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
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 impact of the COVID-19 pandemic on our business and results of operation; the adequacy of our allowance for credit 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; inflation; changes to our primary service area; changes in interest rates; our ability to identify, negotiate, secure and develop new branch locations and renew, modify, or terminate leases or dispose of properties for existing branch 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; our ability to regain compliance with Nasdaq Listing Rule 5250(c)(1); the failure to maintain current technologies; failure to attract or retain key employees; our ability to access cost-effective funding; fluctuations in real estate values; litigation liabilities, including costs, expenses, settlements and judgments; 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, 2021, 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 SecuritiesLitigation 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 Pennsylvaniain 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 Citythrough our offices and branch locations in those markets. As of March 31, 2022, we serve our customers through 33 branch locations, in addition to four loan offices that specialize in commercial, small business and residential mortgage lending. It is our goal to deliver best in class customer service across all delivery channels including not only our physical branch locations, but online and mobile options as well. 40 --------------------------------------------------------------------------------
Economic Environment 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 Governorsof 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. During the first quarter of 2022, the federal funds target range increased by 25 basis points to a range of 0.25% - 0.50% to curb inflation, with continued increases planned. The President signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act") in March 2020to 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. 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.
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 has been 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 has had on their businesses to date and the expected ramifications that could be felt in the future. We have 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, 2020or (ii) 60 days after the President declared a termination of the COVID-19 national emergency were not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law, which extended the period to suspend the requirements under TDR accounting guidance to the earlier of (i) January 1, 2022, or (ii) 60 days after the President declared a termination of the national emergency related to the COVID-19 pandemic. As of March 31, 2022and December 31, 2021, there were no loan customers deferring loan payments, and all customers that were granted deferrals to assist during the height of the COVID pandemic have resumed contractual payments. As a result of the changes in economic conditions, we increased the qualitative factors for certain components of Republic's allowance for credit loss calculation. We also took into consideration the probable impact that the various stimulus initiatives provided through the CARES Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, lower loan-to-value ratios on underlying collateral, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP should help mitigate potential future period losses. We will continue to closely monitor all key economic indicators and our internal asset quality metrics as the effects of the coronavirus pandemic begin to unfold. Based on the current expected credit loss methodology currently utilized by Republic, the provision for credit 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. 41
Financial Condition Assets Total assets increased by
$74.0 million, or 1%, to $5.7 billionas of March 31, 2022, compared to $5.6 billionas of December 31, 2021. The increase in assets was due to a $40.7 million, or 4%, increase in available for sale securities and a $46.3 million, or 2%, increase in loans. In addition to the ongoing success with our expansion strategy, the growth in assets was also driven by our participation in the PPP loan program, which resulted in a significant increase in new business relationships and deposit account openings. Cash and Cash Equivalents Cash and due from banks and interest-bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount in these three categories decreased by $17.4 millionto $101.5 millionas of March 31, 2022, from $118.9 millionas of December 31, 2021as excess cash was used to fund loan originations and security purchases. Loans Held for Sale Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration("SBA") and residential mortgage loans, both of which we intend to sell in the future. Total SBA loans held for sale were $4.5 millionas of March 31, 2022compared to $5.2 millionas of December 31, 2021. Residential mortgage loans held for sale totaled $4.7 millionat March 31, 2022, a decrease of $3.9 million, versus $8.5 millionat December 31, 2021. A decrease