2019 ANNUAL REPORT
THE POWER OF RED IS BACK
CHAIRMAN’S LETTER
Dear Shareholders, Customers, Investors,
Team Members and Friends,
2019 marked another exceptional year in balance
sheet growth for “The Power of Red is Back” expansion
campaign. We celebrated the opening of four new stores
to great fanfare, including our first two locations in New
York City. As we continue to enter new markets, we
remain laser-focused on turning customers into FANS.
We accomplish this by staying true to our customer-
centric philosophy that embraces:
• Delivering the best banking experience across every
delivery channel, in-store, online and via mobile
• Hiring local bankers serving local customers
• Killing stupid bank rules
As a result of our unique growth model, the past
12 months saw:
• Assets increase 21% to $3.3 billion
• Loans rise 22% to $1.7 billion
• Deposits increase 25% to $3 billion
Equally important, the ratio of non-performing assets
continued to decline. While profitability remains
challenged due to compression in our net interest margin,
we are taking necessary steps to reduce expenses and
improve earnings.
Led by the success of our all-glass prototype store,
we have achieved:
• Deposit growth for new stores at an average
rate of $30 million per year
• Deposit growth for all stores at an average
rate of $22 million per year
• Loan growth in excess of 20% for
three consecutive years
We remained a leader in small business lending, with more
than $55 million in new SBA loans originated over the last
year. For six years in a row, we have been ranked as one of
the top small business lenders in the tri-state area. We’ve
also hired a lending team for New York City, focusing on
talent with deep ties and relationships throughout the city.
We’re excited to continue positioning Republic Bank as
the preferred lender for small businesses.
The hiring of Jack Allison, a banking technology
veteran with more 30 years of experience, as our Chief
Technology Officer was an important step in our steadfast
commitment to enhancing the customer experience
across every delivery channel.
Our momentum is strong as customers gravitate to
our unique, value-added, differentiated business model.
“The Power of Red is Back.”
THE BEST IS YET TO COME.
Vernon W. Hill, II,
Chairman, Republic First Bancorp
REPUBLIC FIRST BANCORP, INC. FINANCIAL HIGHLIGHTS
($ in millions, except per share data)
2019 % Change
vs 2018
3 YEAR
AVERAGE
GROWTH RATE
2018
2017
2016
2015
$3,341
+21%
+20%
$2,753
$2,322
$1,924
$1,439
ASSETS
LOANS
NET INCOME
(before Tax)
NET INCOME
PER SHARE
1,748
+22%
+22%
DEPOSITS
2,999
+25%
+21%
(4.9)
-148%
-18%
1,437
2,393
10.2
1,162
965
875
2,063
1,678
1,249
6.0
4.8
2.4
$ (0.06)
-140%
-38%
$ 0.15
$ 0.15
$ 0.12
$0.06
($ in millions, except per share data)
CHIEF EXECUTIVE OFFICER’S LETTER
I am pleased to present the 2019 Annual Report of Republic First Bancorp, Inc. (NASDAQ: FRBK) which recaps
our financial progress, continued market expansion and purposeful community engagement. We remain steady
in executing upon our “Power of Red is Back” controlled growth plan, which aims to provide customers with
a one-of-a-kind, omnichannel banking experience unmatched by our competition.
Assets, loans and deposits continue to increase at rates that far surpass other financial institutions. Importantly,
these increases are completely organic – we are growing without acquisitions. After several years of improvement
in profitability, earnings in 2019 were impacted by the shape of the yield curve, in addition to the costs incurred
to initiate our expansion into New York City. As we enter 2020, a number of cost control measures have been
implemented to offset the challenges faced in growing revenue as a result of compression in the net interest margin.
As national and regional banks downsize their inflated branch networks, we are strategically building new stores
in highly trafficked areas with identified customer demand. In addition to our entrance into the New York City
market, we are also focusing on growing our presence in critical parts of Pennsylvania and New Jersey. Customers
are eager to open accounts at these new stores as they recall Vernon Hill’s best in class service model that we’re
replicating today at Republic Bank.
Oak Mortgage, our residential mortgage division, is serving the home financing needs of customers throughout
our footprint, perfectly complementing the suite of traditional banking services we offer. Oak Mortgage originated
more than $450 million in mortgage loans over the last 12 months, making 2019 its strongest year to date.
As a bank dedicated to the communities we serve, we continue to take great pride in supporting the local
populations, organizations and initiatives that matter most to our customers. In addition to the support we offer
to a select nonprofit at each store opening, this year, we renewed our focus on improving youth financial literacy.
We hosted dozens of our proprietary Money Zone sessions at elementary schools across the region, teaching
students the importance of saving and budgeting.
On behalf of the Board of Directors and our Executive Team, thank you for your unwavering support of our
model and mission. We look forward to a successful 2020 together.
Harry D. Madonna
CEO, Republic First Bancorp
2019 ANNUAL REPORT | REPUBLIC BANK | 01
STORE OPENINGS
Our aggressive growth plan,“The Power of Red is Back,”
gained momentum in 2019 as we opened four new
stores. We entered the Lumberton, NJ community in
March, which marked our fifth location in Burlington
County, and opened a store in Feasterville, PA in May
as we continued our expansion into Bucks County.
