 22% and (28%), respectively. The effect of permanent deductions increases the effective tax benefit percentage when in a pre-tax loss position and decreases the effective tax rate when in a pre-tax income position. The impact of these permanent differences on the effective tax rate is proportional to the level of the non-taxable income in relation to pre-tax income.

The Company evaluates the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management’s evaluation of both positive and negative evidence.

In assessing the need for a valuation allowance, the Company carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.

The Company is in a three-year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets is expected to continue, supported by the capital raise completed during 2020. The ratio of non-performing assets to total assets along with other credit quality metrics continue to improve. A number of cost control measures have been implemented to offset the challenges faced in growing revenue as a result of compression in the net interest margin. The Company has added thirteen store locations in the past four years and since the inception of the growth and expansion strategy in 2014, almost every new store location has met or exceeded expectations. The success of the expansion strategy, combined with the stabilization of interest rates and continued loan growth, are expected to continue to support improvement in profitability going forward. As of December 31, 2020, the Company has no federal NOLs to carry forward which could expire in the future.

Conversely, the Company’s net interest margin declined during 2020 as a result of the challenging interest rate environment. The effects of the COVID-19 pandemic to the local and global economy may result in a significant increase in future loan loss provisions and charge-offs. Rising interest rates and a downturn in the economy could significantly decrease the volume of mortgage loan originations.

Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), the Company believed that the positive evidence considered at December 31, 2020 outweighed the negative evidence and that it was more likely than not that all of the Company’s deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance was not required at December 31, 2020.

The net deferred tax asset balance was $12.0 million as of December 31, 2020 and $12.6 million as of December 31, 2019. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.

Preferred Dividends

Preferred dividends of $923,000 were declared and paid on preferred stock during the twelve months ended December 31, 2020.

Net Income and Net Income per Common Share

The net income available to shareholders for the twelve months ended December 31, 2020 was $4.1 million, compared to a net loss of $3.5 million for the twelve months ended December 31, 2019. For the twelve months ended December 31, 2020, basic and fully diluted net income per common share was $0.07, compared to basic and fully diluted net loss per common share of $0.06 for the twelve months ended December 31, 2019.

Return on Average Assets and Average Equity

The ROA for the twelve months ended December 31, 2020 and 2019 was 0.13% and (0.12%), respectively. Return on average equity The ROE for the twelve months ended December 31, 2020 was 1.86%, compared to (1.41%) for the twelve months ended December 31, 2019.

Financial Condition

December 31, 2021 compared to December 31, 2020

Total assets increased by $560.9 million, or 11%, to $5.6 billion at December 31, 2021, compared to $5.1 billion at December 31, 2020. In addition to our ongoing success with our expansion strategy, the growth in assets was also driven by our participation in the PPP loan program, which resulted in a significant increase in new business relationships and account openings in 2021. A more detailed discussion of changes in the balance sheet accounts can be found in the following paragraphs.

Cash and Cash Equivalents

Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount in these three categories decreased by $656.4 million to $118.9 million at December 31, 2021, from $775.3 million at December 31, 2020. The decrease as of December 31, 2021 was caused by repayment of short-term borrowings in the amount of $633.9 million related to the PPP loan program in 2020.

Loans Held for Sale

Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration (“SBA”) and residential mortgage loans, both of which we intend to sell in the future. Total SBA loans held for sale were $5.2 million and $3.0 million at both December 31, 2021 and December 31, 2020. Residential mortgage loans held for sale amounted to $8.5 million at December 31, 2021, a decrease of $41.8 million, compared to $50.4 million at December 31, 2020. A decrease in the volume of residential mortgage loans during 2021 drove the decrease in residential mortgage loans held for sale as of December 31, 2021. Loans held for sale, as a percentage of our total assets, were less than 1% at December 31, 2021.

Restricted Stock

Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, is carried at cost as of December 31, 2021 and December 31, 2020. As of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”).