in the volume of residential mortgage loans originated during the three months ended March 31, 2022due to the higher interest rate environment drove the decrease in residential mortgage loans held for sale compared to December 31, 2021. Loans held for sale as a percentage of our total assets were less than 1% at March 31, 2022. Loans Receivable The loan portfolio represents 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, commercial real estate loans, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Loans increased $46.3 million, or 2%, to $2.5 billionat March 31, 2022, versus $2.5 billionat December 31, 2021. Loans originated through the PPP loan program continue to be repaid or forgiven by the SBA and decreased by $55.7 million, or 47%, in the first quarter of 2022, which offsets the growth experienced in other categories in the portfolio. Excluding the impact of the PPP loans, gross loans increased by $103.7 million, or 4%, to $2.5 billionat March 31, 2022compared to $2.4 billionat December 31, 2021. 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. 42 --------------------------------------------------------------------------------
Investment SecuritiesInvestment securities available for sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our debt securities consist primarily of U.S. Governmentagency SBA bonds, U.S. Governmentagency collateralized mortgage obligations ("CMO"), agency mortgage-backed securities ("MBS"), municipal securities, and corporate bonds. Investment securities available for sale totaled $1.1 billionat March 31, 2022as compared to $1.1 billionat December 31, 2021. The $40.7 millionincrease was primarily due to the purchase of securities totaling $147.8 millionpartially offset by the paydowns, maturities, and calls of securities totaling $37.7 millionduring the three months ended March 31, 2022. At March 31, 2022, the portfolio had a net unrealized loss on available for sale securities of $80.4 millioncompared to a net unrealized loss of $11.6 millionat December 31, 2021. The $68.9 milliondecrease in the market value of the investment portfolio was driven by an increase in market interest rates, which drove a decrease in value of the available for sale securities held in our portfolio at March 31, 2022. As interest rates are expected to continue to increase throughout 2022, management will be looking to mitigate the trend on our investment portfolio with offsetting strategies and opportunities. 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. Governmentagency Small Business Investment Companybonds (SBIC) and SBA bonds, CMO's and MBS's. The fair value of securities held-to-maturity totaled $1.5 billionand $1.6 billionat March 31, 2022and December 31, 2021, respectively. The $115.9 milliondecrease was primarily due to paydowns, maturities, and calls of securities held in the portfolio totaling $60.9 millionpartially offset by the purchase of securities held to maturity totaling $51.1 millionduring the three month period ended March 31, 2022. At March 31, 2022, the portfolio had a net unrecognized loss on held-to-maturity securities of $118.4 millioncompared to a net unrecognized loss of $12.9 millionat December 31, 2021. The $105.5 milliondecrease in the market value of the investment portfolio was driven by an increase in market interest rates, which drove a decrease in the value of the held-to-maturity securities held in our portfolio at March 31, 2022.
Equity securities consist of investments in the preferred stock of domestic
banks. Equity securities are held at fair value. The fair value of equity
Restricted Stock Restricted stock, which represents a required investment in the capital stock of correspondent banks related to available credit facilities, was carried at cost as of
March 31, 2022and December 31, 2021. 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 March 31, 2022and December 31, 2021, the investment in FHLB of Pittsburghcapital stock totaled $3.0 millionand $3.4 million, respectively. At both March 31, 2022and December 31, 2021, ACBB capital stock totaled $143,000. Both the FHLB and ACBB paid dividends during the first quarter of 2022. Premises and Equipment The balance of premises and equipment increased by $2.2 millionto $129.6 millionat March 31, 2022from $127.4 millionat December 31, 2021. The increase was primarily due to purchases of premises and equipment totaling $4.3 millionpartially offset by depreciation and amortization expense of $2.1 millionoffset during the three months ended March 31, 2022. The total branch count was 33 at March 31, 2022with the opening of a new branch in Ocean City, New Jerseycompared to 32 at December 31, 2021. The Company's branch strategy will be a critical focus throughout 2022 and beyond. Other Real Estate Owned
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
March 31, 2022and December 31, 2021, the balance of operating leases - right-of-use asset was $76.5 millionand $75.6 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 $119.1 millionto $5.3 billionat March 31, 2022from $5.2 billionat December 31, 2021. We 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 also resulted in significant growth in new deposit relationships.