In the second half of the year, we officially established
our presence New York City by cutting the ribbon at
two locations in Manhattan. We remain committed to
strategically growing our store network while providing
customers with unparalleled levels of service and
convenience.
TOTAL DEPOSITS
Average Annual Growth = 23%
$2,999
$2,393
$2,063
$1,678
$1,249
s
n
o
i
l
l
i
m
n
i
$
$3,000
$2,750
$2,500
$2,250
$2,000
$1,750
$1,500
$1,250
$1,000
$750
$500
$250
$0
2015
2016
2017
2018
2019
DEPOSIT ACCOUNTS
90,000
75,000
60,000
45,000
30,000
15,000
0
Average Annual Growth = 35%
86,554
67,924
52,511
38,290
27,640
2015
2016
2017
2018
2019
TOTAL LOANS
Average Annual Growth = 18%
$1,748
$1,437
$1,162
$965
$875
1,800
1,500
1,200
900
600
300
0
s
n
o
i
l
l
i
m
n
i
$
2015
2016
2017
2018
2019
Feasterville, PA Grand Opening
TOTAL RETURN PERFORMANCE
Republic First Bancorp, Inc.
NASDAQ Composite Index
SNL Bank Index
300
250
200
150
100
50
l
e
u
a
V
x
e
d
n
I
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
51st St.& 3rd Ave., NYC Grand Opening
02
STORE LOCATIONS
NYC Stores:
14th St. & 5th Ave.
51st St. & 3rd Ave.
64th St. & 3rd Ave.
611
Southampton
476
202
King of
Prussia
76
Plymouth
Meeting
476
76
276
1
Feasterville
Fairless Hills
276
309
Abington
Bensalem
95
PENNSYLVANIA
1
13
Torresdale
Mayfair
476
Wynnewood
Lawrence
Park
Media
476
Havertown
1
18th & Market
16th & Walnut
13
95
611
1
13
16th & Market
95
130
Cinnaminson
Moorestown
73
Cherry Hill 2
38
295
38
295
Lumberton
Evesboro
Lumberton
8th & Chestnut
95
130
Cherry Hill
70
70
Haddonfield
Marlton
295
N J T U R N P I K E
42
Voorhees
30
Medford
295
45
322
130
NEW JERSEY
E
P I K
N
R
U
J T
N
Deptford
55
Washington
Township
Gloucester
42
Township
A
.
C
.
E
X
P
W
Y
55
322
Berlin
73
30
Northfield
Glassboro
Sicklerville
Somers Point
Ocean City
322
Open 7 Days
Coming Soon
2019 ANNUAL REPORT | REPUBLIC BANK | 03
PERSONAL BANKING
We’re not like other banks – building personal
relationships with our customers is deeply ingrained in
our culture, and our “Fans Not Customers” model is at
the heart of all we do. Our goal is to make banking as
easy and as convenient as possible to effectively meet
our customers’ needs. Whether it is in-store, online or
via mobile, we strive to exceed our customers’
expectations at every step of the way.
• Open 7 Days
early & late, 361 days a year
• Absolutely FREE
Personal Checking
• Residential Mortgages
• FREE Coin Counting
for everyone1
• ATM/Debit Card
on the spot
• Fee FREE ATMs2
over 55,000 Allpoint® ATMs
worldwide
• Bank Anywhere
in-store, online, phone or mobile3
1 Some limitations or restrictions may apply for businesses.
2 For Republic Bank customers. 3 Text and data charges may apply.
COMMUNITY SERVICE
As a bank dedicated to the communities we serve,
we take pride in championing the local organizations
and initiatives that matter most to our customers.
That’s why at each store opening we make a donation
to an area non-profit in support of their mission.
This year, that included the Feasterville Fire Company,
Lumberton Township Emergency Squad and the
Intrepid Fallen Heroes Fund. We also give back to
the philanthropic organizations that align with our
core values, including Girls on the Run, the YMCA
and CONTACT of Burlington County, among others.
04
Lumberton Township Emergency Squad
THE POWER OF RED
RETURNS TO NEW YORK
2019 marked the important return of “The Power of
Red” to New York City as we brought back the legendary
banking experience that New Yorkers have been missing.
We opened two new locations in Manhattan – one at
14th Street and 5th Avenue, where a highly trafficked
Commerce Bank once stood, and a second store at
51st Street and 3rd Avenue. Additional stores are set to
open in 2020 and beyond.
In 2003, when Chase Bank moves into the space upstairs,
Commerce Bank takes over the corner of 14th St. & 5th Ave.
In 2008, TD Bank acquires Commerce Bank, and ultimately
downsizes to the smaller space next door.
On July 12, 2019 the Power of Red returns to the corner
of 14th St. & 5th Ave.
2019 ANNUAL REPORT | REPUBLIC BANK | 05
SURPRISE AND DELIGHT
As part of our ongoing Surprise and Delight Series,
we hosted several pop-up events throughout
Philadelphia. Outside our flagship store at 16th &
Market Streets, we handed out free treats from local
favorites such as Franklin Fountain, Federal Donuts
and Philadelphia Water Ice. We also partnered with
renowned art school Studio Incamminati to host a
workshop at Roman Catholic High School where
students drew a live subject – R Dog! The series aims
to give back to our community and connect groups
of people in unexpected ways.