At December 31, 2021 and December 31, 2020, the investment in FHLB stock totaled $3.4 million and $2.9 million, respectively. The $471,000 increase was due to a higher required investment in FHLB stock during 2021. At both December 31, 2021 and December 31, 2020, ACBB stock totaled $143,000.

Premises and Equipment

The balance of premises and equipment increased to $127.4 million at December 31, 2021 from $123.2 million at December 31, 2020. The increase was primarily due to premises and equipment expenditures of $12.7 million reduced by depreciation and amortization expense of $8.4 million during 2021. The expenditures made during 2021 primarily relate to the construction of new store locations in addition to normal investments in hardware, software and other operating equipment. A new store was opened in Deptford, New Jersey bringing the total store count to thirty-two at December 31, 2021.

Other Real Estate Owned

The balance of other real estate owned decreased to $360,000 at December 31, 2021 from $1.2 million at December 31, 2020. The decrease was primarily the result of valuation adjustments and dispositions totaling $1.2 million offset by additions of $360,000 during 2021.

Operating Leases – Right of Use Asset

Under ASC 842, the right-of-use asset is valued as the initial amount of the lease liability obligation adjusted for any initial direct costs, prepaid or accrued rent, and any lease incentives. At December 31, 2021 and 2020, the balance of the operating lease right-of-use asset was $75.6 million and $72.9 million, respectively.

Goodwill

In connection with the review of our financial condition in light of the COVID-19 pandemic, we evaluated our assets, including goodwill and other intangibles for potential impairment on an interim basis at the end of each quarter during 2020. Goodwill was written off as a result of an interim test completed as of September 30, 2020. This was a complete write-off of all goodwill on the balance sheet. There was no goodwill on the balance sheet at December 31, 2021 and 2020.

Investment Securities Portfolio

Republic’s investment securities portfolio is intended to provide liquidity and contribute to earnings while diversifying credit risk. We attempt to maximize earnings while minimizing our exposure to interest rate risk. Investment securities available for sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our debt securities consist primarily of U.S. Government agency SBA bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Investment securities available for sale totaled $1.1 billion at December 31, 2021 as compared to $529 million at December 31, 2020. The $547 million increase was primarily due to the purchase of securities totaling $706 million partially offset by the paydowns, maturities, and calls of securities totaling $142 million during 2021. At December 31, 2021, the portfolio had a net unrealized loss of $12 million compared to a net unrealized gain of $1 million at December 31, 2020. The $12.9 million decrease in the unrealized gain/(loss) of the investment portfolio was driven by an increase in market interest rates, which drove a decrease in value of the securities held in our portfolio during 2021.

Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (“SBIC”) and SBA bonds, CMOs and MBSs. The fair value of securities held-to-maturity totaled $1.6 billion and $837.0 million at December 31, 2021 and December 31, 2020, respectively. The $810.4 million increase was primarily due to the purchase of securities held to maturity totaling $1.1 billion partially offset by the paydowns, maturities, and calls of securities held in the portfolio totaling $269.8 million during the year ended December 31, 2021.

ASC 320 “Investments – Debt Securities” requires an entity to determine how to classify a security at the time of acquisition. The appropriateness of the original classification should be reassessed at each reporting period. The transfer of investment securities from available-for-sale to held-to maturity category during the quarter ended December 31, 2018 was completed after an extensive analysis of the characteristics of all securities held in the portfolio, in addition to a review of our liquidity position under multiple scenarios including varying interest rate environments. Twenty-three of the twenty-five securities transferred from available-to-sale to held-to-maturity were collateralized mortgage obligations. Thirteen securities transferred were GNMA collateralized mortgage obligations which are backed by the full faith and credit of the U.S. government. The remaining ten collateralized mortgage obligations were issued by FNMA or FHLMC. Bonds issued by GNMA receive favorable risk rating when calculating regulatory risk-based capital ratios. In addition, GNMA, FNMA, and FHLMC securities are often pledged as collateral as required to hold certain government deposits and are accepted as collateral as a result of the high quality and low-risk nature of these bonds. The other two securities transferred from available-for sale to held-to-maturity were FNMA agency mortgage-backed securities.