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
March 31, 2022and December 31, 2021, the balance of the operating lease liability obligation was $82.8 millionand $81.8 million, respectively. Shareholders' Equity Total shareholders' equity decreased $47.2 millionto $277.0 millionat March 31, 2022compared to $324.2 millionat December 31, 2021. The decrease was primarily due to a decrease in the accumulated other comprehensive loss of $51.2 millionpartially offset by an increase in retained earnings of $3.0 million. The decrease in the accumulated other comprehensive loss was exacerbated by an increase in market interest rates which drove a decrease in the market value of the securities held in our portfolio. Results of Operations
Three Months Ended
We reported net income available to common shareholders of
$5.3 millionor $0.08per diluted share, for the three-month period ended March 31, 2022compared to a net income available to common shareholders of $6.2 millionor $0.09per diluted share, for the three-month period ended March 31, 2021. The decrease was primarily driven by a reduction in non-interest income during the first quarter of 2022. We reported net income available to common shareholders of $5.3 millionor $0.08per diluted share, for the three-month period ended March 31, 2022compared to a net income available to common shareholders of $5.2 millionor $0.08per diluted share, for the three-month period ended December 31, 2021. The increase during the first quarter of 2022 was primarily driven by a decrease in the provision for loan losses, a decrease in non-interest expense, and an increase in net interest income partially offset by decrease in non-interest income. 44 --------------------------------------------------------------------------------
Analysis of Net Interest Income
Our earnings depend 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 25% in 2022 and 24% in 2021. Average Balances and Net Interest Income For the three months ended For the three months ended March 31, 2022 March 31, 2021 Interest Interest Average Income/ Yield/ Average Income/ Yield/ (dollars in thousands) Balance Expense Rate(1) Balance Expense Rate(1) Interest-earning assets: Federal funds sold and other interest-earning assets
$ 137,533 $ 400.12 % $ 208,397 $ 490.09 % Investment securities and restricted stock 2,816,956 13,378 1.93 % 1,430,854 6,488 1.81 % Loans receivable 2,516,719 26,177 4.22 % 2,676,705 30,019 4.55 % Total interest-earning assets 5,471,208 39,595 2.93 % 4,315,956 36,556 3.44 % Other assets 221,835 276,967 Total assets $ 5,693,043 $ 4,592,923Interest-earning liabilities: Demand - non-interest bearing $ 1,378,400 $ 1,087,052Demand - interest bearing 2,326,808 2,210 0.39 % 1,846,968 3,258 0.72 % Money market & savings 1,365,857 795 0.24 % 1,013,275 1,118 0.45 % Time deposits 195,516 246 0.51 % 184,831 539 1.18 % Total deposits 5,266,581 3,249 0.25 % 4,132,126 4,915 0.48 % Total interest-bearing deposits 3,888,181 3,249 0.34 % 3,045,074 4,915 0.65 % Other borrowings 11,938 57 1.97 % 46,059 73 0.64 % Total interest-bearing liabilities 3,900,119 3,307 0.34 % 3,091,133 4,988 0.65 % Total deposits and other borrowings 5,278,519 3,307 0.25 % 4,178,185 4,988 0.48 % Non-interest-bearing other liabilities 110,416 104,843 Shareholders' equity 304,108 309,895 Total liabilities and shareholders' equity $ 5,693,043 $ 4,592,923Net interest income (2) $ 36,288 $ 31,568Net interest spread 2.59 % 2.79 % Net interest margin (2) 2.69 % 2.97 %
(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
$148and $136for the three months ended March 31, 2022and 2021, 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. 45 --------------------------------------------------------------------------------
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. For the three months ended March 31, 2022 vs. 2021 Changes due to: Average Average Total (dollars in thousands) Volume Rate Change Interest earned: Federal funds sold and other interest-earning assets $ (20 ) $ 11 $ (9 ) Securities 6,583 307 6,890 Loans (2,329 ) (1,513 ) (3,842 ) Total interest-earning assets 4,234 (1,195 ) 3,039 Interest expense: Deposits Interest-bearing demand deposits 456 (1,504 ) (1,048 ) Money market and savings 197 (523 ) (326 ) Time deposits 13 (305 ) (292 ) Total deposit interest expense 666 (2,332 ) (1,666 ) Other borrowings (37 ) 22 (15 ) Total interest expense 629 (2,310 ) (1,681 ) Net interest income
$ 3,605 $ 1,115 $ 4,720
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis for the three months ended