MONEY ZONE
For more than five years, we have pioneered Money
Zone, a one-of-a-kind interactive instructional program
designed to introduce elementary school students to
the fundamentals of making deposits and withdrawals,
saving and earning money and creating a budget.
We conducted more than 500 Money Zone classes
throughout Pennsylvania and New Jersey in 2019 and
look forward to bringing this proprietary program to
New York in 2020.
06
BUSINESS BANKING
Republic Bank continues to be one of the top small
business lenders in the tri-state region and we remain
steadfast in our unique approach to doing business –
delivering funding quickly and locally. We are proud to
provide business owners with the necessary financing
to establish and grow their companies and offer a
comprehensive suite of products and services to make
business banking simple and easy, including:
• Absolutely FREE
Business Checking*
• Cash Management Solutions
• Loans and Lines of Credit
• Online Banking with Bill Pay
• Business Visa® Credit Card
• Small Business Lending
• Commercial Real Estate
*Up to 600 checks/deposited items monthly for this account.
THE ENTREPRENEUR’S BANK
For the sixth year in a row, we demonstrated our support
of small businesses by honoring two of our valued
customers on their busiest shopping day of the year –
Small Business Saturday. We brought employees, a
festive street team and R Dog to Haddonfield, NJ to
honor local mainstays Running Co. of Haddonfield and
Sweet T’s Bakeshop by handing out $10 gift cards to
incentivize purchases.
2019 ANNUAL REPORT | REPUBLIC BANK | 07
EXECUTIVE MANAGEMENT
Harry D. Madonna
Chief Executive Officer
Andrew J. Logue
President
Chief Operating Officer
Frank Cavallaro
Executive Vice President
Chief Financial Officer
Jay Neilon
Executive Vice President
Chief Credit Officer
Tracie Young
Executive Vice President
Chief Risk Officer
SENIOR OFFICERS
Sharon Hammel
Senior Vice President
Chief Retail Officer
Steve McWilliams
Senior Vice President
Director of Commercial
& Industrial Lending
Joseph Tredinnick
Senior Vice President
Jack Allison
Senior Vice President
Market President, PA & NJ
Chief Information Officer
BOARD OF DIRECTORS
Harry D. Madonna
Barry L. Spevak
Andrew B. Cohen
Brian P. Tierney, Esquire
Theodore J. Flocco, Jr., CPA
Harris Wildstein, Esquire
Lisa R. Jacobs, Esquire
Vernon W. Hill, II
Chairman, Republic First Bancorp
08
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2019.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___ to ___.
Commission File Number: 000-17007
REPUBLIC FIRST BANCORP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania
(State or other jurisdiction of incorporation or organization)
50 South 16th Street, Philadelphia, Pennsylvania
(Address of principal executive offices)
23-2486815
(I.R.S. Employer Identification No.)
19102
(Zip code)
Registrant’s telephone number, including area code 215-735-4422
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock
Trading
Symbol(s)
FRBK
Name of each exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES [ ] NO [X]
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months. YES [X] NO [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]
Non-Accelerated filer [ ]
Emerging growth company [ ]
Accelerated filer [X]
Smaller reporting company [ ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $257,259,804 based on the last sale
price on Nasdaq Global Market on June 30, 2019.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Common Stock, par value $0.01 per share
Title of Class
58,850,778
Number of Shares Outstanding as of March 13, 2020
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Shareholders, which Definitive Proxy Statement
will be filed with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31,
2019, are incorporated by reference into Part III of this Form 10-K; provided, however, that the Compensation Committee Report, the Audit
Committee Report and any other information in such proxy statement that is not required to be included in this Annual Report on
Form 10-K, shall not be deemed to be incorporated herein by reference or filed as a part of this Annual Report on Form 10-K.
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
TABLE OF CONTENTS
PART I:
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II:
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Item 6.
Selected Financial Data
PAGE
1
13
27
27
27
27
28
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
30
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
74
74
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
141
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III:
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Directors Independence
Item 14.
Principal Accounting Fees and Services
PART IV:
Item 15.
Signatures
Exhibits, Financial Statement Schedules
ii
141
142
142
142
142
143
143
144
148
Item 1: Business
PART I
Throughout this Annual Report on Form 10-K, the registrant, Republic First Bancorp, Inc., is referred
to as
is
the “Company” or as “we,” “our” or “us”. The Company’s website address
www.myrepublicbank.com. The information on this website is not and should not be considered part of this
Form 10-K and is not incorporated by reference in this Form 10-K. This website is, and is only intended to
be, for reference purposes only. The Company makes available free of charge on or through its website its
Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the Securities and Exchange Commission (the
“SEC”).
Forward Looking Statements
This document contains “forward-looking statements,” as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995. These statements can be identified by reference to a future period
or periods or by the use of words such as “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. These forward-looking statements
include, among others: statements of goals, intentions and expectations, statements regarding the impact
of accounting pronouncements, statements regarding prospects and business strategy, statements regarding
allowance for loan losses, asset quality and market risk and estimates of future costs, benefits and results.
