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REPUBLIC FIRST BANCORP INC - Quarter Report: 2021 September (Form 10-Q)

frbk20210930_10q.htm
 
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2021.

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from ____ to ____.

Commission File Number: 000-17007

Republic First Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

23-2486815

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

  

50 South 16th Street, Philadelphia, Pennsylvania

19102

(Address of principal executive offices)

(Zip code)

215-735-4422

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock

   

FRBK

 

Nasdaq Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☒

Non-Accelerated filer ☐Smaller reporting company ☐

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  ☐    No   ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.

 

Common Stock, $0.01 per share

59,454,998

Title of Class

Number of Shares Outstanding as of November 5, 2021

 

1

 

 

REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

     

Part I: Financial Information

Page

     

Item 1.

Financial Statements

 
 

Consolidated balance sheets as of September 30, 2021 and December 31, 2020 (unaudited)

3

 

Consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020 (unaudited)

4

  Consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020 (unaudited) 5
 

Consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020 (unaudited)

6

 

Consolidated statements of changes in shareholders’ equity for the three and nine months ended September 30, 2021 and 2020 (unaudited)

7

 

Notes to consolidated financial statements (unaudited)

8

     

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

43

     

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

66

     

Item 4.

Controls and Procedures

66

     

Part II: Other Information

 
     

Item 1.

Legal Proceedings

67
     

Item 1A.

Risk Factors

67

     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

67

     

Item 3.

Defaults Upon Senior Securities

67

     

Item 4.

Mine Safety Disclosures

67

     

Item 5.

Other Information

67

     

Item 6.

Exhibits

68

     

Signatures

69

 

2

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2021 and December 31, 2020

(Dollars in thousands, except per share data)

 

  

September 30,

2021

(unaudited)

  

December 31,

2020

 

ASSETS

        

Cash and due from banks

 $15,560  $29,746 

Interest bearing deposits with banks

  368,408   745,554 

Cash and cash equivalents

  383,968   775,300 
         

Investment securities available for sale, at fair value

  880,494   528,508 

Investment securities held to maturity, at amortized cost (fair value of $1,373,183 and $836,972, respectively)

  1,377,253   814,936 

Equity securities

  9,231   9,039 

Restricted stock, at cost

  3,510   3,039 

Mortgage loans held for sale, at fair value

  12,082   50,387 

Other loans held for sale

  4,909   2,983 

Loans receivable (net of allowance for credit losses of $17,218 and $12,975, respectively)

  2,479,796   2,632,367 

Premises and equipment, net

  125,301   123,170 

Other real estate owned, net

  532   1,188 

Accrued interest receivable

  15,080   16,120 

Operating lease right-of-use asset

  76,772   72,946 

Other assets

  36,650   35,752 

Total Assets

 $5,405,578  $5,065,735 

LIABILITIES AND SHAREHOLDERS EQUITY

        

Liabilities

        

Deposits

        

Demand – non-interest bearing

 $1,346,353  $1,006,876 

Demand – interest bearing

  2,162,324   1,776,995 

Money market and savings

  1,265,926   1,043,519 

Time deposits

  197,478   186,361 

Total Deposits

  4,972,081   4,013,751 

Other borrowings

  -   633,866 

Accrued interest payable

  482   926 

Other liabilities

  14,843   20,232 

Operating lease liability

  83,383   77,576 

Subordinated debt

  11,276   11,271 

Total Liabilities

  5,082,065   4,757,622 

Commitments and contingencies (see note 3)

      -  

Shareholders Equity

          

Preferred stock, par value $0.01 per share; liquidation preference $25.00 per share; 10,000,000 shares authorized; share issued 2,000,000 as of September 30, 2021 and December 31, 2020; shares outstanding 2,000,000 as of September 30, 2021 and December 31, 2020

  20   20 

Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,442,998 as of September 30, 2021 and 59,388,623 as of December 31, 2020; shares outstanding 58,914,153 as of September 30, 2021 and 58,859,778 as of December 31, 2020

  594   594 

Additional paid in capital

  324,023   322,321 

Retained earnings / accumulated deficit

  8,388   (8,085)

Treasury stock at cost (503,408 shares as of September 30, 2021 and December 31, 2020)

  (3,725)  (3,725)

Stock held by deferred compensation plan (25,437 shares as of September 30, 2021 and December 31, 2020)

  (183)  (183)

Accumulated other comprehensive loss

  (5,604)  (2,829)

Total Shareholders’ Equity

  323,513   308,113 

Total Liabilities and Shareholders’ Equity

 $5,405,578  $5,065,735 

 

(See notes to consolidated financial statements)

 

3

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands, except per share data)

(unaudited)

 

  

Three Months Ended September 30,

  

Nine Months Ended September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Interest income:

                

Interest and fees on taxable loans

 $26,954  $24,135  $84,453  $65,941 

Interest and fees on tax-exempt loans

  426   548   1,290   1,652 

Interest and dividends on taxable investment securities

  8,128   3,758   21,273   15,612 

Interest and dividends on tax-exempt investment securities

  89   20   242   59 

Interest on federal funds sold and other interest-earning assets

  181   99   294   438 

Total interest income

  35,778   28,560   107,552   83,702 

Interest expense:

                

Demand- interest bearing

  3,165   3,056   9,706   9,333 

Money market and savings

  837   1,613   2,888   4,827 

Time deposits

  281   884   1,245   3,138 

Other borrowings

  53   77   200   293 

Total interest expense

  4,336   5,630   14,039   17,591 

Net interest income

  31,442   22,930   93,513   66,111 

Provision for loan losses

  900   850   3,900   2,800 

Net interest income after provision for loan losses

  30,542   22,080   89,613   63,311 

Non-interest income:

                

Loan and servicing fees

  946   917   2,239   2,152 

Mortgage banking income

  2,397   4,962   9,869   10,809 

Gain on sales of SBA loans

  641   649   2,035   1,567 

Service fees on deposit accounts

  3,283   2,134   10,503   6,166 

Gain on sale of investment securities

  -   279   2   2,760 

Other non-interest income

  50   1,090   624   1,546 

Total non-interest income

  7,317   10,031   25,272   25,000 

Non-interest expenses:

                

Salaries and employee benefits

  14,640   14,596   44,216   41,154 

Occupancy

  3,630   3,560   11,238   10,294 

Depreciation and amortization

  2,059   1,964   6,368   6,081 

Legal

  265   261   776   810 

Other real estate owned

  119   80   710   437 

Appraisal and other loan expenses

  410   619   1,669   1,580 

Advertising

  192   386   482   1,055 

Data processing

  2,472   1,606   5,991   4,747 

Insurance

  304   279   938   836 

Professional fees

  800   679   2,371   2,069 

Debit card processing

  743   915   2,527   2,639 

Regulatory assessments and costs

  904   625   2,511   1,930 

Taxes, other

  978   303   2,083   789 

Goodwill impairment

  -   5,011   -   5,011 

Other operating expenses

  2,259   2,696   7,760   8,084 

Total non-interest expense

  29,775   33,580   89,640   87,516 

Income (loss) before benefit for income taxes

  8,084   (1,469)  25,245   795 

Provision (benefit) for income taxes

  1,988   (503)  6,147   (158)

Net income (loss)

 $6,096  $(966) $19,098  $953 

Preferred stock dividends

  875   -   2,625   - 

Net income (loss) available to common shareholders

 $5,221  $(966) $16,473  $953 

Net income (loss) per share:

                

Basic earnings per common share

 $0.09  $(0.02) $0.28  $0.02 

Diluted earnings per common share

 $0.08  $(0.02) $0.25  $0.02 

 

(See notes to consolidated financial statements)

 

4

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

(unaudited)

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
  

2021

  

2020

  

2021

  

2020

 
                 

Net income (loss)

 $6,096  $(966) $19,098  $953 
                 

Other comprehensive income (loss), net of tax

                
Unrealized gains (losses) on securities (pre-tax ($4,158)($795), $(5,717), and $4,668, respectively)  (3,102)  (593)  (4,265)  3,483 

Reclassification adjustment for securities (gains) (pre-tax ($2), ($279), ($2), and ($2,760), respectively)

  (1)  (208)  (1)  (2,060)

Net unrealized gains (losses) on securities

  (3,103)  (801)  (4,266)  1,423 

Net unrealized holding losses on securities transferred from available-for-sale to held-to-maturity:

                

Amortization of net unrealized holding losses to income during the period (pre-tax $499, $952, $1,998, and $2,006 respectively)

  373   710   1,491   1,498 
                 

Total other comprehensive income (loss)

  (2,730)  (91)  (2,775)  2,921 
                 

Total comprehensive income (loss)

 $3,366  $(1,057) $16,323  $3,874 

 

(See notes to consolidated financial statements)

 

5

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

(unaudited)

 

    Nine Months Ended September 30,  
   

2021

   

2020

 

Cash flows from operating activities

               

Net income

  $ 19,098     $ 953  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Goodwill impairment

    -       5,011  

Provision for loan losses

    3,900       2,800  

Write down of other real estate owned

    670       31  

Depreciation and amortization

    6,368       6,081  

Stock based compensation

    1,562       1,538  

Gain on sale of investment securities

    (2 )     (2,760 )

Fair value adjustments on equity securities

    (192 )     -  

Amortization of premiums on investment securities

    6,394       5,573  

Accretion of discounts on retained SBA loans

    (709 )     (655 )

Fair value adjustments on SBA servicing assets

    545       301  

Proceeds from sales of SBA loans originated for sale

    22,489       22,999  

SBA loans originated for sale

    (22,380 )     (19,294 )

Gains on sales of SBA loans originated for sale

    (2,035 )     (1,567 )

Proceeds from sales of mortgage loans originated for sale

    344,087       289,521  

Mortgage loans originated for sale

    (298,521 )     (312,150 )

Fair value adjustment for mortgage loans originated for sale

    1,920       (1,338 )

Gains on sales of mortgage loans originated for sale

    (9,572 )     (7,590 )

Amortization of debt issuance costs

    5       5  

Non-cash expense related to leases

    249       448  

Net decrease (increase) in accrued interest receivable and other assets

    1,392       (8,149 )

Net (decrease) increase in accrued interest payable and other liabilities

    (4,563 )     6,004  

Net cash provided by (used in) operating activities

    70,705       (12,238 )
                 

Cash flows from investing activities

               

Purchase of investment securities available for sale

    (464,868 )     (166,622 )

Purchase of investment securities held to maturity

    (764,947 )     (208,230 )

Proceeds from the sale of securities available for sale

    -       125,222  

Proceeds from the paydown, maturity, or call of securities available for sale

    104,147       144,057  

Proceeds from the paydown, maturity, or call of securities held to maturity

    201,255       160,964  

Net purchase of restricted stock

    (471 )     (1,043 )

Net decrease (increase) in loans

    149,212       (880,763 )

Net proceeds from sale of other real estate owned

    155       586  

Premises and equipment expenditures

    (8,499 )     (13,159 )

Net cash used in investing activities

    (784,016 )     (838,988 )
                 

Cash flows from financing activities

               

Net proceeds from issuance of preferred stock

    -       48,325  

Net proceeds from exercise of stock options

    140       33  

Net increase in demand, money market and savings deposits

    947,213       926,726  

Net increase (decrease) in time deposits

    11,117       (20,283 )

Net (repayment) increase in other borrowings

    (633,866 )     646,267  

Preferred stock dividends paid

    (2,625 )     -  

Net cash provided by financing activities

    321,979       1,601,068  
                 

Net increase in cash and cash equivalents

    (391,332 )     749,842  

Cash and cash equivalents, beginning of year

    775,300       168,319  

Cash and cash equivalents, end of period

  $ 383,968     $ 918,161  
                 

Supplemental disclosures

               

Interest paid

  $ 13,595     $ 17,238  

Income taxes paid

  $ 8,540     $ -  

Addition to other real estate owned

  $ 168     $ -  

 

(See notes to consolidated financial statements)

 

6

 

 

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders Equity

For the Three and Nine Months Ended September 30, 2021 and 2020

(Dollars in thousands)

(unaudited)

 

  

Preferred

Stock

  

Common

Stock

  

Additional

Paid in

Capital

  

Retained

Earnings /

Accumulated Deficit

  

Treasury

Stock

  

Stock Held by Deferred Compensation Plan

  

Accumulated Other Comprehensive Loss

  

Total Shareholders Equity

 
                                 

Balance July 1, 2021

 $20  $594  $323,442  $3,167  $(3,725) $(183) $(2,874) $320,441 
                                 

Net income

              6,096               6,096 

Preferred stock dividends paid (1)

              (875)              (875)

Other comprehensive loss, net of tax

                          (2,730)  (2,730)

Stock based compensation

          532                   532 

Options exercised (28,000 shares)

          49                   49 
                                 

Balance September 30, 2021

 $20  $594  $324,023  $8,388  $(3,725) $(183) $(5,604) $323,513 
                                 

Balance January 1, 2021

 $20  $594  $322,321  $(8,085) $(3,725) $(183) $(2,829) $308,113 
                                 

Net income

              19,098               19,098 

Preferred stock dividends paid (2)

              (2,625)              (2,625)

Other comprehensive loss, net of tax

                          (2,775)  (2,775)

Stock based compensation

          1,562                   1,562 

Options exercised (54,375 shares)

          140                   140 
                                 

Balance September 30, 2021

 $20  $594  $324,023  $8,388  $(3,725) $(183) $(5,604) $323,513 
                                 

Balance July 1, 2020

 $-  $594  $273,118  $(10,297) $(3,725) $(183) $(4,329) $255,178 
                                 

Net loss

              (966)              (966)

Other comprehensive loss, net of tax

                          (91)  (91)

Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675

  20       48,305                   48,325 

Stock based compensation

          482                   482 

Options exercised (5,000 shares)

          10                   10 
                                 

Balance September 30, 2020

 $20  $594  $321,915  $(11,263) $(3,725) $(183) $(4,420) $302,938 
                                 

Balance January 1, 2020

 $-  $594  $272,039  $(12,216) $(3,725) $(183) $(7,341) $249,168 
                                 

Net income

              953               953 

Other comprehensive income, net of tax

                          2,921   2,921 

Proceeds from shares issued under preferred stock offering (2,000,000 shares) net of offering costs of $1,675

  20       48,305                   48,325 

Stock based compensation

          1,538                   1,538 

Options exercised (13,000 shares)

          33                   33 
                                 

Balance September 30, 2020

 $20  $594  $321,915  $(11,263) $(3,725) $(183) $(4,420) $302,938 

 

 

(1)

Dividends per share of $0.44 were declared and paid on preferred stock for the three months ended September 30, 2021

 

(2)

Dividends per share of $1.32 were declared and paid on preferred stock for the nine months ended September 30, 2021

 

(See notes to consolidated financial statements)

 

7

 

Republic First Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

 

 

Note 1: Basis of Presentation

 

Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly-owned subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”). Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia, Southern New Jersey, and New York City markets through its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington, Atlantic, Gloucester, and New York Counties. In 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, Florida, and New York. In 2018, Oak Mortgage was merged into Republic and restructured as a division of Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection with its sponsorship of two separate issuances of trust preferred securities.

 

The Company and Republic encounter vigorous competition for market share in the geographic areas they serve from bank holding companies, national, regional and other community banks, thrift institutions, credit unions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies.

 

The Company and Republic are subject to federal and state regulations governing virtually all aspects of their activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition.

 

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”).  The FASB sets accounting principles generally accepted in the United States of America (“US GAAP”) that are followed to ensure consistent reporting of financial condition, results of operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in the consolidated financial statements.  

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to United States Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for financial statements for a complete fiscal year. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine month period ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

 

 

Note 2: Summary of Significant Accounting Policies

 

Risks and Uncertainties

 

The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic are heavily dependent upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment. Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities vary significantly and may cause significant fluctuations in interest margins.

 

8

 

The coronavirus (“COVID-19”) outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions. In response to these conditions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. The Federal Reserve has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.

 

The economic downturn that began in the U.S. as a result of the government-mandated business closures and stay-at-home orders significantly impacted the labor market, consumer spending, business investment and profitability. As a result, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which was the largest economic stimulus package in the nation’s history in an effort to lessen the impact of COVID-19 on consumers and businesses. Among other measures, the CARES Act authorized funding for the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to provide loans to small businesses to keep employees on their payroll and to make other eligible payments to sustain their operation in the near term. In December 2020, the Economic Aid Act was signed into law, which extended certain provisions of the CARES Act and provides additional support and financial assistance for small businesses, non-profit organizations and other entities.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates are made by management in determining the allowance for credit losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

 

Mortgage Banking Activities and Mortgage Loans Held for Sale

 

Mortgage loans held for sale are originated and held until sold to permanent investors. Management elected to adopt the fair value option in accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair value.