March 31, 2022, increased $4.7 million, or 15%, over the same period in 2021. Interest income on interest-earning assets totaled $39.6 millionfor the three months ended March 31, 2022, an increase of $3.0 million, compared to $36.6 millionfor the three months ended March 31, 2021. The increase in interest income was primarily the result of an increase in the balance of interest-earning assets, offset by a 51 basis point decrease in the average yield on interest-earning assets. The most significant increase in interest-earning assets was a $1.4 billionincrease in the average balance of the investment securities portfolio. Total interest expense for the three months ended March 31, 2022decreased by $1.7 million, or 34%, over the same period in 2021. Interest expense on deposits decreased by $1.7 millionfor the three months ended March 31, 2022versus the same period in 2021 due primarily to a 23 basis point decrease in the average cost of deposit balances, offset by a $1.1 billionincrease in the average balance of deposits. Interest expense on other borrowings decreased by $15,000for the three months ended March 31, 2022as compared to March 31, 2021due primarily to a decrease in the average balance of overnight borrowings Changes in net interest income are frequently measured by two statistics: net interest rate spread and net interest margin. Net interest rate spread is the difference between the average rate earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a fully tax-equivalent basis was 2.59% during the first three months of 2022 compared to 2.79% during the first three months of 2021. 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 first three months of 2022 and 2021, the fully tax-equivalent net interest margin was 2.69% and 2.97%, respectively. The decrease in the net interest margin was primarily attributable to the reduction in origination fees related to PPP loans recognized during the period. In the first quarter of 2022, $1.9 millionin fees were recognized as revenue compared to $7.4 millionin fees recognized during the first quarter of 2021. 46 --------------------------------------------------------------------------------
Provision for Credit Losses As of
March 31, 2022, the estimated ACL in accordance with CECL is $21.9 millionfor the loan portfolio. This is relatively unchanged from the ACL reserve balance as of December 31, 2021. The allowance for credit losses estimate at March 31, 2022includes segment-specific quantitative calculations for homogeneous loan pools based on similar risk characteristics ( $16.3 million), specific measurement for loans that do not share similar risk characteristics with other loans or pools of loans ( $3.6 million), and a qualitative assessment to account for model limitations and/or facts and circumstances not representative of the default and loss observations used to derive the quantitative measurement ( $2.0 million). Management believes this is the best estimate of expected credit losses under the CECL guidance as of March 31, 2022. Non-interest Income Total non-interest income for the three months ended March 31, 2022decreased by $5.9 million, or 58%, compared to the same period in 2021. Mortgage banking income totaled $1.1 millionduring the three months ended March 31, 2022, which represents a decrease of $3.4 millioncompared to the same period in 2021. The decrease was driven by a reduction in refinancing activity due to a decline in residential mortgage loan originations due to the higher interest rate environment. Service fees on deposit accounts totaled $3.5 millionfor the three months ended March 31, 2022compared to $4.0 millionduring the same period in 2021. Gains on the sale of SBA loans totaled $527,000for the three months ended March 31, 2022, a decrease of $234,000, compared to $761,000for the same period in 2021. Loan and servicing fees totaled $495,000for the three months ended March 31, 2022compared to $633,000for the same period in 2021. Non-interest income during the first quarter of 2022 was also negatively impacted by a reduction in the value of equity securities held in the investment portfolio, which were recognized as losses during the current period. In addition, during the first quarter of 2021 we recognized a one-time non-recurring incentive of $1.4 millionrelated to a branding and marketing agreement signed with VISA. Non-interest Expenses Non-interest expenses increased $2.3 million, or 8%, to $31.7 millionfor the first three months of 2022 compared to $29.3 millionfor the same period in 2021. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs. Salaries and employee benefits decreased by $189,000, or 1%, for the first three months of 2022 compared to the same period in 2021. The decrease in salaries and benefits was related to lower commissions paid to residential mortgage lenders based on lower production offset by increased headcount due to our growth and relocation strategy. Occupancy expense, including depreciation and amortization expense, decreased by $26,000for the first three months of 2022 compared to the same period last year. A new branch was opened in Ocean City, New Jerseyduring the three months ended March 31, 2022. Other real estate expenses totaled $203,000during the first three months of 2022, an increase of $105,000, or 107%, compared to the same period in 2021. This increase was a result of higher costs to carry foreclosed properties in the current period. 47
-------------------------------------------------------------------------------- All other non-interest expenses increased by
$2.4 million, or 29%, for the first three months of 2022 compared to the same period last year due to increases in expenses related to data processing fees, regulatory assessments and costs, legal fees, other taxes, professional fees, and other expenses, which were mainly associated with our growth strategy. In addition, we incurred certain one-time costs and expenditures during the first quarter of 2022 in preparation for the implementation of our new technology platform, which was launched during the second quarter of 2022. 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. For the purposes of this calculation, net non-interest expenses equal non-interest expenses less non-recurring expenses less non-interest income. For the three month period ended March 31, 2022, the ratio was 1.87% compared to 2.59% for the three month period ended March 31, 2021. The decrease in this ratio was mainly due to our growth in average assets. Another productivity measure utilized by management is the efficiency ratio, a non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio equaled 78.2% for the first three months of 2022, compared to 70.4% for the first three months of 2021. The increase for the three months ended March 31, 2022versus March 31, 2021was due to non-interest expenses increasing at a faster rate than net interest income and non-interest income.
Provision (Benefit) for Federal Income Taxes
We recorded a provision for income taxes of
$2.1 millionfor the three months ended March 31, 2022, compared to a $2.3 millionprovision for income taxes for the three months ended March 31, 2021. The effective tax rates for the three-month periods ended March 31, 2022and 2021 were 25% and 24%, respectively The Company evaluates the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if necessary, in accordance with the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available evidence. If management makes a determination based on the available evidence that it is more likely than not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded. These determinations are inherently subjective and dependent upon estimates and judgments concerning management's evaluation of both positive and negative evidence. In assessing the need for a valuation allowance, the Company carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified. The Company is in a four-year cumulative profit position factoring in pre-tax GAAP income and permanent book/tax differences. Growth in interest-earning assets has occurred over the last several years and is expected to continue. As of December 31, 2021, the Company has no federal NOLs to carry forward which would have potentially been at risk of expiring in the future.
Conversely, the effects of the COVID-19 pandemic to the local and global economy
may result in a significant increase in future credit loss provisions and
charge-offs. Rising interest rates and a downturn in the economy could
significantly decrease the volume of mortgage loan originations and have a
negative impact on asset quality.
Based on the guidance provided in ASC 740, we believe that the positive evidence
evidence and that it was more likely than not that all of our deferred tax
assets would be realized within their life cycle. Therefore, a valuation
allowance was not required during either period.
The net deferred tax asset balance was
$31.9 millionas of March 31, 2022and $14.2 millionas of December 31, 2021. The increase in the deferred tax asset balance is primarily related to FAS 115 and the unrealized losses in the investment portfolio. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability. Preferred Dividends
preferred stock during the three months ended
Net Income and Net Income per Common Share
Net income available to common shareholders for the first three months of 2022 was
$5.3 million, a decrease of $940,000, compared to a net income available to common shareholders of $6.2 millionrecorded for the first three months of 2021. The decline was mainly driven by a reduction in non-interest income during the first quarter of 2022. For the three-month period ended March 31, 2022, basic and fully diluted net income per common share was $0.09and $0.08, respectively, compared to basic and fully diluted net loss per common share of $0.11and $0.09for the three month period ended March 31, 2021.
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 first three months of 2022 and 2021 was 0.44% and 0.62%, respectively. Return on average equity ("ROE") indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE for the first three months of 2022 and 2021 was 8.16% and 9.25%, respectively.