Forward-looking statements are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking statements. For example, and in addition
to the “Risk Factors” discussed elsewhere in this Form 10-K, risks and uncertainties can arise with changes
in or related to:
general economic conditions, including turmoil in the financial markets and related efforts of
government agencies to stabilize the financial system;
the adequacy of our allowance for loan losses and our methodology for determining such
allowance;
adverse changes in our loan portfolio and credit risk-related losses and expenses;
concentrations within our loan portfolio, including our exposure to commercial real estate
loans, and to our primary service area;
changes in interest rates;
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;
1
the regulatory environment, including evolving banking industry standards and 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;
health emergencies, including the spread of infectious diseases or pandemics;
litigation liabilities, including costs, expenses, settlements and judgments; and
other economic, competitive, governmental, regulatory and technological factors affecting our
operations, pricing, products and services.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect
management’s beliefs only as of the date hereof. Except as required by applicable law or regulation, we do
not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statements
to reflect any changed assumptions, any unanticipated events or any changes in the future. Significant
factors which could have an adverse effect on the operations and future prospects of the Company are
detailed in the “Risk Factors” section included under Item 1A of Part I of this Annual Report on
Form 10-K. Readers should carefully review the risk factors included in this Annual Report on Form 10-
K and in other documents the Company files from time to time with the SEC.
General
Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of
Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the
name Republic Bank, and we may refer to as Republic or the Bank throughout this document. Republic
offers a variety of credit and depository banking services. Such services are offered to individuals and
businesses primarily in the Greater Philadelphia, Southern New Jersey, and the New York City area through
offices and branches in Philadelphia, Bucks, Delaware, and Montgomery Counties in Pennsylvania,
Atlantic, Burlington, Camden, and Gloucester Counties in New Jersey, and New York County in New York.
Historically, our primary objective had been to position ourselves as an alternative to the large financial
institutions for commercial banking services in the Greater Philadelphia and Southern New Jersey region.
However, in 2008, we made an important and strategic shift in our business approach, redirecting our efforts
toward the creation of a major retail bank that would meet an important need in our existing marketplace.
Focused on delivering high levels of customer service and satisfaction, driving innovation, developing a
bold brand and creating shareholder value, Republic Bank sought to offer a banking experience that would
turn customers into Fans. As other banks began to turn toward automation for growth, Republic Bank took
a different approach and chose not only to embrace advances in technology, but to also define itself by the
personal touch.
To achieve such a transformation, we recruited several key banking executives who had previously
served in leadership roles at Commerce Bank, upon which this business model draws inspiration. With a
strong management team in place, along with adequate capital resources to support this revitalized vision,
we began to build a unique brand with the goal of establishing ourselves as a premier financial institution
in the Philadelphia metropolitan area.
2
An important part of that strategic shift toward creating a retail and customer focused bank was the
decision in 2010 to rebrand our stores from Republic First Bank to Republic Bank, which had been the
name under which we had initially incorporated and operated from 1988-1996. In support of that rebrand,
we also renovated and remodeled the majority of our existing branches which refer to and operate as
stores. Further, we embraced critical service changes that reframed the Republic Bank brand and
experience in the eyes of the consumer to include expanded hours, absolutely free checking, free coin
counting, no ATM surcharges, mobile banking and much more.
From a lending perspective, we also shifted away from our historic approach, which was primarily
focused on business banking and isolated commercial lending transactions, in particular commercial real
estate loans. While restructuring our loan portfolio and deemphasizing the origination of commercial real
estate loans, we also undertook a detailed review of our more significant credit relationships. This review
allowed us to reduce exposure, enhance our allowance for loan loss methodology and commit to originate
fewer commercial real estate loans in an effort to reduce our credit concentrations in that particular category.
In December 2011, we completed the sale of several distressed commercial real estate loans and
foreclosed properties to a single investor. This transaction dramatically reduced our non-performing asset
balances and significantly improved our credit quality metrics. This loan sale was a cornerstone transaction
in the transformation of Republic Bank.
With these significant changes implemented, Republic Bank was then well-positioned to execute an
aggressive expansion plan which was given the title, “The Power of Red is Back.” To support this growth
strategy, we completed the sale of $45 million of common stock through a private placement offering in
April 2014 which provided the necessary capital to begin our aggressive expansion plan.
During 2016, we expanded our product offerings through the addition of a residential mortgage lending
team. We acquired Oak Mortgage Company in July 2016 which has been fully integrated and became a
division of the Bank. Oak Mortgage is headquartered in Marlton, NJ and is licensed to do business in
Pennsylvania, Delaware, New Jersey, and Florida providing our customers with opportunities in the
residential lending market. The Oak Mortgage team has been a tremendous fit for Republic’s commitment
to extraordinary customer service and has proven to be a perfect complement to the Bank’s network of store
locations.