After completion of these analyses and consideration of the factors mentioned above, management determined that it had the intent and ability to hold specific securities until maturity and it was appropriate to transfer them to the held-to-maturity category during the fourth quarter of 2018.

The fair value of the securities transferred to the held-to-maturity category was $230.1 million. The book value of the securities on the date of transfer was $239.5 million. The unrealized holding gain or loss on each individual security calculated at the time of transfer was reported as a component of shareholders’ equity in the accumulated other comprehensive income account and will be amortized as an adjustment to yield over the remaining life of each security.

Equity securities consist of investments in the preferred stock of domestic banks. Equity securities are held at fair value. The fair value of equity securities at December 31, 2021 totaled $9.2 million compared to $9.0 million at December 31, 2020.

A summary of investment securities available for sale at fair value, investment securities held-to-maturity, and equity securities at December 31, 2021, 2020, and 2019 is as follows:

The total amortized cost of the investment securities portfolio has grown to $2.7 billion at December 31, 2021 compared to $1.3 billion at December 31, 2020, and $1.2 billion at December 31, 2019. Investment securities represented 49% of total assets at December 31, 2021 and 27% of total assets at December 31, 2020. We evaluate our investment securities portfolio in light of the interest rate environment and changing market conditions and when appropriate, take necessary actions to improve and enhance our overall positioning. We consider the portfolio to be well structured and of high quality. At December 31, 2021, 95% of the portfolio consisted of U.S. government debt securities or U.S. government agency issued mortgage-backed securities which were rated Aaa /AA+ by the major credit rating agencies.

The investment securities portfolio includes investment securities classified as both available for sale and held to maturity and equity securities at fair value.

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally decreases when interest rates rise and increases when interest rates fall. In addition, the fair value generally decreases when credit spreads widen and increases when credit spreads tighten. Net unrealized losses in the investment securities portfolio were $24.5 million at December 31, 2021 compared to net unrealized gains of $23.4 million at December 31, 2020. The decrease was a result of an increase in market interest rates in 2021. The available for sale portfolio had unrealized losses of $11.6 million at December 31, 2021 and unrealized gains of $1.3 million at December 31, 2020. The held to maturity portfolio had unrealized losses of $12.9 million at December 31, 2021 and unrealized gains of $22.0 million at December 31, 2020.

We held four U.S. Government agency securities, 27 collateralized mortgage obligations and sixty-one agency mortgage-backed securities that were in an unrealized loss position at December 31, 2021. Principal and interest payments of the underlying collateral for each of these securities carry minimal credit risk. Management found no evidence of other than temporary impairment (“OTTI”) on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of December 31, 2021.

At December 31, 2021, the investment portfolio included eight municipal securities with a total market value of $6.9 million. These securities are reviewed quarterly for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, we periodically conduct our own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in New Jersey where six municipal securities had a market value of $6.2 million. As of December 31, 2021, management found no evidence of OTTI on any of the municipal securities held in the investment securities portfolio.

At December 31, 2021, the investment portfolio included fifteen corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration. Seven of the fifteen corporate bonds are issued by four of the largest U.S. financial institutions. Each financial institution is well capitalized.

There were no proceeds from the sale of securities during the twelve-month period ended December 31, 2021. A gain of $2,000 was realized on the call of securities. The tax provision applicable to the gain of $2,000 for the year ended December 31, 2021 amounted to $1,000.

Proceeds associated with the sale of securities available for sale in 2020 were $125.2 million. Gross gains of $3.0 million and gross losses of $230,000 were realized on these sales. The tax provision applicable to the net gains of $2.8 million for the year ended December 31, 2020 amounted to $700,000.