Commitments, Contingencies and Concentrations
Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately
$542.8 millionand $549.8 million, and standby letters of credit of approximately $18.1 millionand $18.0 million, at March 31, 2022and December 31, 2021, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $542.8 millionof commitments to extend credit at March 31, 2022were 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. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. 49 -------------------------------------------------------------------------------- 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. Regulatory Matters We are required to comply with certain "risk-based" capital adequacy guidelines issued by the Federal Reserveand the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the "credit-equivalent" amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts. Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk. Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets. Management believes that the Company and Republic met, as of March 31, 2022and December 31, 2021, all applicable capital adequacy requirements. In the current year, the FDICcategorized 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. 50
-------------------------------------------------------------------------------- The following table presents our regulatory capital ratios at
March 31, 2022, and December 31, 2021. To Be Well Minimum Capital Capitalized Under Minimum Capital Adequacy with Prompt Corrective (dollars in thousands) Actual Adequacy Capital Buffer Action Provisions Amount Ratio Amount Ratio Amount Ratio Amount Ratio At March 31, 2022: Total risk based capital Republic $ 355,13311.25 % $ 252,517
367,795 11.61 % 253,338 8.00 % 332,506 10.50 % - - % Tier one risk based capital Republic 332,619 10.54 % 189,388 6.00 % 268,299 8.50 % 252,517 8.00 % Company 345,281 10.90 % 190,003 6.00 % 269,171 8.50 % - - % CET 1 risk based capital Republic 332,619 10.54 % 142,041 4.50 % 220,952 7.00 % 205,170 6.50 % Company 299,186 9.45 % 142,502 4.50 % 221,671 7.00 % - - % Tier one leveraged capital Republic 275,351 5.83 % 228,289 4.00 % 228,289 4.00 % 285,362 5.00 % Company 277,013 6.04 % 228,708 4.00 % 228,708 4.00 % - - % At
December 31, 2021: Total risk based capital Republic $ 347,03011.43 % $ 242,787
360,175 11.83 % 243,591 8.00 % 319,713 10.50 % - - % Tier one risk based capital Republic 328,066 10.81 % 182,091 6.00 % 257,962 8.50 % 242,787 8.00 % Company 341,211 11.21 % 182,693 6.00 % 258,816 8.50 % - - % CET 1 risk based capital Republic 328,066 10.81 % 136,568 4.50 % 212,439 7.00 % 197,265 6.50 % Company 281,886 9.26 % 137,020 4.50 % 213,142 7.00 % - - % Tier one leveraged capital Republic 322,097 5.85 % 224,247 4.00 % 224,247 4.00 % 280,309 5.00 % Company 324,242 6.08 % 224,656 4.00 % 224,656 4.00 % - - % Dividend Policy On
August 26, 2020, the Company issued 2,000,000 shares of 7.00% Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01per share (the "Series A Preferred Stock"), at a price of $25.00per share. The Company received net proceeds of $48.3 millionfrom 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 1of each year. During the three-month period ended March 31, 2022, $866,000in dividends were declared and paid on the preferred stock compared to $875,000during the three month period ended March 31, 2021. We have not paid any cash dividends on our common stock. We have no current plans to pay cash dividends on common stock in 2022. 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. 51
Liquidity A financial institution must maintain and manage liquidity to ensure it has the ability to meet its financial obligations. These obligations include: the payment of deposits on demand or at their contractual maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become due; the ability to fund new and existing loans and other funding commitments; and the ability to take advantage of new business opportunities. Liquidity needs can be met by either reducing assets or increasing liabilities. Our most liquid assets consist of cash, amounts due from banks and federal funds sold and available for sale securities. 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 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 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
$101.5 millionat March 31, 2022, compared to $118.9 millionat December 31, 2021. Loan maturities and repayments are another source of asset liquidity. At March 31, 2022, Republic estimated that more than $120.0 millionof loans would mature or repay in the six-month period ending September 30, 2022. Additionally, a significant portion of our investment securities are available to satisfy liquidity requirements through sales on the open market or by pledging as collateral to access credit facilities. At March 31, 2022, we had outstanding commitments (including unused lines of credit and letters of credit) of $542.8 million. Certificates of deposit scheduled to mature in one year totaled $167.8 millionat March 31, 2022. 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 $1.3 billionat March 31, 2022. At March 31, 2022and December 31, 2021, we had no outstanding term borrowings and no outstanding overnight borrowings with the FHLB. FHLB had issued letters of credit, on Republic's behalf, totaling $100.0 millionat March 31, 2022and December 31, 2021against our available credit line. We also established a contingency line of credit of $10.0 millionwith ACBB and a Fed Funds line of credit with Zions Bankin the amount of $15.0 millionto 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 March 31, 2022and December 31, 2021.