To strengthen our capital position and prepare for the next stage of growth and expansion, we completed
a capital raise in the amount of $100 million through a registered direct offering of our common stock in
December 2016. At the same time, Vernon W. Hill, II became a member of the Board of Directors and was
appointed Chairman of Republic First Bancorp, Inc. He has been a major investor and consultant to
Republic since 2008. Mr. Hill is often credited with reinventing the concept of Retail Banking. He was the
Founder and Chairman of Commerce Bancorp, a $50 billion Retail Bank headquartered in metro
Philadelphia, which grew to 450 locations along the east coast before its sale in 2007.
The aggressive expansion plan has produced strong results from a balance sheet perspective and
continues to build momentum. Over the last six years, we have opened eighteen new stores using our
signature glass building. During 2019, we expanded our store network in the Southern New Jersey area by
opening a new location in Lumberton and expanded in the Greater Philadelphia area with a new store in
Feasterville, PA. During 2019, we also expanded into the New York market with the grand opening of two
stores located at 14th Street & 5th Avenue and 51st Street & 3rd Avenue in Manhattan.
3
As of December 31, 2019, we had total assets of approximately $3.3 billion, total shareholders’ equity
of approximately $249.2 million, total deposits of approximately $3.0 billion, net loans receivable of
approximately $1.7 billion, and a net loss of $3.5 million for the year ended December 31, 2019. We have
one reportable segment: community banking. The community bank segment primarily encompasses the
commercial loan and deposit activities of Republic, as well as residential mortgage and other consumer
loan products in the area surrounding its stores. We provide banking services through the Bank, and do not
presently engage in any activities other than traditional banking activities.
Republic Bank
Republic First Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of
Pennsylvania, and is subject to examination and comprehensive regulation by the Federal Deposit Insurance
Corporation (FDIC) and the Pennsylvania Department of Banking and Securities. Republic First Bank is a
subsidiary of Republic First Bancorp, Inc. Republic First Bank does business under the name of Republic
Bank. The deposits held by the Bank are insured, up to applicable limits, by the Deposit Insurance Fund of
the FDIC.
Service Area / Market Overview
Our primary service area currently consists of Greater Philadelphia, Southern New Jersey, and New
York City. We presently conduct our principal banking activities through twenty-nine branch locations
which are commonly referred to as “stores” throughout this document to reflect our retail oriented approach
to customer service and convenience. Twelve of these stores are located in Philadelphia and the surrounding
suburbs of Plymouth Meeting, Wynnewood, Abington, Media, Fairless Hills, and Feasterville in
Pennsylvania. There are fifteen stores located in the Southern New Jersey market in Haddonfield, Voorhees,
Glassboro, Marlton, Berlin, Washington Township, Moorestown, Sicklerville, Medford, Cherry Hill,
Gloucester Township, Evesboro, Somers Point, and Lumberton. There are two stores located in New York
City at 14th Street & 5th Avenue and 51st Street & 3rd Avenue. Our commercial lending activities extend
beyond our primary service area, to include other counties in Pennsylvania, New Jersey, and New York as
well as parts of Delaware, Maryland, and other out-of-market opportunities. Our residential lending
activities also extend outside of our primary service area, to include other counties in Pennsylvania, New
Jersey, and New York, as well as Delaware and Florida through our Oak Mortgage lending team.
Competition
We face substantial competition from other financial institutions in our service area. Competitors
include Wells Fargo, BB&T, Citizens, PNC, Santander, TD Bank, and Bank of America, as well as many
regional and local community banks. In addition, we compete directly with savings banks, savings and loan
associations, finance companies, credit unions, mortgage brokers, insurance companies, securities
brokerage firms, mutual funds, money market funds, private lenders and other institutions for deposits,
commercial loans, mortgages and consumer loans, as well as other services. Competition among financial
institutions is based upon a number of factors, including the quality of services rendered, interest rates
offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the
convenience of banking facilities, locations and hours of operation and, in the case of loans to larger
commercial borrowers, applicable lending limits. Many of the financial institutions with which we compete
have greater financial resources than we do, and offer a wider range of deposit and lending products.
Our legal lending limit to one borrower was approximately $38.2 million at December 31,
2019. Loans above this amount may be made if the excess over the lending limit is participated to other
institutions. We are subject to potential intensified competition from new branches of established banks in
the area as well as new banks that could open in our market area. There are banks and other financial
4
institutions, which serve surrounding areas, and additional out-of-state financial institutions, which
currently, or in the future, may compete in our market. We compete to attract deposits and loan applications
both from customers of existing institutions and from customers new to our market and we anticipate a
continued increase in competition in our service area.
We believe that an attractive niche exists serving small to medium sized business customers not
adequately served by our larger competitors, and we will seek opportunities to build commercial
relationships to complement our retail strategy. We believe small to medium-sized businesses
will continue to respond in a positive manner to the attentive and highly personalized service we provide.
Products and Services
We offer a range of competitively priced banking products and services, including consumer and
commercial deposit accounts, checking accounts, interest-bearing demand accounts, money market
accounts, certificates of deposit, savings accounts, sweep accounts, lockbox services and individual
retirement accounts and other traditional banking services, secured and unsecured commercial loans, real
estate loans, construction and land development loans, automobile loans, home improvement loans,
mortgages, home equity and overdraft lines of credit, and other products. We attempt to offer a high level
of personalized service to both our retail and commercial customers.
We also maintain a Small Business Lending team that specializes in the origination of loans guaranteed
by the U.S. Small Business Administration (“SBA”) to provide much needed credit to small businesses
throughout our service area. This team has consistently been one of the top lenders under the SBA program
in our region. For the last several years they have been ranked as one of the top SBA lenders in the tri-state
market of Pennsylvania, New Jersey and Delaware based on the dollar volume of loan originations.
We are members of the STAR™ and PLUS™ automated teller (ATM) networks, and Allpoint -
America's Largest Surcharge Free ATM Network which enable us to provide our customers with free access
to more than 55,000 ATMs worldwide. We currently have thirty-one proprietary ATMs located in our store
network.
Our lending activities generally are focused on small and medium sized businesses within the
communities that we serve. Commercial real estate loans represent the largest category within our loan
portfolio, amounting to approximately 35% of total loans outstanding at December 31, 2019. Repayment
of these loans is, in part, dependent on general economic conditions affecting our customers and various
businesses within the community. As a commercial lender, we are subject to credit risk. Economic and
financial conditions could have an adverse effect on the ability of our borrowers to repay their loans. To
manage the challenges that the economic environment may present we have adopted a conservative loan
classification system, continually review and enhance our allowance for loan loss methodology, and
perform a comprehensive review of our loan portfolio on a regular basis.
With the addition of Oak Mortgage Company in 2016, we are now able to offer residential mortgage
loan products to customers in Pennsylvania, New Jersey, New York, Delaware, and Florida. A majority of
the residential loans originated are currently sold on the secondary market shortly after closing. Oak
Mortgage follows the established underwriting policies and guidelines of third party vendors with whom
loans are being sold to maintain compliance, but credit risk still exists in the portfolio. Repayment of
residential loans held in the portfolio is, in part, dependent on general economic conditions affecting our
customers.
Although management follows established underwriting policies and closely monitors loans through
Republic’s loan review officer, credit risk is still inherent in the portfolio. The majority of Republic’s loan
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portfolio is collateralized with real estate or other collateral; however, a portion of the commercial portfolio
is unsecured, representing loans made to borrowers considered to be of sufficient financial strength to merit
unsecured financing. Republic makes both fixed and variable rate commercial loans with terms typically
ranging from one to five years. Variable rate loans are generally tied to the national prime rate of interest.
Store Expansion Plans and Growth Strategy
During 2019, we opened new stores in Lumberton, New Jersey and Feasterville, Pennsylvania utilizing
our distinctive glass prototype building. We also opened two stores in Manhattan at 14th Street & 5th Avenue
and 51st Street & 3rd Avenue. The Bank anticipates the continuation of its expansion strategy in the Metro
Philadelphia market and New York City in 2020. However, as previously announced, the pace of new store
openings will be slowed as we deal with the challenging nature of the current interest rate environment
which has resulted in compression of the net interest margin and a decline in earnings. Relocation of other
existing store locations may also occur in the future as we continue to enhance our brand and focus on
constantly improving the customer experience. The opening or relocation of any store is subject to
regulatory approval.
The addition of Oak Mortgage in July 2016 provides us with new growth opportunities in the residential
lending market. Oak Mortgage is licensed to do business in Pennsylvania, New Jersey, New York,
Delaware, and Florida and gives us the ability to serve both new and existing customers throughout our
store network. We envision the expansion of the Oak Mortgage lending team along with the growth of our
store network.
Securities Portfolio
We maintain an investment securities portfolio. We purchase investment securities that are in
compliance with our investment policies, which are approved annually by our Board of Directors. The
investment policies address such issues as permissible investment categories, credit quality, maturities and
concentrations. At December 31, 2019 and 2018, approximately 94% and 92%, respectively, of the
aggregate dollar amount of the investment securities consisted of either U.S. government debt securities or
U.S. government agency issued mortgage-backed securities. Credit risk associated with these U.S.
government debt securities and the U.S. government agency securities is minimal, with risk-based capital
weighting factors of 0% and 20%, respectively. The remainder of the securities portfolio consists of
municipal securities, corporate bonds, asset-backed securities, and Federal Home Loan Bank (FHLB)
capital stock.
Supervision and Regulation
General
Republic, as a Pennsylvania state chartered bank, is not a member of the Federal Reserve System
(“Federal Reserve”) and is subject to supervision and regulation by the FDIC and the Pennsylvania
Department of Banking and Securities. Our bank holding company is subject to supervision and regulation
by the Board of Governors of the Federal Reserve under the Federal Bank Holding Company Act of 1956,
as amended (“BHC Act”). As a bank holding company, our activities and those of Republic are limited to
the business of banking and activities closely related or incidental to banking, and we may not directly or
indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially
all of the assets of any company, including a bank, without the prior approval of the Federal Reserve.
We are subject to extensive requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may
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be granted and the interest that may be charged thereon, and limitations on the types of investments that
may be made and the types of services that may be offered. Various federal and state consumer laws and
regulations also affect the operations of Republic. In addition to the impact of regulation, commercial banks
are affected significantly by the actions of the Federal Reserve attempting to control the money supply and
credit availability in order to influence market interest rates and the national economy.
The following discussion summarizes certain banking laws and regulations that affect us and Republic.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) has
had a broad impact on the financial services industry, including significant regulatory and compliance
changes including, among other things, (i) enhanced resolution authority of troubled and failing banks and
their holding companies; (ii) increased capital and liquidity requirements; (iii) increased regulatory
examination fees; (iv) changes to assessments to be paid to the FDIC for federal deposit insurance; and (v)
numerous other provisions designed to improve supervision and oversight of, and strengthening safety and
soundness for, the financial services sector. Additionally, the Dodd-Frank Act established a new framework
for systemic risk oversight within the financial system to be distributed among new and existing federal
regulatory agencies, including the Financial Stability Oversight Council, the Consumer Financial Protection
Bureau, the Federal Reserve, the Office of the Comptroller of the Currency, and the FDIC. A summary of
certain provisions of the Dodd-Frank Act is set forth below.
•
Increased Capital Standards and Enhanced Supervision. The federal banking agencies established
minimum leverage and risk-based capital requirements for banks and bank holding companies. These new
standards are summarized under “Capital Adequacy” below. The Dodd-Frank Act also requires capital
requirements to be countercyclical such that the required amount of capital increases in times of economic
expansion and decreases in times of economic contraction consistent with safety and soundness.
• The Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act created the CFPB
within the Federal Reserve. The CFPB is tasked with establishing and implementing rules and regulations
under certain federal consumer protection laws with respect to the conduct of providers of certain consumer
financial products and services. The CFPB has broad rulemaking, supervisory and enforcement powers for
a wide range of consumer protection laws applicable to banks with greater than $10 billion or more in
assets. Smaller institutions will be subject to rules promulgated by the CFPB, but will continue to be
examined and supervised by federal banking regulators for consumer compliance purposes. In addition, the
Dodd-Frank Act permits states to adopt consumer protection laws and regulations that are more stringent
than those regulations promulgated by the CFPB and state attorneys general are permitted to enforce
consumer protection rules adopted by the CFPB against state-chartered institutions.
•
Deposit Insurance. The Dodd-Frank Act permanently increased the maximum deposit insurance
amount to $250,000 for insured deposits. Amendments to the Federal Deposit Insurance Act, which were
mandated by the Dodd-Frank Act, have revised the assessment base against which an insured depository
institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) are calculated. Under
the amendments, the assessment base is no longer the institution’s deposit base, but rather its average
consolidated total assets less its average tangible equity during the assessment period. Additionally, the
Dodd-Frank Act made changes to the minimum designated reserve ratio of the DIF, by increasing the
minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits by 2020 and
eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio
exceeds certain thresholds. The Dodd- Frank Act also provided that, effective July 21, 2011, depository
institutions may pay interest on demand deposits. For further discussion of deposit insurance regulatory
matters, see “Deposit Insurance and Assessments” below.
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• Transactions with Affiliates. Under federal law, we are subject to restrictions that limit certain
types of transactions between Republic and its non-bank affiliates. In general, we are subject to quantitative
and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving
us and our non-bank affiliates. Transactions between Republic and its non-bank affiliates are required to
be on arms length terms. The Dodd-Frank Act enhanced the requirements for certain transactions with
affiliates under Section 23A and 23B of the Federal Reserve Act, including expanding the definition of
“covered transactions” and “affiliates,” as well as increasing the amount of time for which collateral
requirements regarding covered transactions must be maintained.
• Transactions with Insiders. Under the Dodd-Frank Act, insider transaction limitations are
expanded through the strengthening of loan restrictions to insiders and the expansion of the types of
transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse
repurchase agreements and securities lending or borrowing transactions. Restrictions have also been placed
on certain asset sales to and from an insider to an institution, including requirements that such sales be on
market terms and, if representing more than 10% of capital, approved by the institution’s board of directors.
• Holding Company Capital Levels. The Dodd-Frank Act requires bank regulators to establish
minimum capital levels for holding companies that are at least as stringent as those applicable to depository
institutions. All trust preferred securities, or TRUPs, issued prior to May 19, 2010 by bank holding
companies with less than $15 billion in assets are permanently grandfathered in Tier 1 capital, subject to
limitation of 25% of Tier 1 capital.
Gramm-Leach-Bliley Act
The federal Gramm-Leach-Bliley Act (the “GLB Act”), enacted in 1999, repealed the key provisions
of the Glass Steagall Act so as to permit commercial banks to affiliate with investment banks (securities
firms). It also amended the BHC Act to permit qualifying bank holding companies to engage in many types
of financial activities that were not permitted for banks themselves and permitted subsidiaries of banks to
engage in a broad range of financial activities that were not permitted for themselves.
The result was to permit banking companies to offer a wider range of financial products and services
to combine with other types of financial companies, such as securities and insurance companies. The impact
of the GLB Act has, however, now been substantially limited by the Dodd-Frank Act and regulations issued
by the Federal Reserve thereunder, specifically the so-called “Volcker Rule,” which will limit the ability of
certain banks and their affiliates to invest in, or to engage in, non-banking activities for their own account.