Proceeds associated with the sale of securities available for sale in 2019 were $54.7 million. Gross gains of $1.2 million and gross losses of $67,000 were realized on these sales. The tax provision applicable to the net gains of $1.1 million for the year ended December 31, 2019 amounted to $280,000.

The following table presents the maturity distribution and weighted average yield by holding type and year of maturity of our investment securities portfolio at December 31, 2021. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these securities are classified separately with no specific maturity date. Equity securities are at fair value.

Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of our financial instruments; however, there are inherent weaknesses in any estimation technique.  Therefore, for substantially all financial instruments, the fair value estimates herein are not necessarily indicative of the amounts we could have realized in a sale transaction on the dates indicated.  The estimated fair value amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial statements subsequent to those respective dates.  As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each year-end.

We follow the guidance issued under ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair value measurements.

ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

The fair value of securities available for sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.  For certain securities, which are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments, are generally based on available market evidence (Level 3).  In the absence of such evidence, management’s best estimate is used.  Management’s best estimate consists of both internal and external support on certain Level 3 investments.  Internal cash flow models using a present value formula that includes assumptions market participants would use along with indicative exit pricing obtained from broker/dealers (where available) were used to support fair values of certain Level 3 investments.

The types of instruments valued based on matrix pricing in active markets include all of our U.S. government and agency securities, corporate bonds, and municipal obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, we do not adjust the matrix pricing for such instruments.

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows. There was one Level 3 investment security classified as available-for-sale at December 31, 2021. This security is a corporate bond.

The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2021, 2020, and 2019:

The Level 3 investment security classified as available for sale is a corporate bond that is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.

Loan Portfolio

Loans Receivable

The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small- and medium-sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, PPP loans and others. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans typically range between $250,000 and $5 million, but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $51.2 million at December 31, 2021. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit. There were no loans in excess of the legal lending limit at December 31, 2021. A $34 million threshold, which amounts to approximately 10% of total regulatory capital, reflects an additional internal monitoring guideline. We had one loan relationship in excess of $34 million at December 31, 2021. The internal monitoring guideline in place as of December 31, 2020 was $30 million. We had no loan relationships in excess of that guideline at December 31, 2020.

The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and the surrounding suburbs, Southern New Jersey, and New York City. Repayment of our loans is in part dependent upon general economic conditions affecting our market place and specific industries in which our customers operate. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral varies but primarily includes residential, commercial and income-producing properties.

At December 31, 2021, we had loan concentrations exceeding 10% of total loans for credits extended to lessors of nonresidential real estate in the aggregate amount of $509.2 million, which represented 20% of gross loans receivable. Loan concentrations are considered to exist when amounts are loaned to multiple numbers of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. At December 31, 2021, we had no foreign loans outstanding.

Loans decreased $143.9 million, or 5%, to $2.5 billion at December 31, 2021, versus $2.6 billion at December 31, 2020. Loans originated through the PPP loan program continue to be repaid or forgiven by the SBA, which offsets the growth experienced in other categories in the portfolio. Excluding the impact of the PPP loans, which decreased by $517.6 million in 2021, gross loans increased by $374 million, or 18%, to $2.4 billion at December 31, 2021 compared to $2.0 billion at December 31, 2020. We continue to see results from the continued success with our relationship banking model which has driven a steady flow in quality loan demand. We experienced strongest growth in the commercial and industrial, construction and land development, owner-occupied real estate, commercial real estate and residential mortgage categories during 2021.

The following table sets forth gross loans by major categories for the periods indicated:

Total loans, net of deferred loan costs, decreased $138 million, or 5%, to $2.5 billion at December 31, 2021, versus $2.6 billion at December 31, 2020. This decrease was due to a $517.6 million reduction in PPP loans. Excluding the impact of the PPP loan program, loans grew $374 million, or 18%, year over year.

Loan Maturity and Interest Rate Sensitivity

The amount of loans outstanding by category as of the dates indicated, which are due in: (i) one year or less, (ii) more than one year through five years, and (iii) over five years, is shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates.