Financial Market

REPUBLIC FIRST BANCORP INC : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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  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 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.



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.



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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 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. 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 2020 to lessen the impact of COVID-19 on consumers
and businesses. Among other measures, the CARES Act authorized funding for the
Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") to
provide loans to small businesses to keep employees on their payroll and to make
other eligible payments to sustain their operation in the near term. In December
2020, the Economic Aid Act was signed into law, which extended certain
provisions of the CARES Act and provides additional support and financial
assistance for small businesses, non-profit organizations, and other entities.



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, 2020 or (ii) 60 days after the President
declared a termination of the COVID-19 national emergency were not classified as
TDRs if the related loans were not more than 30 days past due as of December 31,
2019. In December 2020, the Economic Aid Act was signed into law, which 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, 2022 and 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.



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Financial Condition



Assets



Total assets increased by $74.0 million, or 1%, to $5.7 billion as of March 31,
2022, compared to $5.6 billion as 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 million to $101.5 million as of March 31, 2022,
from $118.9 million as of December 31, 2021 as 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 million as of
March 31, 2022 compared to $5.2 million as of December 31, 2021. Residential
mortgage loans held for sale totaled $4.7 million at March 31, 2022, a decrease
of $3.9 million, versus $8.5 million at December 31, 2021. A decrease in the
volume of residential mortgage loans originated during the three months ended
March 31, 2022 due 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 billion at March 31, 2022, versus
$2.5 billion at 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 billion at March 31, 2022 compared
to $2.4 billion at 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.



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Investment Securities



Investment securities available for sale are investments that may be sold in
response to changing market and interest rate conditions, and for liquidity and
other purposes. Our debt securities consist primarily of U.S. Government agency
SBA bonds, U.S. Government agency collateralized mortgage obligations ("CMO"),
agency mortgage-backed securities ("MBS"), municipal securities, and corporate
bonds. Investment securities available for sale totaled $1.1 billion at March
31, 2022 as compared to $1.1 billion at December 31, 2021. The $40.7 million
increase was primarily due to the purchase of securities totaling $147.8 million
partially offset by the paydowns, maturities, and calls of securities totaling
$37.7 million during 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 million compared to a net unrealized loss of $11.6 million at December 31,
2021. The $68.9 million decrease 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. Government agency Small Business Investment Company bonds (SBIC) and SBA
bonds, CMO's and MBS's. The fair value of securities held-to-maturity totaled
$1.5 billion and $1.6 billion at March 31, 2022 and December 31, 2021,
respectively. The $115.9 million decrease was primarily due to paydowns,
maturities, and calls of securities held in the portfolio totaling $60.9 million
partially offset by the purchase of securities held to maturity totaling $51.1
million during 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 million compared to a net unrecognized loss of $12.9 million at December
31, 2021. The $105.5 million decrease 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
securities totaled $7.9 million at March 31, 2022 compared to $9.2 million at
December 31, 2021.




Restricted Stock



Restricted stock, which represents a required investment in the capital stock of
correspondent banks related to available credit facilities, was carried at cost
as of March 31, 2022 and 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, 2022 and December 31, 2021, the investment in FHLB of Pittsburgh
capital stock totaled $3.0 million and $3.4 million, respectively. At both March
31, 2022 and 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 million to $129.6
million at March 31, 2022 from $127.4 million at December 31, 2021. The increase
was primarily due to purchases of premises and equipment totaling $4.3 million
partially offset by depreciation and amortization expense of $2.1 million offset
during the three months ended March 31, 2022. The total branch count was 33 at
March 31, 2022 with the opening of a new branch in Ocean City, New Jersey
compared to 32 at December 31, 2021. The Company's branch strategy will be a
critical focus throughout 2022 and beyond.



Other Real Estate Owned


At both March 31, 2022 and December 31, 2021, the balance of other real estate
owned was $360,000.




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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, 2022 and December 31, 2021,
the balance of operating leases - right-of-use asset was $76.5 million and $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 million to $5.3 billion at March 31, 2022
from $5.2 billion at 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,
2022 and December 31, 2021, the balance of the operating lease liability
obligation was $82.8 million and $81.8 million, respectively.



Shareholders' Equity



Total shareholders' equity decreased $47.2 million to $277.0 million at March
31, 2022 compared to $324.2 million at December 31, 2021. The decrease was
primarily due to a decrease in the accumulated other comprehensive loss of $51.2
million partially 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 March 31, 2022 Compared to Three Months Ended March 31, 2021




We reported net income available to common shareholders of $5.3 million or $0.08
per diluted share, for the three-month period ended March 31, 2022 compared to a
net income available to common shareholders of $6.2 million or $0.09 per 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 million or $0.08
per diluted share, for the three-month period ended March 31, 2022 compared to a
net income available to common shareholders of $5.2 million or $0.08 per 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.



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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     $      40          0.12 %   $   208,397     $      49          0.09 %
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                                 $ 4,592,923

Interest-earning
liabilities:
Demand - non-interest
bearing                        $ 1,378,400                                 $ 1,087,052
Demand - 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                                 $ 4,592,923
Net interest income (2)                        $  36,288                                   $  31,568
Net 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 $148 and $136 for the three months ended March 31,
2022 and 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.



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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 million for the three
months ended March 31, 2022, an increase of $3.0 million, compared to $36.6
million for 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 billion increase in the average balance of
the investment securities portfolio. Total interest expense for the three months
ended March 31, 2022 decreased by $1.7 million, or 34%, over the same period in
2021. Interest expense on deposits decreased by $1.7 million for the three
months ended March 31, 2022 versus 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
billion increase in the average balance of deposits. Interest expense on other
borrowings decreased by $15,000 for the three months ended March 31, 2022 as
compared to March 31, 2021 due 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 million in fees were recognized as revenue compared
to $7.4 million in fees recognized during the first quarter of 2021.



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Provision for Credit Losses



As of March 31, 2022, the estimated ACL in accordance with CECL is $21.9 million
for 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, 2022 includes 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, 2022 decreased by
$5.9 million, or 58%, compared to the same period in 2021. Mortgage banking
income totaled $1.1 million during the three months ended March 31, 2022, which
represents a decrease of $3.4 million compared 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 million for the three
months ended March 31, 2022 compared to $4.0 million during the same period in
2021. Gains on the sale of SBA loans totaled $527,000 for the three months ended
March 31, 2022, a decrease of $234,000, compared to $761,000 for the same period
in 2021. Loan and servicing fees totaled $495,000 for the three months ended
March 31, 2022 compared to $633,000 for 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 million related to a branding and marketing agreement signed with VISA.



Non-interest Expenses



Non-interest expenses increased $2.3 million, or 8%, to $31.7 million for the
first three months of 2022 compared to $29.3 million for 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
$26,000 for the first three months of 2022 compared to the same period last
year. A new branch was opened in Ocean City, New Jersey during the three months
ended March 31, 2022.



Other real estate expenses totaled $203,000 during 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.



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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, 2022 versus
March 31, 2021 was 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 million for the three months
ended March 31, 2022, compared to a $2.3 million provision for income taxes for
the three months ended March 31, 2021. The effective tax rates for the
three-month periods ended March 31, 2022 and 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.

                                       48
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Based on the guidance provided in ASC 740, we believe that the positive evidence
considered at March 31, 2022 and December 31, 2021 outweighed the negative
evidence and that it was more likely than not that all of our deferred tax
assets would be realized within their life cycle. Therefore, a valuation
allowance was not required during either period.




The net deferred tax asset balance was $31.9 million as of March 31, 2022 and
$14.2 million as 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


Dividends of $866,000 were declared and paid on the Company’s outstanding
preferred stock during the three months ended March 31, 2022 compared to
$875,000 for the three months ended March 31, 2021.

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 million recorded 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 $0.09 and $0.08, respectively,
compared to basic and fully diluted net loss per common share of $0.11 and $0.09
for 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 million and $549.8
million, and standby letters of credit of approximately $18.1 million and $18.0
million, at March 31, 2022 and 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 million of commitments
to extend credit at March 31, 2022 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. 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
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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 Reserve and the FDIC. The risk-based capital guidelines
assign varying risk weights to the individual assets held by a bank. The
guidelines also assign weights to the "credit-equivalent" amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts.



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



Management believes that the Company and Republic met, as of March 31, 2022 and
December 31, 2021, 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.



                                       50
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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                      $ 355,133       11.25 %   $ 252,517      

8.00 % $ 331,428 10.50 % $ 315,646 10.00 %
Company

                         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                      $ 347,030       11.43 %   $ 242,787       

8.00 % $ 318,658 10.50 % $ 303,484 10.00 %
Company

                         360,175       11.83 %     243,591       8.00 %     319,713       10.50 %            -           - %
Tier one risk based capital
Republic                        328,066       10.81 %     182,091       6.00 %     257,962        8.50 %      242,787        8.00 %
Company                         341,211       11.21 %     182,693       6.00 %     258,816        8.50 %            -           - %
CET 1 risk based capital
Republic                        328,066       10.81 %     136,568       4.50 %     212,439        7.00 %      197,265        6.50 %
Company                         281,886        9.26 %     137,020       4.50 %     213,142        7.00 %            -           - %
Tier one leveraged capital
Republic                        322,097        5.85 %     224,247       4.00 %     224,247        4.00 %      280,309        5.00 %
Company                         324,242        6.08 %     224,656       4.00 %     224,656        4.00 %            -           - %




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 $0.01 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 period ended March 31, 2022, $866,000 in dividends
were declared and paid on the preferred stock compared to $875,000 during 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
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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
million at March 31, 2022, compared to $118.9 million at December 31, 2021. Loan
maturities and repayments are another source of asset liquidity. At March 31,
2022, Republic estimated that more than $120.0 million of 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
million at 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 billion at March 31, 2022. At March 31, 2022 and 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 million at March 31, 2022 and December 31, 2021 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 March 31, 2022 and December 31, 2021.



Investment Securities Portfolio




At 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 billion as of March 31, 2022 and December 31, 2021. At March 31, 2022,
securities classified as available for sale had a net unrealized loss of $80.4
million and a net unrealized loss of $11.6 million at December 31, 2021.



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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 $250,000 and $5.0 million, but customers may borrow significantly larger
amounts up to Republic's legal lending limit of approximately $51.2 million as
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 $438,000 to $12.8 million as of March
31, 2022 from $13.2 million at December 31, 2021. Non-accrual loans decreased
$117,000 to $12.4 million as of March 31, 2022, from $12.5 million at December
31, 2021. There were $2,000 of loans accruing but past due 90 days or more as of
March 31, 2022 compared to $323,000 at December 31, 2021.



                                       53
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The following table presents our 30 to 89 days past due loans at March 31, 2022
and December 31, 2021.



(dollars in thousands)                March 31,      December 31,
                                        2022             2021
30 to 59 days past due               $     7,588     $       4,851
60 to 89 days past due                     2,825             4,706

Total loans 30 to 89 days past due $ 10,413 $ 9,557

Loans with payments 30 to 59 days past due increased to $10.4 million as of
March 31, 2022 from $9.6 million at December 31, 2021.



Other Real Estate Owned



The balance of other real estate owned was $360,000 as of March 31, 2022 and
December 31, 2021. The following table presents a reconciliation of other real
estate owned for the three months ended March 31, 2022 and the year ended
December 31, 2021:



                                  March 31,      December 31,
(dollars in thousands)              2022             2021
Beginning Balance, January 1st   $       360     $       1,188
Additions                                  -               360
Valuation adjustments                      -              (722 )
Dispositions                               -              (466 )
Ending Balance                   $       360     $         360



As of March 31, 2022, we had no credit exposure to “highly leveraged
transactions” as defined by the FDIC.



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
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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, 2022 and 2021, and the twelve months ended December 31, 2021 is 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                 -                     -

Charge­offs:

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      $      2,676,705
As 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 $620,000 during the
three-month period ended March 31, 2022 and a $3.0 million provision 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
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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,
2021 and 122% at March 31, 2021. Total non-performing loans were $12.4 million,
$12.9 million, and $13.2 million at March 31, 2022, December 31, 2021, and March
31, 2021, respectively. The increase in the coverage ratio at March 31, 2022
compared to December 31, 2021 was 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 million at both March 31, 2022 and December 31,
2021.



                                       56
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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     $       12,864
Nonperforming and impaired loans with partial
charge-offs                                                       4,243     

4,242

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

                                                        0.17 %   

0.17 %
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.

© Edgar Online, source Glimpses

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