 

Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking income in the statements of income. Direct loan origination costs are recognized when incurred and are included in non-interest expense in the statements of income.

 

Interest Rate Lock Commitments (IRLCs)

 

Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage that will be held for sale upon funding are considered derivative instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking income and included in non-interest income in the statements of income. Outstanding interest rate lock commitments (“IRLCs”) are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancellation, or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans where the servicing is released, and the servicing released premium is included in the market price. See Note 12 Derivatives and Risk Management Activities for further detail of IRLCs.

 

9

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of financial instruments, and the realization of deferred income tax assets. Consideration is given to a variety of factors in establishing these estimates.

 

In estimating the allowance for loan losses, management considers current economic conditions, past loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and qualitative risk factors. Subsequent to foreclosure, an estimate for the carrying value of other real estate owned is normally determined through valuations that are periodically performed by management and the assets are carried at the lower of carrying amount or fair value, less the cost to sell. Because the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Company’s and Republic’s control, the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term.

 

In estimating OTTI of investment securities, securities are evaluated on at least a quarterly basis and more frequently when market conditions warrant such an evaluation, to determine whether a decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the security and the likelihood of the Company not being required to sell the security prior to an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is permanent but indicates that the prospects for a near-term recovery of value is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline related to credit impairment is charged to earnings.

 

In evaluating the Company’s ability to recover deferred tax assets, management considers all available positive and negative evidence, including the past operating results and forecasts of future taxable income. In determining future taxable income, management makes assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require management to make judgments about the future taxable income and are consistent with the plans and estimates used to manage the business. A material 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.

 

10

 

Stock-Based Compensation

 

The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the Company granted options, restricted stock or stock appreciation rights to the Company’s employees, directors, and certain consultants. The 2005 Plan became effective on November 14, 1995 and was amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the 2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to 1.5 million shares, were available for such grants. As of June 30, 2021, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.

 

On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At September 30, 2021, the maximum number of common shares issuable under the 2014 Plan was 6.4 million shares. During the nine months ended September 30, 2021, 532,513 stock units were granted under the 2014 Plan with a fair value of $1.78 million.

 

On April 27, 2021 the Company’s shareholders approved the 2021 Equity Incentive Plan of Republic First Bancorp, Inc. (the “2021 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2021 Plan, the maximum number of shares which may be issued or awarded is 7.5 million shares of common stock. As of September 30, 2021, no shares have been granted under the 2021 Plan.

 

The Company utilizes the Black-Scholes option pricing model to calculate the estimated fair value of each stock option granted on the date of the grant.

 

During the nine months ended September 30, 2021 and 2020, 636,635 shares and 907,790 shares vested, respectively. Expense is recognized ratably over the period required to vest. At September 30, 2021, the intrinsic value of the 5,561,349 options outstanding was $398,000, while the intrinsic value of the 3,807,260 exercisable (vested) options was $278,000. At September 30, 2020, the intrinsic value of the 5,993,700 options outstanding was $11,000, while the intrinsic value of the 3,384,500 exercisable (vested) options was $11,000. During the nine months ended September 30, 2021, 54,375 options were exercised resulting in cash receipts of $140,000 and 283,701 options were forfeited with a weighted average grant date fair value of $578,051. During the nine months ended September 30, 2020, 13,000 options were exercised resulting in cash receipts of $33,000 and 220,875 options were forfeited with a weighted average grant date fair value of $419,999.

 

Information regarding stock based compensation for the nine months ended September 30, 2021 and 2020 is set forth below:

 

  

2021

  

2020

 

Stock based compensation expense recognized

 $1,133,000  $1,538,000 

Number of unvested stock options

  1,754,089   2,609,200 

Fair value of unvested stock options

 $2,918,535  $4,915,841 

Amount remaining to be recognized as expense

 $1,493,293  $3,121,499 

 

11

 

The remaining unrecognized expense amount of $1,493,293 will be recognized ratably as expense through December 2024.

 

The Company granted stock units under the 2014 Plan during the nine month period ended September 30, 2021. The compensation expense for the stock units is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.

 

The following table details the Stock Units for the three and nine months ended September 30, 2021:

 

  

Three Months Ended

  

Nine Months Ended

 
  

Number

of Units

  

Weighted

Average

Grant

Date Fair

Value

  

Number

of Units

  

Weighted

Average

Grant

Date Fair

Value

 

Beginning balance

  524,863  $3.35   -  $- 

Granted

  2,500   3.45   532,513   3.35 

Vested

  -   -   -   - 

Forfeited

  (3,300)  3.34   (8,450)  3.34 

Ending balance

  524,063  $3.35   524,063  $3.35 

 

Information regarding stock unit compensation for the nine months ended September 30, 2021 and 2020 is set forth below:

 

  

2021

  

2020

 

Stock based compensation expense recognized

 $428,756   - 

Number of unvested stock units

  524,063   - 

Fair value of unvested stock units

 $1,783,518   - 

Amount remaining to be recognized as expense

 $1,354,762   - 

 

The remaining unrecognized expense amount of $1,354,762 will be recognized ratably as expense through August 2025.

 

Earnings per Share

 

Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans and common shares issuable through the conversion of the Company’s preferred stock for the nine months ended September 30, 2021 and September 30, 2020.

 

12

 

The calculation of EPS for the three and nine months ended September 30, 2021 and 2020 is as follows (in thousands, except per share amounts):

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Net income (loss) attributable to basic common shareholders

 $5,221  $(966) $16,473  $953 
                 

Weighted average shares outstanding

  58,895   58,853   58,877   58,851 
                 

Basic earnings per common share

 $0.09  $(0.02) $0.28  $0.02 
                 

Preferred stock dividends

 $875  $-  $2,625  $- 
                 

Net income (loss) attributable to diluted common shareholders

 $6,096   (966) $19,098   953 
                 

Weighted average shares outstanding (including dilutive CSEs)

  75,876   58,853   75,946   60,751 
                 

Diluted earnings per common share

 $0.08  $(0.02) $0.25  $0.02 

 

The following is a summary of securities that could potentially dilute basic earnings per common share in future periods. These securities were not included in the computation of diluted earnings per common share because the effect would have been anti-dilutive for the periods presented.

 

(in thousands)

 

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Anti-dilutive securities

                
                 

Share based compensation awards

  5,771   5,994   5,683   5,945 
                 

Convertible preferred stock

  -   -   -   - 
                 

Total anti-dilutive securities

  5,771   5,994   5,683   5,945 

 

Recent Accounting Pronouncements

 

ASU 2016-13

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company has evaluated the impact of this ASU, continuing its implementation efforts and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Calculations of expected losses under the new guidance have been run parallel to the calculations under existing guidance to assess and evaluate the potential impact to the Company’s financial statements. The new model includes different assumptions used to calculate credit losses, such as estimating losses over the estimated life of a financial asset and considers expected future changes in macroeconomic conditions. The Company was initially required to adopt this ASU on January 1, 2020. The Company elected to defer the adoption of this ASU as permitted by Section 4014 of the CARES Act, which allowed financial institutions to postpone adoption until the earlier of (i) the date on which the national emergency concerning the COVID-19 outbreak declared under the National Emergencies Relief Act terminates or (ii) December 31, 2020. The Economic Aid Act approved in December 2020 extended the option to defer this ASU until January 1, 2021 or January 1, 2022. The Company has chosen to defer adoption until January 1, 2022. While based on the parallel calculations run to date, the Company does not anticipate a material increase to the allowance for credit losses at the present time, the impact on the date of adoption is unknown.

 

13

 

ASU 2020-04

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU became effective March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.

 

ASU 2021-01

 

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. The ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition, including derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The ASU became effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of this guidance. There is only one relationship that has LIBOR pricing with a maturity date beyond December 31, 2022. The loan documentation for the relationship contains language for an alternative pricing index when LIBOR is no longer available.

 

 

Note 3: Commitments and Contingencies

 

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

 

 

Note 4: Segment Reporting

 

The Company has one reportable segment: community banking. The community banking segment primarily encompasses the commercial loan and deposit activities of Republic, as well as, residential mortgage and consumer loan products in the area surrounding its stores. Mortgage loans in Delaware and Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida. Republic does not have loan production offices in those states.

 

14

 

 

Note 5: Investment Securities

 

A summary of the amortized cost and market value of securities available for sale, securities held to maturity, and equity securities at September 30, 2021 and December 31, 2020 is as follows:

 

  

At September 30, 2021

 

(dollars in thousands)

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 

Available for sale

                

U.S. Government agencies

 $27,508  $803  $(1,285) $27,026 

Collateralized mortgage obligations

  312,328   1,988   (3,396)  310,920 

Agency mortgage-backed securities

  359,817   539   (3,256)  357,100 

Municipal securities

  7,858   337   -   8,195 

Corporate bonds

  177,380   920   (1,047)  177,253 

Investment securities available for sale

 $884,891  $4,587  $(8,984) $880,494 
                 

Held to maturity

                

U.S. Government agencies

 $70,349  $2,470  $-  $72,819 

Collateralized mortgage obligations

  401,750   6,793   (8,133)  400,410 

Agency mortgage-backed securities

  905,154   3,030   (8,230)  899,954 

Investment securities held to maturity

 $1,377,253  $12,293  $(16,363) $1,373,183 
                 

Equity securities (1)

             $9,231 

 

(1)

Equity securities consist of investments in non-cumulative preferred stock.

 

  

At December 31, 2020

 

(dollars in thousands)

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 

Available for sale

                

U.S. Government agencies

 $32,312  $-  $(426) $31,886 

Collateralized mortgage obligations

  218,232   3,584   (270)  221,546 

Agency mortgage-backed securities

  149,325   1,204   (1)  150,528 

Municipal securities

  8,201   24   -   8,225 

Corporate bonds

  119,118   595   (3,390)  116,323 

Investment securities available for sale

 $527,188  $5,407  $(4,087) $528,508 
                 

Held to maturity

                

U.S. Government agencies

 $82,093  $4,185  $-  $86,278 

Collateralized mortgage obligations

  363,363   12,687   (231)  375,819 

Agency mortgage-backed securities

  369,480   5,640   (245)  374,875 

Investment securities held to maturity

 $814,936  $22,512  $(476) $836,972 
                 

Equity securities (1)

             $9,039 

 

(1)

Equity securities consist of investments in non-cumulative preferred stock.

 

15

 

The following table presents investment securities by stated maturity at September 30, 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 with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.

 

  

Available for Sale

  

Held to Maturity

 

(dollars in thousands)

 

Amortized

Cost

  

Fair

Value

  

Amortized

Cost

  

Fair

Value

 

Due in 1 year or less

 $10,290  $10,285  $4  $4 

After 1 year to 5 years

  79,331   80,205   70,345   72,815 

After 5 years to 10 years

  52,030   52,089   -   - 

After 10 years

  71,095   69,895   -   - 

Collateralized mortgage obligations

  312,328   310,920   401,750   400,410 

Agency mortgage-backed securities

  359,817   357,100   905,154   899,954 

Total

 $884,891  $880,494  $1,377,253  $1,373,183 

 

The Company’s investment securities portfolio consists primarily of debt securities issued by U.S. government agencies, U.S. government-sponsored agencies, state governments, local municipalities and certain corporate entities. Equity securities consist of investments in non-cumulative preferred stock. There were no private label mortgage-backed securities (“MBS”) or collateralized mortgage obligations (“CMO”) held in the investment securities portfolio as of September 30, 2021 and December 31, 2020. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime” as of those dates.

 

The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax. Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the current fair value of an individual security is less than the amortized cost basis.

 

The Company regularly evaluates investment securities that are in an unrealized loss position in order to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include the current economic climate, the length of time and the extent to which the fair value has been below cost, the current interest rate environment and the rating of each security. An OTTI loss must be recognized for a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of the security that is attributed to credit deterioration. Accounting standards require the evaluation of the expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss, that amount must be recognized against income in the current period. The portion of the unrealized loss related to other factors, such as liquidity conditions in the market or the current interest rate environment, is recorded in accumulated other comprehensive income (loss) for investment securities classified available for sale. There were no impairment charges (credit losses) recorded at September 30, 2021 and December 31, 2020.

 

16

 

The following tables show the fair value and gross unrealized losses associated with the investment portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020:

 

  

At September 30, 2021

 
  

Less than 12 months

  

12 months or more

  

Total

 

(dollars in thousands)

 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
                         

U.S. Government agencies

 $67,292  $802  $27,026  $483  $94,318  $1,285 

Collateralized mortgage obligations

  176,855   3,396   -   -   176,855   3,396 

Agency mortgage-backed securities

  187,061   3,256   -   -   187,061   3,256 

Municipal securities

  -   -   -   -   -   - 

Corporate bonds

  33,576   24   33,462   1,023   67,038   1,047 

Investment Securities Available for Sale

 $464,784  $7,478  $60,488  $1,506  $525,272  $8,984 

 

  

At September 30, 2021

 
  

Less than 12 months

  

12 months or more

  

Total

 

(dollars in thousands)

 

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

  

Fair

Value

  

Unrealized

Losses

 
                         

U.S. Government agencies

 $-  $-  $-  $-  $-  $- 

Collateralized mortgage obligations

  256,326   8,132   383   1   256,709   8,133 

Agency mortgage-backed securities

  660,106   8,230   -   -   660,106   8,230 

Investment Securities Held to Maturity

 $916,432  $16,362  $383  $1  $916,815  $16,363 

 

  

At December 31, 2020

 
  

Less than 12 months

  

12 months or more

  

Total

 

(dollars in thousands)

 

Fair

Value

  

Unrealized Losses

  

Fair

Value

  

Unrealized Losses

  

Fair

Value

  

Unrealized Losses

 
                         

U.S. Government agencies

 $-  $-  $31,886  $426  $31,886  $426 

Collateralized mortgage obligations

  99,497   270   -   -   99,497   270 

Agency mortgage-backed securities

  20,934   1   -   -   20,934   1 

Municipal securities

  -   -   -   -   -   - 

Corporate bonds

  4,559   39   54,649   3,351   59,208   3,390 

Investment Securities Available for Sale

 $124,990  $310  $86,535  $3,777  $211,525  $4,087 

 

  

At December 31, 2020

 
  

Less than 12 months

  

12 months or more

  

Total

 

(dollars in thousands)

 

Fair

Value

  

Unrealized Losses

  

Fair

Value

  

Unrealized Losses

  

Fair

Value

  

Unrealized Losses

 
                         

U.S. Government agencies

 $-  $-  $-  $-  $-  $- 

Collateralized mortgage obligations

  62,603   231   -   -   62,603   231 

Agency mortgage-backed securities

  54,537   245   -   -   54,537   245 

Investment Securities Held to Maturity

 $117,140  $476  $-  $-  $117,140  $476 

 

Unrealized losses on securities in the investment portfolio amounted to $25.3 million with a total fair value of $1.4 billion as of September 30, 2021 compared to unrealized losses of $4.6 million with a total fair value of $328.7 million as of December 31, 2020. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

 

17

 

The Company held seven U.S. Government agency securities, twenty-seven collateralized mortgage obligations and thirty-seven agency mortgage-backed securities that were in an unrealized loss position at September 30, 2021. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of September 30, 2021.

 

All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At September 30, 2021, the investment portfolio included no municipal securities that were in an unrealized loss position.

 

At September 30, 2021, the investment portfolio included nine corporate bonds that were in an unrealized loss position. Management believes the unrealized losses on these securities were also driven by changes in market interest rates and not a result of credit deterioration. Six of the corporate bonds are with four of the largest U.S. financial institutions. The financial institutions for all nine corporate bonds are well capitalized.

 

There were no proceeds from the sale of securities during the three or nine months ended September 30, 2021. Proceeds associated with the sale of securities available for sale during the three months ended September 30, 2020 were $32.4 million. The tax provision applicable to the net gains of $279,000 for the three months ended September 30, 2020 amounted to $71,000. Proceeds associated with the sale of securities available for sale during the nine months ended September 30, 2020 were $125.2 million. The tax provision applicable to the net gains of $2.8 million for the nine months ended September 30, 2020 amounted to $700,000.

 

 

Note 6: Loans Receivable and Allowance for Loan Losses

 

The following table sets forth the Company’s gross loans by major category as of September 30, 2021 and December 31, 2020:

 

(dollars in thousands)

 

September 30,

2021

  

December 31,

2020

 
         

Commercial real estate

 $775,168  $705,748 

Construction and land development

  153,132   142,821 

Commercial and industrial

  250,650   200,188 

Owner occupied real estate

  496,301   475,206 

Consumer and other

  87,208   102,368 

Residential mortgage

  496,963   395,174 

Paycheck protection program

  248,610   636,637 

Total loans receivable

  2,508,032   2,658,142 

Deferred fees (net)

  (11,018)  (12,800)

Allowance for loan losses

  (17,218)  (12,975)

Net loans receivable

 $2,479,796  $2,632,367 

 

18

 

The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the allowance for loan losses. The Company’s loan groups include commercial real estate, construction and land development, commercial and industrial, owner occupied real estate, consumer, residential mortgages, and PPP loans. PPP loans are fully guaranteed by the U.S. Government and as such have no allowance associated with them. The loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics.

 

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended September 30, 2021 and 2020:

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied Real

Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

Three months ended September 30, 2021

                                    

Allowance for loan losses:

                                    

Beginning balance:

 $5,919  $1,133  $1,503  $2,440  $717  $4,270  $-  $128  $16,110 

Charge-offs

  -   -   -   -   (1)  -   -   -   (1)

Recoveries

  -   -   12   48   149   -   -   -   209 

Provisions (credits)

  265   (43)  181   420   (213)  282   -   8   900 

Ending balance

 $6,184  $1,090  $1,696  $2,908  $652  $4,552  $-  $136  $17,218 
                                     

Three months ended September 30, 2020

                                    

Allowance for loan losses:

                                    

Beginning balance:

 $3,732  $952  $1,431  $1,995  $675  $2,255  $-  $-  $11,040 

Charge-offs

  -   -   (33)  -   (2)  (17)  -   -   (52)

Recoveries

  -   -   11   -   2   -   -   -   13 

Provisions (credits)

  235   112   74   (8)  6   429   -   2   850 

Ending balance

 $3,967  $1,064  $1,483  $1,987  $681  $2,667  $-  $2  $11,851 

 

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the nine months ended September 30, 2021 and 2020:

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and

Industrial

  

Owner

Occupied Real

Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

Nine months ended September 30, 2021

                                    

Allowance for loan losses:

                                    
                                     

Beginning balance:

 $4,394  $948  $1,367  $2,374  $723  $3,025  $-  $144  $12,975 

Charge-offs

  -   -   (60)  -   (48)  -   -   -   (108)

Recoveries

  -   -   162   88   201   -   -   -   451 

Provisions (credits)

  1,790   142   227   446   (224)  1,527   -   (8)  3,900 

Ending balance

 $6,184  $1,090  $1,696  $2,908  $652  $4,552  $-  $136  $17,218 
                                     

Nine months ended September 30, 2020

                                    

Allowance for loan losses:

                                    
                                     

Beginning balance:

 $3,043  $688  $931  $2,292  $590  $1,705  $-  $17  $9,266 

Charge-offs

  -   -   (84)  (48)  (67)  (67)  -   -   (266)

Recoveries

  -   2   38   1   10   -   -   -   51 

Provisions (credits)

  924   374   598   (258)  148   1,029   -   (15)  2,800 

Ending balance

 $3,967  $1,064  $1,483  $1,987  $681  $2,667  $-  $2  $11,851 

 

19

 

The following tables provide a summary of the allowance for loan losses and balance of loans receivable by loan class and by impairment method as of September 30, 2021 and December 31, 2020:

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and Industrial

  

Owner

Occupied

Real Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

September 30, 2021

                                    
                                     

Allowance for loan losses:

                                    

Individually evaluated for impairment

 $1,401  $-  $53  $481  $-  $-  $-  $-  $1,935 

Collectively evaluated for impairment

  4,783   1,090   1,643   2,427   652   4,552   -   136   15,283 

Total allowance for loan losses

 $6,184  $1,090  $1,696  $2,908  $652  $4,552  $-  $136  $17,218 
                                     

Loans receivable:

                                    

Loans evaluated individually

 $4,931  $-  $2,558  $9,651  $1,154  $1,682  $10  $-  $19,986 

Loans evaluated collectively

  770,237   153,132   248,092   486,650   86,054   495,281   248,600   -   2,488,046 

Total loans receivable

 $775,168  $153,132  $250,650  $496,301  $87,208  $496,963  $248,610  $-  $2,508,032 

 

(dollars in thousands)

 

Commercial

Real Estate

  

Construction

and Land

Development

  

Commercial

and Industrial

  

Owner

Occupied

Real Estate

  

Consumer

and Other

  

Residential

Mortgage

  

Paycheck

Protection

Program

  

Unallocated

  

Total

 
                                     

December 31, 2020

                                    
                                     

Allowance for loan losses:

                                    

Individually evaluated for impairment

 $418  $-  $51  $122  $-  $-  $-  $-  $591 

Collectively evaluated for impairment

  3,976   948   1,316   2,252   723   3,025   -   144   12,384 

Total allowance for loan losses

 $4,394  $948  $1,367  $2,374  $723  $3,025  $-  $144  $12,975 
                                     

Loans receivable:

                                    

Loans evaluated individually

 $9,048     $2,963  $3,955  $1,302  $701  $-  $-  $17,969 

Loans evaluated collectively

  696,700   142,821   197,225   471,251   101,066   394,473   636,637   -   2,640,173 

Total loans receivable

 $705,748  $142,821  $200,188  $475,206  $102,368  $395,174  $636,637  $-  $2,658,142 

 

20

 

A loan is considered impaired, when based on current information and events, it is probable that the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming loans, but also include internally classified accruing loans. The following table summarizes information with regard to impaired loans by loan portfolio class as of September 30, 2021 and December 31, 2020:

 

  

September 30, 2021

  

December 31, 2020

 

(dollars in thousands)

 

Recorded

Investment

  

Unpaid

Principal

Balance

  

Related

Allowance

  

Recorded

Investment

  

 

Unpaid

Principal

Balance

 Related
Allowance
 

With no related allowance recorded:

                        

Commercial real estate

 $344  $351  $-  $5,033  $5,040  $- 

Construction and land development

  -   -   -   -   -   - 

Commercial and industrial

  2,295   2,296   -   2,608   2,794   - 

Owner occupied real estate

  6,528   6,676   -   3,198   3,407   - 

Consumer and other

  1,154   1,419   -   1,302   1,556   - 

Residential mortgage

  1,682   1,749   -   701   768   - 

Paycheck protection program

  10   10   -   -   -   - 

Total

 $12,013  $12,501  $-  $12,842  $13,565  $- 
                         

With an allowance recorded:

                        

Commercial real estate

 $4,587  $5,108  $1,401  $4,015  $4,536  $418 

Construction and land development

  -   -   -   -   -   - 

Commercial and industrial

  263   402   53   355   371   51 

Owner occupied real estate

  3,123   3,142   481   757   775   122 

Consumer and other

  -   -   -   -   -   - 

Residential mortgage

  -   -   -   -   -   - 

Paycheck protection program

  -   -   -   -   -   - 

Total

 $7,973  $8,652  $1,935  $5,127  $5,682  $591 
                         

Total:

                        

Commercial real estate

 $4,931   5,459   1,401   9,048   9,576   418 

Construction and land development

  -   -   -   -   -   - 

Commercial and industrial

  2,558   2,698   53   2,963   3,165   51 

Owner occupied real estate

  9,651   9,818   481   3,955   4,182   122 

Consumer and other

  1,154   1,419   -   1,302   1,556   - 

Residential mortgage

  1,682   1,749   -   701   768   - 

Paycheck protection program

  10   10   -   -   -   - 

Total

 $19,986  $21,153  $1,935  $17,969  $19,247  $591 

 

21

 

The following table presents additional information regarding the Company’s impaired loans for the three months ended September 30, 2021 and September 30, 2020:

 

  

Three Months Ended September 30,

 
  

2021

  

2020

 

(dollars in thousands)

 

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

With no related allowance recorded:

                

Commercial real estate

 $440  $2  $6,534  $69 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,298   -   2,615   - 

Owner occupied real estate

  3,387   52   3,491   13 

Consumer and other

  1,204   14   1,114   6 

Residential mortgage

  830   -   724   - 

Paycheck protection program

  2   -   -   - 

Total

 $8,161  $68  $14,478  $88 
                 

With an allowance recorded:

                

Commercial real estate

 $4,086  $3  $4,167  $- 

Construction and land development

  -   -   -   - 

Commercial and industrial

  265   -   37   - 

Owner occupied real estate

  1,105   10   819   1 

Consumer and other

  -   -   10   - 

Residential mortgage

  -   -   -   - 

Paycheck protection program

  -   -   -   - 

Total

 $5,456  $13  $5,033  $1 
                 

Total:

                

Commercial real estate

 $4,526  $5  $10,701  $69 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,563   -   2,652   - 

Owner occupied real estate

  4,492   62   4,310   14 

Consumer and other

  1,204   14   1,124   6 

Residential mortgage

  830   -   724   - 

Paycheck protection program

  2   -   -   - 

Total

 $13,617  $81  $19,511  $89 

 

22

 

The following table presents additional information regarding the Company’s impaired loans for the nine months ended September 30, 2021 and September 30, 2020:

 

  

Nine Months Ended September 30,

 
  

2021

  

2020

 

(dollars in thousands)

 

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Average

Recorded

Investment

  

Interest

Income

Recognized

 

With no related allowance recorded:

                

Commercial real estate

 $385  $2  $6,484  $207 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,297   -   2,607   1 

Owner occupied real estate

  3,892   73   3,051   21 

Consumer and other

  1,227   14   1,156   13 

Residential mortgage

  946   -   768   1 

Paycheck protection program

  3   -   -   - 

Total

 $8,750  $89  $14,066  $243 
                 

With an allowance recorded:

                

Commercial real estate

 $4,158  $6  $4,153  $- 

Construction and land development

  -   -   -   - 

Commercial and industrial

  263   -   479   - 

Owner occupied real estate

  1,140   20   1,273   17 

Consumer and other

  -   -   -   - 

Residential mortgage

  -   -   30   1 

Paycheck protection program

  -   -   -   - 

Total

 $5,561  $26  $5,935  $18 
                 

Total:

                

Commercial real estate

 $4,543  $8  $10,637  $207 

Construction and land development

  -   -   -   - 

Commercial and industrial

  2,560   -   3,086   1 

Owner occupied real estate

  5,032   93   4,324   38 

Consumer and other

  1,227   14   1,156   13 

Residential mortgage

  946   -   798   2 

Paycheck protection program

  3   -   -   - 

Total

 $14,311  $115  $20,001  $261 

 

23

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2021 and December 31, 2020:

 

(dollars in thousands)

 

30-59

Days Past

Due

  

60-89

Days Past

Due

  

Greater

than 90

Days

  

Total

Past Due

  

Current

  

Total

Loans

Receivable

  

Loans

Receivable >

90 Days and

Accruing

 

At September 30, 2021

                            

Commercial real estate

 $-  $-  $4,303  $4,303  $770,865  $775,168  $- 

Construction and land development

  -   -   -   -   153,132   153,132   - 

Commercial and industrial

  -   -   2,558   2,558   248,092   250,650   - 

Owner occupied real estate

  -   4,461   3,169   7,630   488,671   496,301   - 

Consumer and other

  21   -   1,167   1,188   86,020   87,208   13 

Residential mortgage

  -   -   1,738   1,738   495,225   496,963   - 

Paycheck protection program

  -   43   10   53   248,557   248,610   - 

Total

 $21  $4,504  $12,945  $17,470  $2,490,562  $2,508,032  $13 

 

(dollars in thousands) 

30-59

Days Past

Due

  

60-89

Days Past

Due

  Greater
than 90
Days
  

Total

Past Due

  Current  

Total

Loans

Receivable

  Loans
Receivable >
90 Days and
Accruing
 
At December 31, 2020                            

Commercial real estate

 $-  $97  $4,421  $4,518  $701,230  $705,748  $- 

Construction and land development

  -   -   -   -   142,821   142,821   - 

Commercial and industrial

  1,648   -   2,963   4,611   195,577   200,188   - 

Owner occupied real estate

  581   813   2,859   4,253   470,953   475,206   - 

Consumer and other

  92   28   1,302   1,422   100,946   102,368   - 

Residential mortgage

  -   -   1,313   1,313   393,861   395,174   612 

Paycheck protection program

  -   -   -   -   636,637   636,637   - 

Total

 $2,321  $938  $12,858  $16,117  $2,642,025  $2,658,142  $612 

 

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2021 and December 31, 2020:

 

 

(dollars in thousands)

 

Pass

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 

At September 30, 2021:

                    

Commercial real estate

 $770,242  $-  $4,926  $-  $775,168 

Construction and land development

  153,132   -   -   -   153,132 

Commercial and industrial

  248,092   -   2,558   -   250,650 

Owner occupied real estate

  486,457   238   9,606   -   496,301 

Consumer and other

  86,054   -   1,154   -   87,208 

Residential mortgage

  495,281   -   1,682   -   496,963 

Paycheck protection program

  248,600   -   10   -   248,610 

Total

 $2,487,858  $238  $19,936  $-  $2,508,032 

 

 

(dollars in thousands)

 

Pass

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 

At December 31, 2020:

                    

Commercial real estate

 $701,151  $80  $4,517  $-  $705,748 

Construction and land development

  142,821   -   -   -   142,821 

Commercial and industrial

  197,225   -   2,963   -   200,188 

Owner occupied real estate

  470,732   519   3,955   -   475,206 

Consumer and other

  101,066   -   1,302   -   102,368 

Residential mortgage

  394,473   -   701   -   395,174 

Paycheck protection program

  636,637   -   -   -   636,637 

Total

 $2,644,105  $599  $13,438  $-  $2,658,142 

 

24

 

The following table shows non-accrual loans by class as of September 30, 2021 and December 31, 2020:

 

(dollars in thousands)

 

September 30,

2021

  

December 31,

2020

 
         

Commercial real estate

 $4,303  $4,421 

Construction and land development

  -   - 

Commercial and industrial

  2,558   2,963 

Owner occupied real estate

  3,169   2,859 

Consumer and other

  1,154   1,302 

Residential mortgage

  1,738   701 

Paycheck protection program

  10   - 

Total

 $12,932  $12,246 

 

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $190,075 and $546,451 for the three and nine months ended September 30, 2021, respectively, and $190,000 and $587,000 for the three and nine months ended September 30, 2020, respectively.

 

Troubled Debt Restructurings

 

A modification to the contractual terms of a loan which results in a concession to a borrower that is experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are declining. Concessions include a reduction in interest rate below current market rates, a material extension of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance, acceptance of interest only payments for a period of time, or a combination of any of these conditions.

 

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law which amended certain sections of the CARES Act. This amendment extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declares a termination of the national emergency related to the COVID-19 pandemic. As of September 30, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the height of the COVID pandemic have resumed contractual payments. At December 31, 2020, 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.

 

25

 

The following table summarizes information with regard to outstanding troubled debt restructurings at September 30, 2021 and December 31, 2020:

 

(dollars in thousands)

 

Number

of Loans

  

Accrual

Status

  

Non-

Accrual

Status

  

Total TDRs

 

September 30, 2021

                

Commercial real estate

  -  $-  $-  $- 

Construction and land development

  -   -   -   - 

Commercial and industrial

  -   -   -   - 

Owner occupied real estate

  -   -   -   - 

Consumer and other

  -   -   -   - 

Residential mortgage

  -   -   -   - 

Paycheck protection program

  -   -   -   - 

Total

  -  $-  $-  $- 
                 

December 31, 2020

                

Commercial real estate

  1  $4,530  $-  $4,530 

Construction and land development

  -   -   -   - 

Commercial and industrial

  -   -   -   - 

Owner occupied real estate

  -   -   -   - 

Consumer and other

  -   -   -   - 

Residential mortgage

  -   -   -   - 

Paycheck protection program

  -   -   -   - 

Total

  1  $4,530  $-  $4,530 

 

All TDRs are considered impaired and are therefore individually evaluated for impairment in the calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of principal and interest as restructured and could lead to potential incremental losses. These potential incremental losses would be factored into the Company’s estimate of the allowance for loan losses. The level of any subsequent defaults will likely be affected by future economic conditions.

 

There were no loan modifications made during the three and nine months ended September 30, 2021 and 2020 that met the criteria of a TDR.

 

After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three and nine months ended September 30, 2021. There were no TDRs that subsequently defaulted during the year ended December 31, 2020. The loan classified as a TDR at December 31, 2020 was repaid in full during the second quarter of 2021.

 

There was one residential mortgage in the process of foreclosure as of September 30, 2021 and December 31, 2020. There was no other real estate owned relating to residential real estate at September 30, 2021 and December 31, 2020.

 

26

 

 

Note 7: Other Borrowings

 

The following is a summary of other borrowings by type.

 

  

September 30, 2021

  

December 31, 2020

 

(dollars in thousands)

 

Balance at

End of Period

  

Weighted Average

Interest Rate at

End of Period

  

Balance at

End of Period

  

Weighted Average

Interest Rate at

End of Period

 

Other borrowings

                

Paycheck Protection Program

                

Liquidity Facility borrowings

 $-   -  $633,866   0.35%

 

As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowings to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. The Company did not pledge any PPP loans or borrow any funds as part of the PPPLF program at September 30, 2021 since the PPPLF program was discontinued on July 30, 2021. The Company pledged $634 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $634 million of funds at a rate of 0.35% at December 31, 2020.

 

 

Note 8: Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

27

 

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 were as follows:

 

(dollars in thousands)

 

Total

  

(Level 1)

Quoted Prices in Active Markets for Identical Assets

  

(Level 2)

Significant Other Observable Inputs

  

(Level 3)

Significant Unobservable Inputs

 
                 

September 30, 2021

                

Assets:

                
                 

U.S. Government agencies

 $27,026  $-  $27,026  $- 

Collateralized mortgage obligations

  310,920   -   310,920   - 

Agency mortgage-backed securities

  357,100   -   357,100   - 

Municipal securities

  8,195   -   8,195   - 

Corporate bonds

  177,253   -   174,650   2,603 

Investment securities available for sale

 $880,494     $877,891  $2,603 

Equity securities

  9,231   9,231   -   - 
                 

Mortgage Loans Held for Sale

 $12,082  $-  $12,082  $- 

SBA Servicing Assets

  4,572   -   -   4,572 

Interest Rate Lock Commitments

  593   -   593   - 

Best Efforts Forward Loan Sales Commitments

  67   -   67   - 

Mandatory Forward Loan Sales Commitments

  43   -   43   - 
                 

Liabilities:

                
                 

Interest Rate Lock Commitments

  -   -   -   - 

Best Efforts Forward Loan Sales Commitments

  109   -   109   - 

Mandatory Forward Loan Sales Commitments

  33   -   33   - 
                 

December 31, 2020

                

Assets:

                
                 

U.S. Government agencies

 $31,886  $-  $31,886  $- 

Collateralized mortgage obligations

  221,546   -   221,546   - 

Agency mortgage-backed securities

  150,528   -   150,528   - 

Municipal securities

  8,225   -   8,225   - 

Corporate bonds

  116,323   -   113,692   2,631 

Investment securities available for sale

 $528,508     $525,877  $2,631 

Equity securities

  9,039   9,039   -   - 
                 

Mortgage Loans Held for Sale

 $50,387  $-  $50,387  $- 

SBA Servicing Assets

  4,626   -   -   4,626 

Interest Rate Lock Commitments

  1,580   -   1,580   - 

Best Efforts Forward Loan Sales Commitments

  2   -   2   - 

Mandatory Forward Loan Sales Commitments

  -   -   -   - 
                 

Liabilities:

                
                 

Interest Rate Lock Commitments

  -   -   -   - 

Best Efforts Forward Loan Sales Commitments

  612   -   612   - 

Mandatory Forward Loan Sales Commitments

  800   -   800   - 

 

28

 

The following tables present an analysis of the activity in the SBA servicing assets for the three and nine months ended September 30, 2021 and 2020:

 

  

Three Months Ended

September 30,

 

(dollars in thousands)

 

2021

  

2020

 

Beginning balance, July 1st

 $4,641  $4,604 

Additions

  178   173 

Fair value adjustments

  (247)  (143)

Ending balance, September 30th

 $4,572  $4,634 

 

  

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

  

2020

 

Beginning balance, January 1st

 $4,626  $4,447 

Additions

  491   488 

Fair value adjustments

  (545)  (301)

Ending balance, September 30th

 $4,572  $4,634 

 

Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $567,000 and $510,000 for the three months ended September 30, 2021 and 2020, respectively. Servicing fee income, not including fair value adjustments, totaled $1.6 million and $1.4 million for the nine months ended September 30, 2021 and 2020, respectively. Total loans in the amount of $214.3 million at September 30, 2021 and $208.7 million at December 31, 2020 were serviced for others.

 

The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2021 and 2020:

 

  

Three Months Ended

September 30,

 
  

2021

  

2020

 

Level 3 Investments Only

(dollars in thousands)

 

Corporate

Bonds

  

Corporate

Bonds

 

Balance, July 1st

 $2,603  $2,665 

Unrealized gains (losses)

  -   (34)

Proceeds from sales

  -   - 

Realized losses

  -   - 

Balance, September 30th

 $2,603  $2,631 

 

  

Nine Months Ended

September 30,

 
  

2021

  

2020

 

Level 3 Investments Only

(dollars in thousands)

 

Corporate

Bonds

  

Corporate

Bonds

 

Balance, January 1st

 $2,631  $2,819 

Unrealized gains (losses)

  (28)  (188)

Proceeds from sales

  -   - 

Realized losses

  -   - 

Balance, September 30th

 $2,603  $2,631 

 

29

 

For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 were as follows:

 

(dollars in thousands)

 

Total

  

(Level 1)

Quoted Prices

in Active

Markets for

Identical Assets

  

(Level 2)

Significant

Other

Observable

Inputs

  

(Level 3)

Significant

Unobservable

Inputs

 

September 30, 2021

                

Impaired loans

 $6,182  $-  $-  $6,182 

Other real estate owned

  168   -   -   168 
                 

December 31, 2020

                

Impaired loans

 $5,678  $-  $-  $5,678 

Other real estate owned

  364   -   -   364 

 

The table below presents additional quantitative information about level 3 assets measured at fair value on a nonrecurring basis (dollars in thousands):

 

  

Quantitative Information about Level 3 Fair Value Measurements

 

Asset Description

 

Fair Value

 

Valuation

Technique

 

Unobservable Input

 

Range (Weighted

Average)

 

September 30, 2021

            
             

Corporate bonds

 $2,603 

Discounted Cash Flows

 

Discount Rate

  (3.37%)  
             

SBA servicing assets

 $4,572 

Discounted Cash Flows

 

Conditional Prepayment Rate Discount Rate

  (14.50%) (10.00%)
             

Impaired loans

 $6,182 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

 10%-42%(21%) (3)
             

Other real estate owned

 $168 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

  (6%) (3)
             

December 31, 2020

            
             

Corporate bonds

 $2,631 

Discounted Cash Flows

 

Discount Rate

  (3.48%)  
             

SBA servicing assets

 $4,626 

Discounted Cash Flows

 

Conditional Prepayment Rate Discount Rate

  (13.22%) (10.00%)
             

Impaired loans

 $5,678 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

 0%-23%(12%) (3)
             

Other real estate owned

 $364 

Appraised Value of Collateral (1)

 

Liquidation expenses (2)

 7%-16%(13%) (3)

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable.

(2)

Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

(3)

The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a percent of the appraised value.

 

The significant unobservable inputs for impaired loans and other real estate owned are the appraised value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be considered essential to the sale and would not have been incurred if the decision to sell had not been made. The costs to sell are based on costs associated with the Company’s actual sales of other real estate owned which are assessed annually.

 

30

 

Fair Value Assumptions

 

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities.  Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.  The following methods and assumptions were used to estimate the fair values of the Company’s financial instruments at September 30, 2021 and December 31, 2020.

 

Investment Securities

 

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

 

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

 

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

 

The corporate bond included in Level 3 was transferred from Level 2 in 2010 and is not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability to raise additional capital, when necessary, through the public capital markets. The fair value of this corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.

 

Mortgage Loans Held for Sale (Carried at Fair Value)

 

The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect their economic value. Interest income on loans held for sale, which totaled $123,000 and $599,000 for three and nine months ended September 30, 2021, respectively, and $248,000 and $497,000 for the three and nine months ended September 30, 2020, respectively, are included in interest and fees in the statements of income.

 

31

 

The following table reflects the difference between the carrying amount of mortgage loans held for sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually entitled to receive at maturity as of September 30, 2021 and December 31, 2020.

 

  

Carrying

Amount

  

Aggregate Unpaid

Principal Balance

  

Excess Carrying

Amount Over

Aggregate Unpaid

Principal Balance

 

September 30, 2021

 $12,082  $11,725  $357 
             

December 31, 2020

 $50,387  $48,109  $2,278 

 

Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of income in mortgage banking income. Republic did not have any mortgage loans held for sale recorded at fair value that were 90 or more days past due and on non-accrual at September 30, 2021 and December 31, 2020.

 

Interest Rate Lock Commitments (IRLC)

 

The Company determines the value of IRLCs by comparing the market price to the price locked in with the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing, and subtracting estimated remaining loan origination costs to the bank based on the processing status of the loan. The Company also considers pull-through as it determines the fair value of IRLCs Factors that affect pull-through rates include the origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage (purchase versus financing), the stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. IRLCs are classified within Level 2 of the valuation hierarchy.

 

Best Efforts Forward Loan Sales Commitments

 

Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy. Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale of mortgage loans into the secondary market. Best efforts forward loan sales commitments are entered into for loans at the time the borrower commitment is made. These best efforts forward loan sales commitments are valued using the committed price to the counterparty against the current market price of the interest rate lock commitment or mortgage loan held for sale.

 

Mandatory Forward Loan Sales Commitments

 

Fair values for mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Due to the observable inputs used by Republic, best efforts mandatory loan sales commitments are classified within Level 2 of the valuation hierarchy.

 

Impaired Loans (Carried at Lower of Cost or Fair Value)

 

Impaired loans are those that the Company has measured impairment based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is calculated as the difference between the recorded investment in a loan and the present value of expected future cash flows or it is calculated based on discounted collateral values if the loans are collateral dependent.

 

32

 

Other Real Estate Owned (Carried at Lower of Cost or Fair Value)

 

These assets are carried at the lower of cost or fair value. Fair value is determined through valuations periodically performed by third-party appraisers, and the real estate is carried at the lower of its carrying amount or fair value less estimated costs to sell. Any declines in the fair value of the real estate properties below the initial cost basis are recorded through a valuation expense. At September 30, 2021 and December 31, 2020, these assets are carried at current fair value and classified within Level 3 of the fair value hierarchy.

 

SBA Servicing Asset (Carried at Fair Value)

 

The SBA servicing asset is initially recorded when loans are sold and the servicing rights are retained and recorded on the balance sheet. An updated fair value is obtained from an independent third party on a quarterly basis and adjustments are presented as loan and servicing fees on the statement of income. The valuation begins with the projection of future cash flows for each asset based on their unique characteristics, the Company’s market-based assumptions for prepayment speeds and estimated losses and recoveries. The present value of the future cash flows are then calculated utilizing the Company’s market-based discount ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly period in order to create the most detailed cash flow stream possible.

 

The Company uses assumptions and estimates in determining the impairment of the SBA servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the risks involved and comparable to assumptions used by participants to value and bid serving rights available for sale in the market. At September 30, 2021 and December 31, 2020, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% adverse changes in key assumptions are included in the accompanying table.

 

(dollars in thousands)

 

September 30, 2021

  

December 31, 2020

 
         

SBA Servicing Asset

        
         

Fair Value of SBA Servicing Asset

 $4,572  $4,626 
         

Composition of SBA Loans Serviced for Others

        

Fixed-rate SBA loans

  4%  2%

Adjustable-rate SBA loans

  96%  98%

Total

  100%  100%
         

Weighted Average Remaining Term (in years)

 

19.6

  

20.0

 
         

Prepayment Speed

  14.50%  13.22%

Effect on fair value of a 10% increase

 $(175) $(170)

Effect on fair value of a 20% increase

  (338)  (329)
         

Weighted Average Discount Rate

  10.00%  10.00%

Effect on fair value of a 10% increase

 $(144) $(152)

Effect on fair value of a 20% increase

  (279)  (295)

 

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in value may not be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one factor may magnify or counteract the effect of the change.

 

33

 

Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)

 

Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.

 

The estimated fair values of the Company’s financial instruments at September 30, 2021 were as follows.

 

  

Fair Value Measurements at September 30, 2021

 
(dollars in thousands) Carrying
Amount
  

Fair

Value

  

Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)

  

Significant
Other
Observable
Inputs

(Level 2)

  

Significant
Unobservable
Inputs

(Level 3)

 
Balance Sheet Data                    
Financial assets:                    

Cash and cash equivalents

 $383,968  $383,968  $383,968  $-  $- 

Investment securities available for sale

  880,494   880,494   -   877,891   2,603 

Investment securities held to maturity

  1,377,253   1,373,183   -   1,373,183   - 

Equity securities

  9,231   9,231   9,231   -   - 

Restricted stock

  3,510   3,510   -   3,510   - 

Loans held for sale

  16,991   16,991   -   12,082   4,909 

Loans receivable, net

  2,479,796   2,470,627   -   -   2,470,627 

SBA servicing assets

  4,572   4,572   -   -   4,572 

Accrued interest receivable

  15,080   15,080   -   15,080   - 

Interest rate lock commitments

  593   593   -   593   - 

Best efforts forward loan sales commitments

  67   67   -   67   - 

Mandatory forward loan sales commitments

  43   43   -   43   - 
                     

Financial liabilities:

                    

Deposits

                    

Demand, savings and money market

 $4,774,603  $4,774,603  $-  $4,774,603  $- 

Time

  197,478   197,702   -   197,702   - 

Subordinated debt

  11,276   8,551   -   -   8,551 

Other borrowings

  -   -   -   -   - 

Accrued interest payable

  482   482   -   482   - 

Interest rate lock commitments

  -   -   -   -   - 

Best efforts forward loan sales commitments

  109   109   -   109   - 

Mandatory forward loan sales commitments

  33   33   -   33   - 
                     

Off-Balance Sheet Data

                    

Commitments to extend credit

  -   -   -   -   - 

Standby letters-of-credit

  -   -   -   -   - 

 

34

 

The estimated fair values of the Company’s financial instruments at December 31, 2020 were as follows:

 

  

Fair Value Measurements at December 31, 2020

 

(dollars in thousands)

 

Carrying

Amount

  

Fair

Value

  

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Balance Sheet Data

                    

Financial assets:

                    

Cash and cash equivalents

 $775,300  $775,300  $775,300  $-  $- 

Investment securities available for sale

  528,508   528,508   -   525,877   2,631 

Investment securities held to maturity

  814,936   836,972   -   836,972   - 

Equity securities

  9,039   9,039   9,039       

Restricted stock

  3,039   3,039   -   3,039   - 

Loans held for sale

  53,370   53,370   -   50,387   2,983 

Loans receivable, net

  2,632,367   2,618,104   -   -   2,618,104 

SBA servicing assets

  4,626   4,626   -   -   4,626 

Accrued interest receivable

  16,120   16,120   -   16,120   - 

Interest rate lock commitments

  1,580   1,580   -   1,580   - 

Best efforts forward loan sales commitments

  2   2   -   2   - 

Mandatory forward loan sales commitments

  -   -   -   -   - 
                     

Financial liabilities:

                    

Deposits

                    

Demand, savings and money market

 $3,827,390  $3,827,390  $-  $3,827,390  $- 

Time

  186,361   187,292   -   187,292   - 

Subordinated debt

  11,271   8,026   -   -   8,026 

Other borrowings

  633,866   633,866   -   633,866   - 

Accrued interest payable

  926   926   -   926   - 

Interest rate lock commitments

  -   -   -   -   - 

Best efforts forward loan sales commitments

  612   612   -   612   - 

Mandatory forward loan sales commitments

  800   800   -   800   - 
                     

Off-Balance Sheet Data

                    

Commitments to extend credit

  -   -   -   -   - 

Standby letters-of-credit

  -   -   -   -   - 

 

35

 

 

Note 9: Changes in Accumulated Other Comprehensive Income (Loss) By Component (1)

 

The following table presents the changes in accumulated other comprehensive loss by component for the nine months ended September 30, 2021 and 2020, and the year ended December 31, 2020.

 

  

Unrealized Gains

(Losses) on Available-

For-Sale Securities

  

 

 

Unrealized Holding

Losses on Securities

Transferred From

Available-For-Sale To

Held-To-Maturity

  Total 

(dollars in thousands)

            

Balance January 1, 2021

 $985  $(3,814) $(2,829)

Unrealized loss on securities

  (4,265)  -   (4,265)

Amounts reclassified from accumulated other comprehensive income to net income (2)

  (1)  1,491   1,490 

Net current-period other comprehensive income

  (4,266)  1,491   (2,775)

Total change in accumulated other comprehensive income

  (4,266)  1,491   (2,775)

Balance September 30, 2021

 $(3,281) $(2,323) $(5,604)
             

Balance January 1, 2020

 $(1,275) $(6,066) $(7,341)

Unrealized gain on securities

  3,483   -   3,483 

Amounts reclassified from accumulated other comprehensive income to net income (2)

  (2,060)  1,498   (562)

Net current-period other comprehensive income (loss)

  1,423   1,498   2,921 

Total change in accumulated other comprehensive income (loss)

  1,423   1,498   2,921 

Balance September 30, 2020

 $148  $(4,568) $(4,420)
             

Balance January 1, 2020

 $(1,275) $(6,066) $(7,341)

Unrealized gain on securities

  4,320   -   4,320 

Amounts reclassified from accumulated other comprehensive income to net income (2)

  (2,060)  2,252   192 

Net current-period other comprehensive income (loss)

  2,260   2,252   4,512 

Total change in accumulated other comprehensive income

  2,260   2,252   4,512 

Balance December 31, 2020

 $985  $(3,814) $(2,829)

 

 

(1)

All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income.

 

(2)

Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Operations.

 

 

Note 10 Shareholders Equity

 

On August 26, 2020, the Company completed an offering of 2,000,000 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $25.00 per share. The Company received net proceeds of $48.3 million from the offering, after deducting offering costs. The Company will pay dividends on the Series A Preferred Stock when and if declared by its board of directors or an authorized committee thereof. If declared, dividends will be due and payable at a rate of 7.00% per annum, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year. During the three month and nine month period ended September 30, 2021, $875,000 and $2.6 million were declared and paid on preferred stock compared to $923,000 during the three month period ended December 31, 2020.

 

36

 

Holders of shares of Series A Preferred Stock may convert such shares at any time and from time to time into shares of the Company’s common stock at a conversion price of $3.00 per share of our common stock, subject to adjustment upon certain events. At any time after August 26, 2025, the Company may cause the outstanding shares of Series A Preferred Stock to convert into shares of common stock if the price of the common stock exceeds 125% of the Conversion Price then applicable to the Series A Preferred Stock for at least 20 trading days in a period of 30 consecutive trading days.

 

 

Note 11: Goodwill and Other Intangibles

 

In connection with the review of our financial condition in light of the COVID-19 pandemic, we evaluated our assets, including goodwill and other intangibles for potential impairment on an interim basis at the end of each quarter during 2020. Goodwill was written off as a result of an interim test completed as of September 30, 2020. This was a complete write-off of all goodwill on the balance sheet.

 

In July 2016, Republic acquired all of the issued and outstanding limited liability company interests of Oak Mortgage Company, LLC and, as a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. The goodwill related to the acquisition of Oak Mortgage is detailed in the table below:

 

  

Three Months Ended

September 30,

 

(dollars in thousands)

 

2021

  

2020

 

Balance, July 1st

 $-  $5,011 

Additions/Adjustments

  -   - 

Amortization

  -   - 

Impairment

  -   (5,011)

Balance, September 30th

 $-  $- 

Amortization Period (in years)

  N/A     

 

  

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

  

2020

 

Balance, January 1st

 $-  $5,011 

Additions/Adjustments

  -   - 

Amortization

  -   - 

Impairment

  -   (5,011)

Balance, September 30th

 $-  $- 

Amortization Period (in years)

  N/A     

 

37

 

 

Note 12: Derivatives and Risk Management Activities

 

Republic did not have any derivative instruments designated as hedging instruments, or subject to master netting and collateral agreements for the nine months ended September 30, 2021 and September 30, 2020. The following table summarizes the amounts recorded in Republic’s statement of financial condition for derivatives not designated as hedging instruments as of September 30, 2021 and December 31, 2020 (in thousands):

 

September 30, 2021

Balance Sheet

Presentation

 

Fair

Value

  

Notional

Amount

 
          

Asset derivatives:

         
          

IRLC’s

Other Assets

 $593  $27,969 

Best efforts forward loan sales commitments

Other Assets

  67   15,592 

Mandatory forward loan sales commitments

Other Assets

  43   9,128 
          

Liability derivatives:

         
          

IRLC’s

Other Liabilities

 $-  $- 

Best efforts forward loan sales commitments

Other Liabilities

  109   12,377 

Mandatory forward loan sales commitments

Other Liabilities

  33   2,530 

 

December 31, 2020

Balance Sheet

Presentation

 

Fair

Value

  

Notional

Amount

 
          

Asset derivatives:

         
          

IRLC’s

Other Assets

 $1,580  $48,223 

Best efforts forward loan sales commitments

Other Assets

  2   2,069 

Mandatory forward loan sales commitments

Other Assets

  -   - 
          

Liability derivatives:

         
          

IRLC’s

Other Liabilities

 $-  $- 

Best efforts forward loan sales commitments

Other Liabilities

  612   46,154 

Mandatory forward loan sales commitments

Other Liabilities

  800   48,373 

 

38

 

The following tables summarize the amounts recorded in Republic’s statement of operations for derivative instruments not designated as hedging instruments for the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

 

Statement of Operations

Presentation

 

Three Months Ended

September 30, 2021

Gain/(Loss)

  

Nine Months Ended

September 30, 2021

Gain/(Loss)

 
          

Asset derivatives:

         
          

IRLCs

Mortgage banking income

 $(211) $(987)

Best efforts forward loan sales commitments

Mortgage banking income

  65   65 

Mandatory forward loan sales commitments

Mortgage banking income

  41   43 
          

Liability derivatives:

         
          

IRLCs

Mortgage banking income

 $-  $- 

Best efforts forward loan sales commitments

Mortgage banking income

  158   503 

Mandatory forward loan sales commitments

Mortgage banking income

  79   767 

 

 

Statement of Operations

Presentation

 

Three Months Ended

September 30, 2020

Gain/(Loss)

  

Nine Months Ended

September 30, 2020

Gain/(Loss)

 
          

Asset derivatives:

         
          

IRLCs

Mortgage banking income

 $(191) $1,089 

Best efforts forward loan sales commitments

Mortgage banking income

  (8)  (4)

Mandatory forward loan sales commitments

Mortgage banking income

  -   (2)
          

Liability derivatives:

         
          

IRLCs

Mortgage banking income

 $(1) $(1)

Best efforts forward loan sales commitments

Mortgage banking income

  100   (421)

Mandatory forward loan sales commitments

Mortgage banking income

  (199)  (442)

 

The fair value of Republic’s IRLCs, best efforts forward loan sales commitments, and mandatory forward loan sales commitments are based upon the estimated value of the underlying mortgage loan (determined consistent with “Loans Held for Sale”), adjusted for (1) estimated costs to complete and originate the loan, and (2) the estimated percentage of IRLCs that will result in a closed mortgage loan. The valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic sells loans servicing released, and the servicing released premium is included in the market price.

 

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Note 13: Revenue Recognition

 

The following table presents non-interest income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606,Revenue from Contracts with Customers”, for the three and nine months ended September 30, 2021 and 2020.

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

  

2020

  

2021

  

2020

 

Non-interest income

                

In-scope of Topic 606

                

Service charges on deposit accounts

 $3,283  $2,134  $10,503  $6,166 

Other non-interest income

  50   1,090   624   1,546 

Non-interest income (in-scope of Topic 606)

  3,333   3,224   11,127   7,712 

Non-interest income (out-of-scope of Topic 606)

  3,984   6,807   14,145   17,288 

Total non-interest income

 $7,317  $10,031  $25,272  $25,000 

 

Contract Balances

 

A contract assets balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s non-interest revenue streams are largely based on transaction activity, or standard month-end revenue accruals. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term contracts with customers, and therefore, does not experience significant contract balances. As of September 30, 2021 and December 31, 2020, the Company did not have any significant contract balances.

 

Contract Acquisition Costs

 

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize as an expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the assets that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

 

40

 

 

Note 14: Leases

 

We have operating lease agreements for certain land, buildings, and equipment. In some instances, a lease may contain renewal options to extend the term of the lease. We do not have any short-term leases in the calculation of the right-of-use assets and lease liability obligations. The most significant assumption related to the Company’s lease application of ASC 842 was the discount rate assumption. Since most of the lease agreements do not provide an implicit interest rate, the discount rate used in determining the operating lease liability obligation for each individual lease was the assumed incremental borrowing rate for the Company that corresponded with the remaining lease term.

 

At September 30, 2021, the Company had forty-four operating lease agreements, which include operating leases for twenty branch locations, seven offices that are used for general office space, and seventeen operating leases for equipment. Two of the real property operating leases did not include one or more options to extend the lease term. Eight of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The forty-four operating leases have maturity dates ranging from December 2021 to August 2059. Most of the property leases include options for multiple five and ten year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 19.07 years as of September 30, 2021. The weighted average operating lease discount rate was 3.35% as of September 30, 2021,

 

At September 30, 2020, the Company had forty-one operating lease agreements, which include operating leases for nineteen branch locations, seven offices that are used for general office space, and fifteen operating leases for equipment. One of the real property operating leases did not include one or more options to extend the lease term. Six of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The forty-one operating leases have maturity dates ranging from December 2020 to August 2059, most of which include options for multiple five and ten year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 20.24 years as of September 30, 2020. The weighted average operating lease discount rate was 3.53% as of September 30, 2020,

 

The following table presents operating lease costs net of sublease income for the three and nine months ended September 30, 2021 and 2020.

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30, 2021

  

September 30, 2020

  

September 30, 2021

  

September 30, 2020

 

(dollars in thousands)

                

Operating lease cost

 $2,142  $2,086  $6,416  $5,920 

Sublease income

  -   -   -   - 

Total lease cost

 $2,142  $2,086  $6,416  $5,920 

 

41

 

The following table presents a maturity analysis of total operating lease liability obligations and reconciliation of the undiscounted cash flows to total operating lease liability obligations at September 30, 2021 and 2020.

 

  

September 30,

2021

  

September 30,

2020

 

(dollars in thousands)

        

Operating lease payments due:

        

Within one year

 $2,102  $6,521 

One to three years

  15,755   11,804 

Three to five years

  14,960   10,529 

More than five years

  85,180   77,596 

Total undiscounted cash flows

  117,997   106,450 

Discount on cash flows

  (34,614)  (33,481)

Total operating lease liability obligations

 $83,383  $72,969 

 

 

The following table presents cash and non-cash activities for the three and nine months ended September 30 2021 and 2020.

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

2021

  

September 30,

2020

  

September 30,

2021

  

September 30,

2020

 

(dollars in thousands)

                

Cash paid for amounts included in the measurement of lease liabilities

                

Operating cash flows from operating leases

 $2,097  $1,893  $6,167  $5,432 
                 

Non-cash investing and financing activities

                

Additions to Operating leases – right of use asset

                

New operating lease liability obligation

 $52  $5,121  $8,174  $5,310 

 

42

 

 

ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is management’s discussion and analysis of our financial condition, changes in financial condition, and results of operations in the accompanying consolidated financial statements. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements.

 

We may from time to time make written or oral "forward-looking statements", including statements contained in this quarterly report. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements.  For example, risks and uncertainties can arise with changes in: general economic conditions, including turmoil in the financial markets and related efforts of government agencies to stabilize the financial system; the adequacy of our allowance for loan losses and our methodology for determining such allowance; adverse changes in our loan portfolio and credit risk-related losses and expenses; concentrations within our loan portfolio, including our exposure to commercial real estate loans, and to our primary service area; changes in interest rates; our ability to identify, negotiate, secure and develop new store locations and renew, modify, or terminate leases or dispose of properties for existing store locations effectively; business conditions in the financial services industry, including competitive pressure among financial services companies, new service and product offerings by competitors, price pressures and similar items; deposit flows; loan demand; the regulatory environment, including evolving banking industry standards, changes in legislation or regulation; our securities portfolio and the valuation of our securities; accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements; rapidly changing technology; litigation liabilities, including costs, expenses, settlements and judgments; the effects of health emergencies, including the spread of infections, diseases, and pandemics; and other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.  You should carefully review the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2020 and other documents we file from time to time with the Securities and Exchange Commission. The words "would be," "could be," "should be," "probability," "risk," "target," "objective," "may," "will," "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect" and similar expressions or variations on such expressions are intended to identify forward-looking statements. All such statements are made in good faith by us pursuant to the "safe harbor" provisions of the U.S. Private Securities Litigation Reform Act of 1995. We do not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of us, except as may be required by applicable law or regulations

 

Executive Summary

 

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. We offer a variety of credit and depository banking services to individuals and businesses primarily in Greater Philadelphia, Southern New Jersey and New York City through our offices and branch locations in those markets. We commonly refer to our branch locations as stores to reflect our retail oriented approach to customer service and convenience.

 

As of September 30, 2021, we serve our customers through 32 store locations, in addition to 4 loan offices that specialize in commercial, small business and residential mortgage lending. Our stores are open 7 days a week, 361 days a year, with extended lobby and drive-thru hours providing customers with some of the most convenient hours compared to any bank in the markets which we operate. We offer free checking, free coin counting, and ATM/Debit cards issued on the spot. We also provide access to more than 55,000 surcharge free ATM machines worldwide through the Allpoint network to our customers. Our commitment to deliver best in class customer service not only applies to our store locations, but includes by phone, online and mobile options as well. Our business model is built on customer loyalty and engagement, understanding customer needs and offering the financial products and services to help them achieve their goals and objectives.

 

43

 

Current Economic Environment

 

The coronavirus (“COVID-19”) outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions over the last eighteen months. In response to these conditions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. It has remained at that level through the period ended September 30, 2021. The Federal Reserve has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.

 

The economic downturn that began in the U.S. as a result of the government-mandated business closures and stay-at-home orders significantly impacted the labor market, consumer spending, business investment and profitability. As a result, the President signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) in March 2020 which is the largest economic stimulus package in the nation’s history in an effort to lessen the impact of COVID-19 on consumers and businesses. Among other measures, the CARES Act authorized funding for the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”) to provide loans to small businesses to keep employees on their payroll and to make other eligible payments to sustain their operation in the near term. In December 2020, the Economic Aid Act was signed into law, which extended certain provisions of the CARES Act and provides additional support and financial assistance for small businesses, non-profit organizations, and other entities. These actions, along with other stimulus programs, enacted by federal, state and local government agencies have provided stability as vaccines continue to become more widely available and governmental restrictions are slowly lifted. The U.S. economy is showing signs of recovery following the severe economic contraction experienced during 2020. However, economic activity remains below pre-pandemic levels, unemployment remains elevated, and the possibility of a resurgence of the COVID virus remains a possibility.

 

In a period of economic contraction, elevated levels of loan losses and lost interest income may occur. The extent to which the COVID-19 pandemic has a further impact the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

 

COVID-19 Response Efforts

 

Republic is committed to providing the financial resources necessary to support the economic recovery in our market. We took an active role in participating in the first round of the (“PPP”). We quickly developed a process to accept PPP loan applications not only from our valued small business customers, but from non-customers throughout our community as well. During the first round of the PPP program, we processed and obtained SBA approval for nearly 5,000 PPP loan applications resulting in more than $680 million in loans. We are now assisting the recipients of those loans through the application process for forgiveness of the outstanding loan balance with the SBA. In addition, we processed applications for the second round of the PPP program which was authorized by the Economic Aid Act in December 2020. In the first and second quarter of 2021 we originated nearly $270 million in additional PPP loans and received approval from the SBA on more than 2,500 applications in this second round.

 

We are now assisting customers that obtained a PPP loan in the second round with the application process for forgiveness as well.

 

Since the pandemic started, we also took a number of steps to mitigate the potential spread of the coronavirus and to assist our customers, employees and other members of the community during this crisis. During this time, we have:

 

 

Put procedures and supplies in place at all of our store locations such as plastic shields, public notices, hand sanitizer, etc., in accordance with CDC guidelines. While temporarily closed for a period of time, all of our store lobbies have been re-opened for all transactions including new account openings.

 

44

 

 

Encouraged customers to utilize our online, mobile and telephone banking systems. In addition, we continue to offer more than 55,000 surcharge free ATM machines to all of our customers.

 

 

Directed our commercial lenders to maintain contact with their customers to discuss the impact of the current economic conditions on their business and to develop a plan for assistance if required.

 

 

Implemented a work from home policy for all employees whose primary responsibilities can be completed in this manner.

 

 

Initiated additional preventative measures by providing guidance and proper supplies to all employees to support appropriate hygiene and social distancing.

 

Loss Mitigation and Loan Portfolio Analysis

 

We took a proactive approach to analyze and prepare for the potential challenges to be faced as the effects of the COVID-19 pandemic continue to impact our customers. A detailed analysis of loan concentrations and segments that may present the areas of highest risk was prepared and continues to be closely monitored. Our commercial lending team initiated contact with a majority of our loan customers to discuss the impact that this pandemic crisis had on their businesses to date and the expected ramifications that could be felt in the future. We executed loan modifications and initiated payment deferrals for all customers that had an immediate need for assistance.

 

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law which amended certain sections of the CARES Act. This amendment extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declares a termination of the national emergency related to the COVID-19 pandemic. As of September 30, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the height of the COVID pandemic have resumed contractual payments. At December 31, 2020, 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.