Investment Securities Portfolio
March 31, 2022, 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 $1.1 billionas of March 31, 2022and December 31, 2021. At March 31, 2022, securities classified as available for sale had a net unrealized loss of $80.4 millionand a net unrealized loss of $11.6 millionat December 31, 2021. 52 --------------------------------------------------------------------------------
Loan Portfolio Our loan portfolio consists of secured and unsecured commercial loans, commercial real estate loans, construction and land development 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
$250,000and $5.0 million, but customers may borrow significantly larger amounts up to Republic's legal lending limit of approximately $51.2 millionas of March 31, 2022. 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 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 credit losses until prior charge-offs have been fully recovered.
The following table shows information concerning loan delinquency and
nonperforming assets as of the dates indicated (dollars in thousands):
March 31, December 31, 2022 2021 Loans accruing, but past due 90 days or more $ 2 $ 323 Non-accrual loans 12,424 12,541 Total non-performing loans 12,426 12,864 Other real estate owned 360 360 Total non-performing assets
$ 12,786 $ 13,224
Non-performing loans as a percentage of total loans,
net of unearned income
0.48 % 0.51 % Non-performing assets as a percentage of total assets 0.22 % 0.24 % Non-performing asset balances decreased by
$438,000to $12.8 millionas of March 31, 2022from $13.2 millionat December 31, 2021. Non-accrual loans decreased $117,000to $12.4 millionas of March 31, 2022, from $12.5 millionat December 31, 2021. There were $2,000of loans accruing but past due 90 days or more as of March 31, 2022compared to $323,000at December 31, 2021. 53 -------------------------------------------------------------------------------- The following table presents our 30 to 89 days past due loans at March 31, 2022and December 31, 2021. (dollars in thousands) March 31, December 31, 2022 2021 30 to 59 days past due $ 7,588 $ 4,85160 to 89 days past due 2,825 4,706
Total loans 30 to 89 days past due
Loans with payments 30 to 59 days past due increased to
Other Real Estate Owned The balance of other real estate owned was
$360,000as of March 31, 2022and December 31, 2021. The following table presents a reconciliation of other real estate owned for the three months ended March 31, 2022and the year ended December 31, 2021: March 31, December 31, (dollars in thousands) 2022 2021 Beginning Balance, January 1st $ 360 $ 1,188Additions - 360 Valuation adjustments - (722 ) Dispositions - (466 ) Ending Balance $ 360$ 360
transactions” as defined by the
Allowance for Credit Losses On
January 1, 2022, the Company adopted ASU 2016-13 (Topic 326), which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The allowance for credit losses is a valuation allowance for management's estimate of expected credit losses in the loan portfolio. The process to determine expected credit losses utilizes analytic tools and management judgement and is reviewed on a quarterly basis. When management is reasonably certain that a loan balance is not fully collectable, an individually evaluated analysis is completed whereby a specific reserve may be established or a full or partial charge off is recorded against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance via a quantitative analysis which considers available information from internal and external sources related to past loan loss and prepayment experience and current conditions as well as the incorporation of reasonable and supportable forecasts. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the allowance for credit losses are qualitative reserves that are expected, but, in the management's assessment, may not be adequately represented in the quantitative analysis. The allowance is available for any loan that, in management's judgment, should be charged off. Management evaluates a variety of factors including available published economic information in arriving at its forecast. Factors considered in the calculation of the allowance for credit losses 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 as well as external factors, such as competition, legal and regulatory requirements. Historical loss experience is analyzed by reviewing charge-offs over a life of loan period to determine loss rates consistent with the loan categories depicted in the allowance for credit loss table below. 54 -------------------------------------------------------------------------------- The factors supporting the allowance for credit losses do not diminish the fact that the entire allowance for credit 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 credit losses. The allowance for credit losses is subject to review by banking regulators along with the Audit Committee and Board of Directors. Our primary bank regulators regularly conduct examinations of the allowance for credit losses and make assessments regarding the adequacy and the methodology employed in their determination. An analysis of the allowance for credit losses for the three months ended March 31, 2022and 2021, and the twelve months ended December 31, 2021is as follows: For the twelve For the three months ended For the three months ended December 31, months ended (dollars in thousands) March 31, 2022 2021 March 31, 2021 Balance at beginning of period $ 18,964 $ 12,975$ 12,975 CECL Day 1 Adjustment 2,980 - - Balance at beginning of period (as adjusted) 21,944 - -