 

As a result of the recent changes in economic conditions, we have increased the qualitative factors for certain components of our allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan to values on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP should help mitigate potential future period losses. We will closely monitor all key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic continue to impact our customer base. Based on the incurred loss methodology currently utilized by Republic, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and severity of the economic downturn and the full impact on our loan portfolio.

 

45

 

Financial Condition

 

Assets

 

Total assets increased by $340 million to $5.4 billion at September 30, 2021, compared to $5.1 billion at December 31, 2020. The ongoing success with our expansion strategy has resulted in a significant increase in new business relationships and account openings during the first nine months of 2021. Total assets increased primarily due to a $914 million increase in investment securities partially offset by a $391 million decrease in cash and a $153 million decrease in loans receivable which was driven by the forgiveness and repayment of PPP loan balances.

 

Cash and Cash Equivalents

 

Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount of these two categories decreased by $391 million to $384 million at September 30, 2021, from $775 million at December 31, 2020.

 

Loans Held for Sale

 

Loans held for sale are comprised of loans guaranteed by U.S. Small Business Administration (“SBA”) which we usually originate with the intention of selling in the future and residential mortgage loans originated which we also intend to sell in the future. Total SBA loans held for sale were $4.9 million at September 30, 2021 as compared to $3.0 million at December 31, 2020. Residential mortgage loans held for sale were $12.1 million at September 30, 2021 compared to $50.4 million at December 31, 2020. The reduction in residential mortgage loans held for sale was a result of the timing of loan closings and subsequent sales as of September 30, 2021. Loans held for sale, as a percentage of total assets, were less than 1% at September 30, 2021.

 

Loans Receivable

 

The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $45.0 million at September 30, 2021. Loans made to one individual customer, even if secured by different collateral, are aggregated for purposes of the lending limit.

 

Loans decreased $153 million, or 6%, to $2.5 billion at September 30, 2021, versus $2.6 billion at December 31, 2020. Due to our proactive approach in assisting PPP loan customers with the submission of forgiveness applications, PPP loans decreased $388 million to $249 million at September 30, 2021 compared to $637 million at December 31, 2020. Total loans excluding PPP loans increased by $235 million at September 30, 2021 compared to December 31, 2020. This growth was primarily the result of the successful execution of our relationship banking model which has driven a steady flow in quality loan demand. We also expect many of the new business relationships that grew from our success with PPP to provide significant opportunities for commercial loan growth in future periods.

 

46

 

Investment Securities

 

Investment securities considered available-for-sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities classified as available-for-sale consist primarily of SBA bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Available-for-sale securities totaled $880.5 million at September 30, 2021, compared to $528.5 million at December 31, 2020. The increase was primarily due to the purchase of securities totaling $464.9 million partially offset by the paydown, maturity, or call, of securities totaling $104.1 million during the first nine months of 2021. At September 30, 2021, the portfolio had a net unrealized loss of $4.4 million compared to a net unrealized gain of $1.3 million at December 31, 2020. The change in value of the investment portfolio was driven by an increase in market interest rates which resulted in a decrease in the value of the securities available-for-sale in our portfolio during the first nine months of 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 $1.4 billion and $837.0 million at September 30, 2021 and December 31, 2020, respectively. The increase was primarily due to the purchase of investment securities held to maturity totaling $764.9 million partially offset by the paydown, maturity, or call of securities totaling $201.3 million during the first six months of 2021.

 

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 totaled $9.2 million at September 30, 2021 compared to $9.0 million at December 31, 2020.

 

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 September 30, 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 September 30, 2021 and December 31, 2020, the investment in FHLB of Pittsburgh capital stock totaled $3.4 million and $2.9 million, respectively. At both September 30, 2021 and December 31, 2020, ACBB capital stock totaled $143,000. Both the FHLB and ACBB issued dividend payments during the third quarter of 2021.

 

Premises and Equipment

 

The balance of premises and equipment increased to $125.3 million at September 30, 2021 from $123.2 million at December 31, 2020. The increase was primarily due to premises and equipment expenditures of $8.5 million less depreciation and amortization expenses of $6.4 million during the first nine months of 2021. A new store was opened in Deptford, NJ in June 2021 bringing the total store count to thirty-two at September 30, 2021 compared to thirty-one locations at December 31, 2020. There are also sites in various stages of development for future store locations.

 

Other Real Estate Owned

 

At September 30, 2021 and December 31, 2020, the balance of other real estate owned was $532,000 and $1.2 million, respectively.

 

47

 

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 September 30, 2021 and December 31, 2020, the balance of operating leases – right-of-use asset was $76.8 million and $72.9 million, respectively.

 

Deposits

 

Deposits, which include non-interest and interest-bearing demand deposits, money market, savings, and time deposits, are Republic’s major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships. Total deposits increased by $958.3 million to $5.0 billion at September 30, 2021 from $4.0 billion at December 31, 2020. We constantly focus our efforts on the growth of deposit balances through the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction. This strategy has also allowed us to build a stable core-deposit base and nearly eliminate our dependence upon the more volatile sources of funding found in brokered and internet certificates of deposit. Our participation in the PPP loan program resulted in significant growth in new deposit relationships over the last twelve months. Many of those applicants were so pleased with their experience during the PPP process that they chose to move their primary banking relationship to Republic.

 

Other Borrowings

 

As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowings to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. The Company did not pledge any PPP loans or borrow any funds as part of the PPPLF program at September 30, 2021 since the PPPLF program was discontinued on July 30, 2021. The Company pledged $634 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $634 million of funds at a rate of 0.35% at December 31, 2020. The borrowings were repaid in full during the first week following quarter end.

 

Operating Lease Liability Obligation

 

Under ASC 842, the operating lease liability obligation is calculated as the present value of the lease payments, using the discount rate specified in the lease, or if that is not available, our incremental borrowing rate. At September 30, 2021 and December 31, 2020, the balance of the operating lease liability obligation was $83.4 million and $77.6 million, respectively.

 

Shareholders Equity

 

Total shareholders’ equity increased $15.4 million to $323.5 million at September 30, 2021 compared to $308.1 million at December 31, 2020. The increase was primarily due to net income of $16.5 million during the first nine months of 2021.

 

Results of Operations

 

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

 

We reported net income available to common shareholders of $5.2 million, or $0.08 per diluted share per diluted share, for the three months ended September 30, 2021 compared to a net loss of $966,000, or ($0.02) per diluted share for the three months ended September 30, 2020. Earnings in 2021 were positively impacted by our growth in net interest income and our ongoing focus on cost control initiatives to limit expense growth. Earnings in 2020 were negatively impacted by a non-recurring goodwill impairment charge of $5.0 million.

 

48

 

Net interest income was $31.4 million for the three month period ended September 30, 2021 compared to $22.9 million for the three months ended September 30, 2020. Interest income increased $7.2 million, or 25%, primarily due to an primarily due to an increase in average investment securities balances and an increase in the average yield on loan receivable balances. Interest expense decreased $1.3 million, or 23%, primarily due to a decrease in the average rate paid on deposit balances. The net interest margin increased by 19 basis points to 2.54% during the third quarter of 2021 compared to 2.35% during the third quarter of 2020.

 

We recorded a provision for loan losses in the amount of $900,000 for the three months ended September 30, 2021 and a provision for loan losses in the amount of $850,000 for the three months ended September 30, 2020. The provision recorded is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.

 

Non-interest income decreased by $2.7 million to $7.3 million during the three months ended September 30, 2021 compared to $10.0 million during the three months ended September 30, 2020. The decrease during the three months ended September 30, 2021 was primarily due to a decrease in mortgage banking income driven by lower mortgage loan originations partially offset by an increase in service fees on deposit accounts.

 

Non-interest expenses decreased $3.8 million to $29.8 million during the three months ended September 30, 2021 compared to $33.6 million during the three months ended September 30, 2020. This decrease was primarily driven by a non-recurring goodwill impairment charge totaling $5.0 million recorded during the third quarter of 2020. Cost control measures implemented by management also have had a positive effect in limiting expense growth in other areas of operations.

 

We recorded a provision for income taxes in the amount of $2.0 million during the three months ended September 30, 2021 compared to a $503,000 benefit for income taxes during the three months ended September 30, 2020.

 

Return on average assets and average equity from continuing operations was 0.47% and 7.47%, respectively, during the three months ended September 30, 2021 compared to (0.09%) and (1.40%), respectively, for the three months ended September 30, 2020.

 

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

 

We reported net income available to shareholders of $16.5 million, or $0.25 per diluted share, for the nine months ended September 30, 2021 compared to net income of $953,000, or $0.02 per diluted share, for the nine months ended September 30, 2020. The increase in earnings year over year was primarily driven by growth in revenue along with the cost control measures implemented by management to limit expense growth. We continue to focus on growing revenue at a greater rate than expenses as we execute our growth strategy and expand our store network. Earnings in 2020 were negatively impacted by a non-recurring goodwill impairment charge of $5.0 million.

 

Net interest income for the nine months ended September 30, 2021 was $93.5 million as compared to $66.1 million for the nine months ended September 30, 2020. Interest income increased $23.9 million, or 28%, primarily due to an increase in average loans receivable and investment securities balances. Interest expense decreased $3.6 million, or 20%, primarily due to a decrease in the average rate paid on deposit balances. The net interest margin increased to 2.71% during nine months ended September 30, 2021 compared to 2.53% during the nine months ended September 30, 2020.

 

We recorded a provision for loan losses of $3.9 million for the nine months ended September 30, 2021 compared to a provision for loan losses of $2.8 million for the nine months ended September 30, 2020. The provision recorded is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. The increase in the provision year over year was a result of an increase in both the allowance required for loans collectively and individually evaluated for impairment. The increase related to the allowance for loans collectively evaluated for impairment was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment caused by the impact of the COVID-19 pandemic.

 

49

 

Non-interest income increased $272,000 to $25.3 million during the nine months ended September 30, 2021 compared to $25.0 million during the nine months ended September 30, 2020. The increase during the nine months ended September 30, 2021 was primarily due to increases in service fees and deposit accounts, gains on the sale of SBA loans, and loan and serving fees partially offset by decreases in gains from the sale of investment securities and mortgage banking income.

 

Non-interest expenses increased $2.1 million to $89.6 million during the nine months ended September 30, 2021 as compared to $87.5 million during the nine months ended September 30, 2020. This increase was primarily a result of growth in salaries and employee benefit costs in addition to higher occupancy and equipment expense driven by our growth and expansion strategy. Cost control measures implemented by management have had a positive effect in limiting overall expense growth.

 

We recorded a provision for income taxes in the amount of $6.1 million during the nine months ended September 30, 2021 compared to a $158,000 benefit for income taxes during the nine months ended September 30, 2020.

 

Return on average assets and average equity from continuing operations were 0.52% and 8.07%, respectively, during the nine months ended September 30, 2021 compared to 0.03% and 0.49, respectively, for the nine months ended September 30, 2020.

 

50

 

Analysis of Net Interest Income

 

Historically, our earnings have depended primarily upon Republic’s net interest income, which is the difference between interest earned on interest‑earning assets and interest paid on interest‑bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest‑earning assets and interest‑bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin (net interest income as a percentage of average total interest-earning assets). Averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax equivalency, a non-GAAP measure, using a rate of 24% in 2021 and 21% in 2020.

 

Average Balances and Net Interest Income

 

   

For the three months ended

September 30, 2021

   

For the three months ended

September 30, 2020

 

(dollars in thousands)

 

Average

Balance

   

Interest

   

Yield/

Rate(1)

   

Average

Balance

   

Interest

   

Yield/

Rate(1)

 

Interest-earning assets:

                                               

Federal funds sold and other interest-earning assets

  $ 480,166     $ 182       0.15

%

  $ 383,632     $ 99       0.10

%

Investment securities and restricted stock (2) 

    1,948,532       8,240       1.68

%

    908,166       3,784       1.67

%

Loans receivable (2)

    2,495,611       27,493       4.37

%

    2,617,981       24,829       3.77

%

Total interest-earning assets

    4,924,309       35,915       2.89

%

    3,909,779       28,712       2.92

%

Other assets

    248,095                       269,111                  

Total assets

  $ 5,172,404                     $ 4,178,890                  
                                                 

Interest-earning liabilities:

                                               

Demand – non-interest bearing

  $ 1,301,102                     $ 1,043,116                  

Demand – interest bearing

    2,022,477       3,165       0.62

%

    1,541,837       3,056       0.79

%

Money market & savings

    1,219,009       837       0.27

%

    980,979       1,613       0.65

%

Time deposits

    193,816       281       0.58

%

    217,554       884       1.62

%

Total deposits

    4,736,404       4,283       0.36

%

    3,783,486       5,553       0.58

%

Total interest-bearing deposits

    3,435,302       4,283       0.49

%

    2,740,370       5,553       0.81

%

Other borrowings

    11,276       53       1.86

%

    32,343       77       0.95

%

Total interest-bearing liabilities

    3,446,578       4,336       0.50

%

    2,772,713       5,630       0.81

%

Total deposits and other borrowings

    4,747,680       4,336       0.36

%

    3,815,829       5,630       0.59

%

Non-interest bearing other liabilities

    100,773                       87,878                  

Shareholders’ equity

    323,951                       275,183                  

Total liabilities and shareholders’ equity

  $ 5,172,404                     $ 4,178,890                  

Net interest income (2)

          $ 31,579                       23,082          

Net interest spread

                    2.39

%

                    2.11 %

Net interest margin (2)

                    2.54

%

                    2.35 %

 

(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 $137 and $152 for the three months ended September 30, 2021 and 2020, 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.

 

51

 

Average Balances and Net Interest Income

 

   

For the nine months ended

September 30, 2021

   

For the nine months ended

September 30, 2020

 

(dollars in thousands)

 

Average

Balance

   

Interest

   

Yield/

Rate(1)

   

Average

Balance

   

Interest

   

Yield/

Rate(1)

 

Interest-earning assets:

                                               

Federal funds sold and other interest-earning assets

  $ 332,590     $ 294       0.12

%

  $ 221,698     $ 438       0.26

%

Investment securities and restricted stock (2)

    1,691,294       21,579       1.71

%

    1,032,289       15,687       2.03

%

Loans receivable (2)

    2,609,622       86,086       4.41

%

    2,255,283       68,032       4.03

%

Total interest-earning assets

    4,633,506       107,959       3.12

%

    3,509,270       84,157       3.20

%

Other assets

    262,383                       265,498                  

Total assets

  $ 4,895,889                     $ 3,774,768                  
                                                 

Interest-earning liabilities:

                                               

Demand – non-interest bearing

  $ 1,207,065                     $ 891,385                  

Demand – interest bearing

    1,945,074       9,706       0.67

%

    1,426,181       9,333       0.87

%

Money market & savings

    1,110,962       2,888       0.35

%

    864,517       4,827       0.75

%

Time deposits

    188,613       1,245       0.88

%

    217,526       3,138       1.93

%

Total deposits

    4,451,714       13,839       0.42

%

    3,399,609       17,298       0.68

%

Total interest-bearing deposits

    3,244,649       13,839       0.57

%

    2,508,224       17,298       0.92

%

Other borrowings

    26,019       200       1.03

%

    29,932       293       1.31

%

Total interest-bearing liabilities

    3,270,668       14,039       0.57

%

    2,538,156       17,591       0.93

%

Total deposits and other borrowings

    4,477,733       14,039       0.42

%

    3,429,541       17,591       0.69

%

Non-interest bearing other liabilities

    101,678                       85,481                  

Shareholders’ equity

    316,478                       259,746                  

Total liabilities and shareholders’ equity

  $ 4,895,889                     $ 3,774,768                  

Net interest income (2)

          $ 93,920                     $ 66,566          

Net interest spread

                    2.55

%

                    2.27

%

Net interest margin (2)

                    2.71

%

                    2.53

%

 

(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 $407 and $455 for the nine months ended September 30, 2021 and 2020, 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.

 

52

 

Rate/Volume Analysis of Changes in Net Interest Income

 

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

 

   

For the three months ended

September 30, 2021 vs. 2020

   

For the nine months ended

September 30, 2021 vs. 2020

 
   

Changes due to:

           

Changes due to:

         

(dollars in thousands)

 

Average

Volume

   

Average

Rate

   

Total

Change

   

Average Volume

   

Average

Rate

   

Total

Change

 

Interest earned:

                                               

Federal funds sold and other interest-earning assets

  $ 47     $ 36     $ 83     $ 98     $ (242 )   $ (144 )

Securities

    4,429       27       4,456       8,408       (2,516 )     5,892  

Loans

    (1,983 )     4,647       2,664       10,891       7,163       18,054  

Total interest-earning assets

    2,493       4,710       7,203       19,397       4,405       23,802  
                                                 

Interest expense:

                                               

Deposits

                                               

Interest-bearing demand deposits

    745       (636 )     109       2,592       (2,219 )     373  

Money market and savings

    152       (928 )     (776 )     600       (2,539 )     (1,939 )

Time deposits

    (28 )     (574 )     (602 )     (191 )     (1,702 )     (1,893 )

Total deposit interest expense

    869       (2,138 )     (1,269 )     3,001       (6,460 )     (3,459 )

Other borrowings

    (19 )     (6 )     (25 )     (11 )     (82 )     (93 )

Total interest expense

    850       (2,144 )     (1,294 )     2,990       (6,542 )     (3,552 )

Net interest income

  $ 1,643     $ 6,854     $ 8,497     $ 16,407     $ (10,947 )   $ 27,354  

 

Net Interest Income and Net Interest Margin

 

Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the three months ended September 30, 2021 increased $8.5 million, or 37%, over the same period in 2020. Interest income on interest-earning assets totaled $35.9 million and $28.7 million for the three months ended September 30, 2021 and 2020, respectively. The increase in interest income earned was primarily the result of an increase in the average balance of investment securities and the average yield on loans receivable. In addition, $3.9 million in origination fees related to PPP loans were recognized during the three months ended September 30, 2021. Total interest expense for the three months ended September 30, 2021 decreased by $1.3 million, or 23%, to $4.3 million from $5.6 million for the same period in 2020. Interest expense on deposits decreased by $1.3 million, or 23%, for the three months ended September 30, 2021 versus the same period in 2020 due primarily to a decrease in the average rate on deposit balances. Interest expense on other borrowings decreased by $25,000 for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 primarily due to a decrease in the average balance on overnight borrowings.

 

Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the nine months ended September 30, 2021 increased $27.4 million, or 41%, over the same period in 2020. Interest income on interest-earning assets totaled $108.0 million and $84.2 million for the nine months ended September 30, 2021 and 2020, respectively. The increase in interest income earned was primarily the result of an increase in the average balances of loans receivable and investment securities related to our growth and expansion strategy. In addition, $16.0 million in origination fees related to PPP loans were recognized during the nine months ended September 30, 2021. Total interest expense for the nine months ended September 30, 2021 decreased by $3.6 million, or 20%, to $14.0 million from $17.6 million for the same period in 2020. Interest expense on deposits decreased by $3.5 million, or 20%, for the nine months ended September 30, 2021 versus the same period in 2020 due primarily to a decrease in the average rate on deposit balances. Interest expense on other borrowings decreased by $93,000 for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 primarily due to a decrease in the average rate overnight borrowings.

 

53

 

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 2.39% during the three months ended September 30, 2021 compared to 2.11% during the three months ended September 30, 2020 and was 2.55% during the nine months ended September 30, 2021 compared to 2.27% during nine months ended September 30, 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 three months ended September 30, 2021 and September 30, 2020, the fully tax-equivalent net interest margin was 2.54% and 2.35%, respectively. For the nine months ended September 30, 2021 and September 30, 2020, the fully tax-equivalent net interest margin was 2.71% and 2.53%, respectively.

 

Provision for Loan Losses

 

We recorded an $900,000 provision for loan losses for the three months ended September 30, 2021 as compared to $850,000 provision for the three months ended September 30, 2020. We recorded a $3.9 million provision for loan losses for the nine months ended September 30, 2021 as compared to $2.8 million for the nine months ended September 30, 2020. During the three and nine months ended September 30, 2021, there was an increase in the allowance required for loans collectively evaluated for impairment which has been adjusted for certain qualitative factors, specifically those factors that account for the state of the economic environment that Republic is doing business in, as well as the nature of and concentration in certain credit types within the loan portfolio. The increase was also partially driven by the allowance required for loans individually evaluated for impairment. The provision recorded at the three and nine months ended September 30, 2021 is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.

 

As a result of the changes in economic conditions caused by the pandemic, we have increased the qualitative factors for certain components included in 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 and Economic Aid Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP Program should continue to help mitigate potential future period losses. Although the economy has begun to demonstrate signs of recovery, many key economic indicators have not returned to pre-pandemic levels and the potential for a resurgence of COVID infection rates remains a possibility. Based on the incurred loss methodology currently utilized by the Bank, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and severity of the economic downturn caused by the COVID pandemic and the corresponding impact on our loan portfolio.

 

We have elected to defer the adoption of ASU` 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the Economic Aid Act approved in December 2020 until January 1, 2022.

 

54

 

NonInterest Income

 

Total non-interest income for the three months ended September 30, 2021 decreased $2.7 million, or 27%, compared to the three months ended September 30, 2020. Mortgage banking income totaled $2.4 million during the three months ended September 30, 2021 which represents a decrease of $2.6 million from the same period in 2020. The decrease in mortgage banking income was a result of a decrease in residential mortgage loan originations year over year. No gains were recognized on the sale of investment securities during the three months ended September 30, 2021 compared to gains of $279,000 on the sale of investment securities during the three months ended September 30, 2020. Gains on the sale of SBA loans totaled $641,000 for the three months ended September 30, 2021, a decrease of $8,000, compared to $649,000 for the same period in 2020. Service fees on deposit accounts totaled $3.3 million for the three months ended September 30, 2021 which represents an increase of $1.1 million over the same period in 2020. This increase was due to the growth in the number of customer accounts and transaction volume in addition to revenue growth from ATM and debit card transactions driven by the conversion to Visa earlier this year. Loan and servicing fees totaled $946,000 for the three months ended September 30, 2021 which represents an increase of $29,000 from the same period in 2020.

 

Total non-interest income for the nine months ended September 30, 2021 increased $272,000, or 1%, compared to the nine months ended September 30, 2020. Service fees on deposit accounts totaled $10.5 million for the nine months ended September 30, 2021 which represents an increase of $4.3 million over the same period in 2020. This increase was due to the growth in the number of customer accounts and transaction volume in addition to revenue growth from ATM and debit card transactions driven by the conversion to Visa earlier this year.. Gains on the sale of SBA loans totaled $2.0 million for the nine months ended September 30, 2021, an increase of $468,000, compared to $1.6 million for the same period in 2020. Loan and servicing fees totaled $2.2 million for the nine months ended September 30, 2021 which represents an increase of $87,000 from the same period in 2020. Gains of $2,000 were recognized on the sale of investment securities during the nine months ended September 30, 2020 compared to gains of $2.8 million on the sale of investment securities during the nine months ended September 30, 2020. Mortgage banking income totaled $9.9 million for the nine months ended September 30, 2021, a decrease of $940,000, compared to $10.8 million during the nine months ended September 30, 2020. The decrease in mortgage banking income was a result of a decrease in residential mortgage loan originations year over year.

 

NonInterest Expenses

 

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

 

Non-interest expenses decreased $3.8 million, or 11%, for the three months ended September 30, 2021 compared to the same period in 2020. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.

 

Salaries and employee benefits increased by $44,000 for the three months ended September 30, 2021 compared to the same period in 2020. Cost control initiatives which have had a positive effect on salary and benefit costs. There were thirty-two stores open as of September 30, 2021 compared to thirty-one stores at September 30, 2020.

 

Occupancy expense, including depreciation and amortization expenses, increased by $165,000, or 3%, for the three months ended September 30, 2021 compared to the same period in 2020, as a result of our continuing growth and expansion strategy.

 

Other real estate expenses totaled $119,000 during the three months ended September 30, 2021, an increase of $39,000, or 49%, compared to the same period in 2020. The increase is related to higher costs on foreclosed assets held in 2021 as compared to 2020.

 

All other non-interest expenses decreased by $4.1 million, or 30%, for the three months ended September 30, 2021 compared to the same period last year. Decreases in goodwill impairment, advertising, debit card processing, appraisal and other loan expenses, and other expenses contributed to the decrease in other operating expenses. A one-time goodwill impairment charge of $5.0 million was recorded in the third quarter of 2020.

 

55

 

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

 

Non-interest expenses increased $2.4 million, or 2%, for the nine months ended September 30, 2021 compared to the same period in 2020. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.

 

Salaries and employee benefits increased by $3.1 million, or 7%, for the nine months ended September 30, 2021 compared to the same period in 2020. The increase was driven by merit increases and a new store opening in Deptford, NJ, during 2021. There were thirty-two stores open as of September 30, 2021 compared to thirty-one stores at September 30, 2020.

 

Occupancy expense, including depreciation and amortization expenses, increased by $1.2 million, or 8%, for the nine months ended September 30, 2021 compared to the same period in 2020, as a result of our continuing growth and expansion strategy.

 

Other real estate expenses totaled $710,000 during the nine months ended September 30, 2021, an increase of $273,000, or 62%, compared to the same period in 2020. The increase is related to higher costs on foreclosed assets held in 2021 as compared to 2020.

 

All other non-interest expenses decreased by $2.4 million, or 8%, for the nine months ended September 30, 2021 compared to the same period last year. Decreases in goodwill impairment, advertising, debit card processing, legal, and other expenses contributed to the decrease in other operating expenses. A one-time goodwill impairment charge of $5.0 million was recorded in the third quarter of 2020.

 

One key measure that management utilizes to monitor progress in controlling overhead expenses is the ratio of annualized net non-interest expenses to average assets, a non-GAAP measure. For the purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the three months ended September 30, 2021, this ratio was 1.72% compared to 2.24% for the three months ended September 30, 2020. For the nine months ended September 30, 2021, the ratio was 1.76% compared to 2.21% for the nine months ended September 30, 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, a non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. For the three months ended September 30, 2021, the operating efficiency ratio was 76.8% compared to 101.9% for the three months ended September 30, 2020. The operating efficiency ratio was 75.5% for the nine months ended September 30, 2021 compared to 96.1% for the nine months ended September 30, 2020. The decrease in this ratio for three and nine months ended September 30, 2020 was due to net interest income and non-interest income increasing at a faster rate than non-interest expenses.

 

Benefit for Income Taxes

 

We recorded a provision for income taxes in the amount of $2.0 million for the three months ended September 30, 2021, compared to a $503,000 benefit for the three months ended September 30, 2020. For the nine months ended September 30, 2021, we recorded a provision for income taxes of $6.1 million compared to a $158,000 benefit for the nine months ended September 30, 2020. The effective tax rates for the three months ended September 30, 2021 and 2020 were 25% and (34%), respectively. For the nine months ended September 30, 2021 and 2020, the effective tax rates were 24% and (20%), respectively. Differences in the effective tax rates are a result of the level of tax exempt interest income relative to pre-tax income (loss).

 

56

 

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

 

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

 

The Company is in a three year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets is expected to continue and is supported by the capital raise completed during 2020. The ratio of non-performing assets to total assets along with other credit quality metrics continue to improve. A number of cost control measures have been implemented to offset the challenges faced in growing revenue as a result of compression in the net interest margin. The Company has added fourteen 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 would have potentially been at risk of expiring in the future.

 

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

 

Based on the guidance provided in ASC 740, we believed that the positive evidence considered at September 30, 2021 and December 31, 2020 outweighed the negative evidence and that it was more likely than not that all of our deferred tax assets would be realized within their life cycle. Therefore, a valuation allowance is not required.

 

The net deferred tax asset balance was $11.8 million as of September 30, 2021 and $12.0 million as of December 31, 2020. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.

 

Net Income (Loss) and Net Income (Loss) per Common Share

 

Net income available to common shareholders for the three months ended September 30, 2021 was $5.2 million, an increase of $6.2 million, compared to a net loss of $966,000 recorded for the three months ended September 30, 2020. The increase in earnings year over year was primarily driven by a 37% increase in net interest income. The net interest margin increased to 2.54% for the three month period ended September 30, 2021 compared to 2.35% for the three month period ended September 30, 2020.

 

Net income available to common shareholders for the nine months ended September 30, 2021 was $16.5 million, an increase of $15.5 million, compared to net income of $953,000 recorded for the nine months ended September 30, 2020. The increase in earnings year over year was primarily driven by a 41% increase in net interest income. The net margin for the nine month period ended September 30, 2021 was 2.71% compared to 2.53% for the nine month period ended September 30, 2021.

 

57

 

For the three month periods ended September 30, 2021 and September 30, 2020, basic net income (loss) per common share was $0.09 and ($0.02) while diluted net income (loss) per share was $0.08 and ($0.02). For the nine month periods ended September 30, 2021 and September 30, 2020, basic net income per common share was $0.28 and $0.02 while diluted net income per common share was $0.25 and $0.02.

 

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 three months ended September 30, 2021 was 0.47% compared to (0.09%) for the three months ended September 30, 2020. The ROA for the nine months ended September 30, 2021 and 2020 was 0.52% and 0.03%, respectively. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by our shareholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE was 7.47% for the three months September 30, 2021, compared to (1.40%) for the three months ended September 30, 2020. The ROE for the nine months ended September 30, 2021 and 2020 was 8.07% and 0.49%, respectively.

 

Commitments, Contingencies and Concentrations

 

Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately $458.9 million and $428.9 million, and standby letters of credit of approximately $27.4 million and $16.6 million, at September 30, 2021 and December 31, 2020, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $458.9 million of commitments to extend credit at September 30, 2021 were committed as variable rate credit facilities.

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment, and accounts receivable.

 

Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment, and accounts receivable. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.  The current amount of liability as of September 30, 2021 and December 31, 2020 for guarantees under standby letters of credit issued is not material. 

 

Regulatory Matters

 

We are required to comply with certain “risk-based” capital adequacy guidelines issued by the FRB and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the “credit-equivalent” amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts.

 

58

 

Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.

 

Management believes that the Company and Republic met, as of September 30, 2021 and December 31, 2020, all applicable capital adequacy requirements. In the current year, the FDIC categorized Republic as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification which management believes would have changed this categorization.

 

The Company and Republic’s ability to maintain the required levels of capital is substantially dependent upon the success of their capital and business plans, the impact of future economic events on Republic’s loan customers and Republic’s ability to manage its interest rate risk, growth and other operating expenses.

 

The following table presents our regulatory capital ratios at September 30, 2021, and December 31, 2020.

 

(dollars in thousands)

 

Actual

   

Minimum Capital

Adequacy

   

Minimum Capital

Adequacy with

Capital Buffer

   

To Be Well

Capitalized Under

Prompt Corrective

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

At September 30, 2021:

                                                               
                                                                 

Total risk-based capital

                                                               

Republic

  $ 338,585       12.18

%

  $ 222,413       8.00

%

  $ 291,917       10.50

%

  $ 278,016       10.00

%

Company

    352,763       12.64

%

    223,199       8.00

%

    292,949       10.50

%

    -       -

%

Tier 1 risk-based capital

                                                               

Republic

    321,367       11.56

%

    166,809       6.00

%

    236,313       8.50

%

    222,413       8.00

%

Company

    335,545       12.03

%

    167,399       6.00

%

    237,149       8.50

%

    -       -

%

CET 1 risk-based capital

                                                               

Republic

    321,367       11.56

%

    125,107       4.50

%

    194,611       7.00

%

    180,710       6.50

%

Company

    276,220       9.90

%

    125,549       4.50

%

    195,299       7.00

%

    -       -

%

Tier 1 leveraged capital

                                                               

Republic

    320,335       6.23

%

    206,255       4.00

%

    206,255       4.00

%

    257,819       5.00

%

Company

    323,513       6.49

%

    206,656       4.00

%

    206,656       4.00

%

    -       -

%

                                                                 

At December 31, 2020:

                                                               
                                                                 

Total risk-based capital

                                                               

Republic

  $ 298,291       12.36

%

  $ 193,062       8.00

%

  $ 253,394       10.50

%

  $ 241,327       10.00

%

Company

    326,554       13.50

%

    193,498       8.00

%

    253,967       10.50

%

    -       -

%

Tier 1 risk-based capital

                                                               

Republic

    285,316       11.82

%

    144,796       6.00

%

    205,128       8.50

%

    193,062       8.00

%

Company

    313,579       12.96

%

    145,124       6.00

%

    205,592       8.50

%

    -       -

%

CET 1 risk-based capital

                                                               

Republic

    285,316       11.82

%

    108,597       4.50

%

    168,929       7.00

%

    156,863       6.50

%

Company

    254,254       10.51

%

    108,843       4.50

%

    169,311       7.00

%

    -       -

%

Tier 1 leveraged capital

                                                               

Republic

    287,114       7.44

%

    153,414       4.00

%

    153,414       4.00

%

    191,767       5.00

%

Company

    308,113       8.17

%

    153,621       4.00

%

    153,621       4.00

%

    -       -

%

 

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Dividend Policy

 

On August 26, 2020, the Company completed an offering of 2,000,000 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”), at a price of $25.00 per share. The Company received net proceeds of $48.3 million from the offering, after deducting offering costs. The Company will pay dividends on the Series A Preferred Stock when and if declared by its board of directors or an authorized committee thereof. If declared, dividends will be due and payable at a rate of 7.00% per annum, payable quarterly in arrears on March 1, June 1, September 1, and December 1 of each year. During the three month and nine month period ended September 30, 2021, dividends of $875,000 and $2.6 million were declared and paid on preferred stock compared to $923,000 during the three month period ended December 31, 2020.