Commercial real estate - 311 - Construction and land development - - - Commercial and industrial - 61 - Owner occupied real estate - - - Consumer and other 67 117 34 Residential mortgage - - Paycheck protection program - - - Total chargeoffs 67 489 34 Recoveries: Commercial real estate - 33 - Construction and land development - - - Commercial and industrial 10 462 104 Owner occupied real estate 7 64 43 Consumer and other - 169 3 Residential mortgage - - - Paycheck protection program - - - Total recoveries 17 728 150 Net chargeoffs/(recoveries) 50 (239 ) (116 ) Provision for credit losses 620 5,750 3,000 Balance at end of period $ 22,514
$ 18,964$ 16,091 Average loans outstanding(1) $ 2,516,719 $ 2,577,498 $ 2,676,705As a percent of average loans:(1) Net chargeoffs (annualized) (0.01 )% (0.01 )% (0.02 )% Provision for credit losses (annualized) 0.10 % 0.22 % 0.45 % Allowance for credit losses 0.89 % 0.74 % 0.60 % Allowance for credit losses to: Total loans, net of unearned income 0.88 % 0.75 % 0.59 % Total nonperforming loans 181.19 % 147.42 % 121.99 %
(1) Includes non-accruing loans
We recorded a provision for credit losses in the amount of
$620,000during the three-month period ended March 31, 2022and a $3.0 millionprovision during the three-month period ended March 31, 2021. The decrease in the provision required during the first quarter of 2022 was driven by the adoption of ASU 2016-13 during the three months ended March 31, 2022. 55 -------------------------------------------------------------------------------- The change in the allowance required for loans evaluated under CECL was primarily driven by the uncertainty surrounding the economic environment due to the impact of the COVID-19 pandemic. 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 credit 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 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. Based on the current expected credit loss methodology currently utilized by the Bank, the provision for credit 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 corresponding impact on our loan portfolio. The allowance for credit losses as a percentage of non-performing loans (coverage ratio) was 181% at March 31, 2022, compared to 147% at December 31, 2021and 122% at March 31, 2021. Total non-performing loans were $12.4 million, $12.9 million, and $13.2 millionat March 31, 2022, December 31, 2021, and March 31, 2021, respectively. The increase in the coverage ratio at March 31, 2022compared to December 31, 2021was a result of an increase in the allowance for credit losses during the first three months of 2022. Management makes at least a quarterly determination as to an appropriate provision to maintain an allowance for credit losses that it determines is adequate to absorb life of loan expected credit 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, reasonable and support forecast of future credit loses, and other relevant factors in reviewing the adequacy of the allowance for credit losses. Any additions deemed necessary to the allowance for credit 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 credit 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 credit 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 $4.2 millionat both March 31, 2022and December 31, 2021. 56
-------------------------------------------------------------------------------- The following table provides additional analysis of partially charged-off loans. March 31, December 31, (dollars in thousands) 2022 2021 Total nonperforming loans
$ 12,426 $ 12,864Nonperforming and impaired loans with partial charge-offs 4,243
Ratio of nonperforming loans with partial charge-offs to
Ratio of nonperforming loans with partial charge-offs to
total nonperforming loans
34.15 % 32.98 % Coverage ratio net of nonperforming loans with partial charge-offs 530.59 % 447.05 % Our charge-off policy is reviewed on an annual basis and updated as necessary. During the three-month period ended
March 31, 2022, there were no changes made to this policy. 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.
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