 

We have not paid any cash dividends on our common stock. We have no plans to pay cash dividends on common stock in 2021. Our ability to pay dividends depends primarily on receipt of dividends from our subsidiary, Republic. Dividend payments from Republic are subject to legal and regulatory limitations. The ability of Republic to pay dividends is also subject to profitability, financial condition, capital expenditures and other cash flow requirements.

 

Liquidity

 

A financial institution must maintain and manage liquidity to ensure it has the ability to meet its financial obligations. These obligations include the payment of deposits on demand or at their contractual maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become due; the ability to fund new and existing loans and other funding commitments; and the ability to take advantage of new business opportunities. Liquidity needs can be met by either reducing assets or increasing liabilities. Our most liquid assets consist of cash, amounts due from banks and federal funds sold.

 

Regulatory authorities require us to maintain certain liquidity ratios in order for funds to be available to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, we have formed an asset/liability committee (ALCO), comprised of certain members of Republic’s Board of Directors and senior management to monitor such ratios. The ALCO committee is responsible for managing the liquidity position and interest sensitivity. That committee’s primary objective is to maximize net interest income while configuring Republic’s interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. The ALCO committee meets on a quarterly basis or more frequently if deemed necessary.

 

Our target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $384.0 million at September 30, 2021, compared to $775.3 million at December 31, 2020. Loan maturities and repayments are another source of asset liquidity. At September 30, 2021, Republic estimated that more than $110.0 million of loans would mature or repay in the six month period ending March 31, 2022. Additionally, a significant portion of our investment securities are available to satisfy liquidity requirements through sales on the open market or by pledging as collateral to access credit facilities. At September 30, 2021, we had outstanding commitments (including unused lines of credit and letters of credit) of $458.9 million. Certificates of deposit scheduled to mature in one year totaled $158.6 million at September 30, 2021. We anticipate that we will have sufficient funds available to meet all current commitments.

 

Daily funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds, or utilizing the credit facilities of the FHLB. We have established a line of credit with the FHLB of Pittsburgh.  Our maximum borrowing capacity with the FHLB was $1.2 billion at September 30, 2021. At September 30, 2021 and December 31, 2020, we had no outstanding term borrowings and no outstanding overnight borrowings with the FHLB. As of September 30, 2021 and December 31, 2020, FHLB had issued letters of credit, on Republic’s behalf, totaling $150.0 million against our available credit line. We also established a contingency line of credit of $10.0 million with ACBB and a Fed Funds line of credit with Zions Bank in the amount of $15.0 million to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit or the Zions Fed Funds line at both September 30, 2021 and December 31, 2020. As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowing capacity to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. The Company did not pledge any PPP loans or borrow any funds as part of the PPPLF program at September 30, 2021. At December 31, 2020, the Company pledged $634 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $634 million of funds at a rate of 0.35%. The PPPLF program was discontinued on July 30, 2021

 

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Investment Securities Portfolio

 

At September 30, 2021, we identified certain investment securities that were being held for indefinite periods of time, including securities that will be used as part of our asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors.  These securities are classified as available-for-sale and are intended to increase the flexibility of our asset/liability management.  Our investment securities classified as available for sale consist primarily of SBAs, CMOs, MBSs, municipal securities, and corporate bonds.  Available for sale securities totaled $880.5 million and $528.5 million as of September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, securities classified as available for sale had a net unrealized loss of $4.4 million compared to a net unrealized gain of $1.3 million at December 31, 2020.

 

Loan Portfolio

 

Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Republic’s commercial loans typically range between $250,000 and $5.0 million, but customers may borrow significantly larger amounts up to Republic’s legal lending limit of approximately $45.0 million at September 30, 2021. Individual customers may have several loans often secured by different collateral.

 

Credit Quality

 

Republic’s written lending policies require specific underwriting, loan documentation and credit analysis standards to be met prior to funding, with independent credit department approval for the majority of new loan balances. A committee consisting of senior management and certain members of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained, while approving the majority of commercial loans.

 

Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment of principal and/or interest in full is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms.

 

While a loan is classified as non-accrual, any collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans, which have been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. 

 

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The following table shows information concerning loan delinquency and non‑performing assets as of the dates indicated (dollars in thousands):

 

   

September 30,

2021

   

December 31,

2020

 

Loans accruing, but past due 90 days or more

  $ 13     $ 612  

Non-accrual loans

    12,932       12,246  

Total non-performing loans

    12,945       12,858  

Other real estate owned

    532       1,188  

Total non-performing assets

  $ 13,477     $ 14,046  
                 

Non-performing loans as a percentage of total loans, net of unearned income

    0.52 %     0.49 %

Non-performing assets as a percentage of total assets

    0.25 %     0.28 %

 

Non-performing asset balances decreased by $569,000 to $13.5 million as of September 30, 2021 from $14.0 million at December 31, 2020. Non-accrual loans increased $686,000 to $12.9 million at September 30, 2021, from $12.2 million at December 31, 2020 due primarily to $1.7 million in transfers offset by payments of $1.0 million during the nine months ended September 30, 2021. There were $13,000 in loans accruing, but past due 90 days or more at September 30, 2021 compared to $612,000 at December 31, 2020. At September 30, 2021 and December 31, 2020, all identified impaired loans are internally classified and individually evaluated for impairment in accordance with the guidance under ASC 310.

 

The following table presents our 30 to 89 days past due loans at September 30, 2021 and December 31, 2020.  

 

(dollars in thousands)

 

September 30,

   

December 31,

 
   

2021

   

2020

 

30 to 59 days past due

  $ 21     $ 2,321  

60 to 89 days past due

    4,504       938  

Total loans 30 to 89 days past due

  $ 4,525     $ 3,259  

 

Loans with payments 30 to 59 days past due decreased to $21,000 at September 30, 2021. This decrease was driven primarily by $2.3 million in loans that are now current. Loans with payments 60 to 89 days past due increased to $4.5 million at September 30, 2021 due to the addition of two loans totaling $4.5 million offset by $900 thousand in loans that are now current.

 

Other Real Estate Owned

 

The balance of other real estate owned was $532,000 at September 30, 2021 and $1.2 million at December 31, 2020. The following table presents a reconciliation of other real estate owned for the nine months ended September 30, 2021 and the year ended December 31, 2020:

 

(dollars in thousands)

 

September 30,

2021

   

December 31,

2020

 

Beginning Balance, January 1st

  $ 1,188     $ 1,730  

Additions

    168       233  

Valuation adjustments

    (670 )     (31 )

Dispositions

    (154 )     (744 )

Ending Balance

  $ 532     $ 1,188  

 

At September 30, 2021, we had no credit exposure to “highly leveraged transactions” as defined by the FDIC.

 

62

 

Allowance for Loan Losses

 

We have elected to defer the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as permitted by the Economic Aid Act approved in December 2020 until January 1, 2022.

 

The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish an allowance against loan losses on a quarterly basis. When an increase in this allowance is necessary, a provision for loan losses is charged to earnings. The allowance for loan losses consists of three components. The first component is allocated to individually evaluated loans found to be impaired and is calculated in accordance with ASC 310 Receivables. The second component is allocated to all other loans that are not individually identified as impaired pursuant to ASC 310-10 (“non-impaired loans”). This component is calculated for all non-impaired loans on a collective basis in accordance with ASC 450 Contingencies. The third component is an unallocated allowance to account for a level of imprecision in management’s estimation process.

 

We evaluate loans for impairment and potential charge-off on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any loan relationships have deteriorated. Any loan rated as substandard or lower will have an individual collateral evaluation analysis prepared to determine if a deficiency exists. We first evaluate the primary repayment source. If the primary repayment source is determined to be insufficient and unlikely to repay the debt, we then look to the secondary repayment sources. Secondary sources are conservatively reviewed for liquidation values. Updated appraisals and financial data are obtained to substantiate current values. If the reviewed sources are deemed to be inadequate to cover the outstanding principal and any costs associated with the resolution of a troubled loan, an estimate of the deficient amount will be calculated and a specific allocation of loan loss reserve is recorded.

 

Factors considered in the calculation of the allowance for non-impaired loans include several qualitative and quantitative factors such as historical loss experience, trends in delinquency and nonperforming loan balances, changes in risk composition and underwriting standards, experience and ability of management, and general economic conditions along with other external factors. Historical loss experience is analyzed by reviewing charge-offs over a three year period to determine loss rates consistent with the loan categories depicted in the allowance for loan loss table below.

 

The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses. The allowance for loan losses is subject to review by banking regulators. Our primary bank regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding the adequacy and the methodology employed in their determination.

 

63

 

An analysis of the allowance for loan losses for the nine months ended September 30, 2021 and 2020, and the twelve months ended December 31, 2020 is as follows:

 

(dollars in thousands)

 

For the nine

months ended

September 30,

2021

   

For the twelve

months ended

December 31,

2020

   

For the nine

months ended

September 30,

2020

 
                         

Balance at beginning of period

  $ 12,975     $ 9,266     $ 9,266  

Charge‑offs:

                       

Commercial real estate

    -       -       -  

Construction and land development

    -       -       -  

Commercial and industrial

    60       333       84  

Owner occupied real estate

    -       48       48  

Consumer and other

    48       107       67  

Residential mortgage

    -       67       67  

Paycheck protection program

    -       -       -  

Total charge‑offs

    108       555       266  

Recoveries:

                       

Commercial real estate

    -       -       -  

Construction and land development

    -       3       2  

Commercial and industrial

    162       48       38  

Owner occupied real estate

    88       1       1  

Consumer and other

    201       12       10  

Residential mortgage

    -       -       -  

Paycheck protection program

    -       -       -  

Total recoveries

    451       64       51  

Net charge‑offs/(recoveries)

    (343 )     491       215  

Provision for loan losses

    3,900       4,200       2,800  

Balance at end of period

  $ 17,218     $ 12,975     $ 11,851  
                         

Average loans outstanding(1)

  $ 2,609,622     $ 2,359,169     $ 2,255,283  

As a percent of average loans:(1)

                       

Net charge‑offs (annualized)

    0.02 %     0.02 %     0.01 %

Provision for loan losses (annualized)

    0.20 %     0.18 %     0.17 %

Allowance for loan losses

    0.66 %     0.55 %     0.53 %

Allowance for loan losses to:

                       

Total loans, net of unearned income

    0.69 %     0.49 %     0.45 %

Total non‑performing loans

    133.01 %     100.91 %     95.20 %

 

(1)Includes non-accruing loans.

 

We recorded a provision for loan losses of $900,000 for the three month period ended September 30, 2021 and $3.9 million for the nine months ended September 30, 2021. We recorded a provision for loan losses of $850,000 for the three month period ended September 30, 2020 and $2.8 million for the nine months ended September 30, 2020. The provision recorded is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio.

 

As a result of the changes in economic conditions caused by the pandemic, we have increased the qualitative factors for certain components included in 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 and Economic Aid Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP Program should continue to help mitigate potential future period losses. Although the economy has begun to demonstrate signs of recovery, many key economic indicators have not returned to pre-pandemic levels and the potential for a resurgence in COVID infections remains a possibility. Based on the incurred loss methodology currently utilized by the Bank, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and severity of the economic downturn caused by the COVID pandemic and the corresponding impact on our loan portfolio.

 

64

 

The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 133% at September 30, 2021, compared to 101% at December 31, 2020 and 95% at September 30, 2020. Total non-performing loans were $12.9 million, $12.9 million, and $12.4 million at September 30, 2021, December 31, 2020 and September 30, 2020, respectively. 

 

Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that it determines is adequate to absorb inherent losses in the loan portfolio. The Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans classified by the management team. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions, and other relevant factors in reviewing the adequacy of the allowance for loan losses. Any additions deemed necessary to the allowance for loan losses are charged to operating expenses.

 

We evaluate loans for impairment and potential charge-offs on a quarterly basis. Any loan rated as substandard or lower will have a collateral evaluation analysis completed in accordance with the guidance under GAAP on impaired loans to determine if a deficiency exists. Our credit monitoring process assesses the ultimate collectability of an outstanding loan balance from all potential sources. When a loan is determined to be uncollectible it is charged-off against the allowance for loan losses. Unsecured commercial loans and all consumer loans are charged-off immediately upon reaching the 90-day delinquency mark unless they are well-secured and in the process of collection. The timing on charge-offs of all other loan types is subjective and will be recognized when management determines that full repayment, either from the cash flow of the borrower, collateral sources, and/or guarantors, will not be sufficient and that repayment is unlikely. A full or partial charge-off is recognized equal to the amount of the estimated deficiency calculation.

 

Serious delinquency is often the first indicator of a potential charge-off. Reductions in appraised collateral values and deteriorating financial condition of borrowers and guarantors are factors considered when evaluating potential charge-offs. The likelihood of possible recoveries or improvements in a borrower’s financial condition is also assessed when considering a charge-off.

 

Partial charge-offs of non-performing and impaired loans can significantly reduce the coverage ratio and other credit loss statistics due to the fact that the balance of the allowance for loan losses will be reduced while still carrying the remainder of a non-performing loan balance in the impaired loan category. The amount of non-performing loans for which partial charge-offs have been recorded amounted to $5.3 million at September 30, 2021 and $4.4 million December 31, 2020.

 

The following table provides additional analysis of partially charged-off loans.

 

(dollars in thousands)

 

September 30,

2021

   

December 31, 2020

 

Total nonperforming loans

  $ 12,945     $ 12,858  

Nonperforming and impaired loans with partial charge-offs

    5,334       4,398  
                 

Ratio of nonperforming loans with partial charge-offs to total loans

    0.21

%

    0.17

%

Ratio of nonperforming loans with partial charge-offs to total nonperforming loans

    41

%

    34

%

Coverage ratio net of nonperforming loans with partial charge-offs

    323

%

    295

%

 

Our charge-off policy is reviewed on an annual basis and updated as necessary. During the nine month period ended September 30, 2021, there were no changes made to this policy.

 

65

 

Effects of Inflation

 

The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on its financial results is through our need and ability to react to changes in interest rates. Management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one-year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations.

 

ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

 

There has been no material change in the Company’s assessment of its sensitivity to market risk since its presentation in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 11, 2021.

 

ITEM 4: CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures  

 

The Company maintains disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

The Company’s management, with the participation of the principal executive officer and the principal financial officer, conducted an evaluation, as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Exchange Act Rule 13a-15(e). Based on this evaluation, the principal executive officer and the principal financial officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.

 

Changes in Internal Controls

 

The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter ended September 30, 2021 that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter ended September 30, 2021.

 

Limitations on the Effectiveness of Controls

 

Control systems, no matter how well designed and operated, can provide only reasonable, not an absolute, level of assurance that the objectives of the control system are met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

66

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 1A. RISK FACTORS

 

Significant risk factors could adversely affect the Company’s business, financial condition and results of operation. Risk factors discussing these risks can be found in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. You should carefully consider these risk factors. The risks described in the Company’s Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

67

 

ITEM 6. EXHIBITS

 

The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S‑K for quarterly reports on Form 10‑Q).

 

Exhibit Number

 

Description

 

Location

         

3.1

 

Amended and Restated Articles of Incorporation of Republic First Bancorp, Inc.

 

Incorporated by reference to Form 10-K filed March 10, 2017

         

3.2

 

Amended and Restated By-laws of Republic First Bancorp, Inc.

 

Incorporated by reference to Form 10-Q filed May 11, 2020

         

31.1

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Republic First Bancorp, Inc.

 

Filed herewith

         

31.2

 

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Republic First Bancorp, Inc.

 

Filed herewith

         

32.1

 

Section 1350 Certification of Vernon W. Hill, II

 

Furnished herewith

         

32.2

 

Section 1350 Certification of Frank A. Cavallaro

 

Furnished herewith

         

101

 

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL; (i) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020, (v) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2021 and 2020, and (vi) Notes to Consolidated Financial Statements.

   
         

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

   

 

68

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

REPUBLIC FIRST BANCORP, INC.

       

Date: November 8, 2021

By:

/s/ Vernon W. Hill, II

 
   

Vernon W. Hill, II

 
   

Chief Executive Officer

(principal executive officer)

 
       

Date: November 8, 2021

By:

/s/ Frank A. Cavallaro

 
   

Frank A. Cavallaro

 
   

Executive Vice President and Chief Financial Officer

(principal financial and accounting officer)

 
       

 

 

69