The GLB Act created a new type of bank holding company called a “financial holding company”
(“FHC”). An FHC is authorized to engage in any activity that is “financial in nature or incidental to
financial activities” and any activity that the Federal Reserve determines is “complementary to financial
activities” and does not pose undue risks to the financial system. Among other things, “financial in nature”
activities include securities underwriting and dealing, insurance underwriting and sales, and certain
merchant banking activities. A bank holding company qualifies to become an FHC if each of its depository
institution subsidiaries is “well capitalized,” “well managed,” and has a rating under the Community
Reinvestment Act (“CRA”) of “satisfactory” or better. A qualifying bank holding company becomes an
FHC by filing with the Federal Reserve an election to become an FHC. We have not elected to become an
FHC. Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities
to those previously permitted by law and regulation.
In addition, the GLB Act provided significant new protections for the privacy of customer
information. These provisions apply to any company the business of which is engaging in activities
permitted for an FHC, even if it is not itself an FHC. The GLB Act subjected a financial institution to four
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new requirements regarding non-public information about a customer. The financial institution must: adopt
and disclose a privacy policy; give customers the right to “opt out” of disclosures to non-affiliated parties;
not disclose any information to third party marketers; and follow regulatory standards to protect the security
and confidentiality of customer information.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) comprehensively revised the laws affecting
corporate governance, auditing and accounting, executive compensation and corporate reporting for
entities, such as us, with equity or debt securities registered under the Exchange Act. Among other things,
Sarbanes-Oxley and its implementing regulations have established new membership requirements and
additional responsibilities for our audit committee, imposed restrictions on the relationship between us and
our outside auditors (including restrictions on the types of non-audit services our auditors may provide to
us), imposed additional responsibilities for our external financial statements on our chief executive officer
and chief financial officer, and expanded the disclosure requirements for our corporate insiders. The
requirements are intended to allow shareholders to more easily and efficiently monitor the performance of
companies and directors.
Regulatory Restrictions on Dividends
Dividend payments by Republic to the holding company are subject to the Pennsylvania Banking Code
of 1965 (“Banking Code”) and the Federal Deposit Insurance Act (“FDIA”). Under the Banking Code, no
dividends may be paid except from “accumulated net earnings” (generally, undivided profits). Under the
FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance
assessment due to the FDIC. Under the Banking Code, Republic would be limited to $48.2 million of
dividends payable plus an additional amount equal to its net profit for 2020, up to the date of any such
dividend declaration. However, dividends would be further limited in order to maintain capital ratios as
discussed in “Capital Adequacy”.
Federal regulatory authorities have adopted standards for the maintenance of adequate levels of
regulatory capital by banks. Adherence to such standards further limits the ability of Republic to pay
dividends to us.
Dividend Policy
We have not paid any cash dividends on our common stock, and have no plans to pay any cash
dividends in 2020 or in the foreseeable future. See Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities of this Form 10-K for more information.
Deposit Insurance and Assessments
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of
federally insured banks and savings institutions and safeguards the safety and soundness of the banking and
savings industries. The deposits of Republic are insured up to applicable limits per insured depositor by the
FDIC. As noted above, pursuant to the Dodd-Frank Act, the maximum deposit insurance amount has been
permanently increased to $250,000.
As an FDIC-insured bank, Republic is subject to FDIC insurance assessments. The FDIC regulations
assess insurance premiums for small insured depository institutions based on a risk-based assessment
system. Under this assessment system, the FDIC evaluates the risk of each financial institution based on
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regulatory capital ratios and other supervisory factors. The rules base assessments on an institution’s
average consolidated total assets less its average tangible equity, as opposed to total deposits.
The FDIC has authority to increase insurance assessments. Any future increase in insurance premiums
may adversely affect our results of operations.
The Dodd-Frank Act also requires the FDIC to take such steps as are necessary to increase the reserve
ratio of the DIF from 1.15% to 1.35% of insured deposits by 2020. The reserve ratio is the DIF balance
divided by estimated insured deposits. The reserve ratio reached 1.36% on September 30, 2018. Because
the reserve ratio has reached 1.35%, two deposit insurance assessment changes occurred under FDIC
regulations: (1) surcharges on insured depository institutions with total consolidated assets of $10 billion
or more (large institutions) will cease; and (2) banks with assets of less than $10 billion, such as us, began
to receive assessment credits for the portion of their assessments that contributed to the growth in the reserve
ratio from between 1.15% and 1.35%, as the reserve ratio exceeded 1.38% as of the June 30, 2019
assessment date, with credits received in September and December 2019.
In addition to paying basic deposit insurance assessments, the FDIC collected Financing Corporation
(“FICO”) assessments to pay interest on FICO bonds. FICO bonds were issued in the late 1980’s to
recapitalize the (former) Federal Savings & Loan Insurance Corporation. The last of the remaining FICO
bonds matured in September 2019. The last FICO assessment was collected on March 29, 2019.
Capital Adequacy
The Federal Reserve has issued risk-based and leverage capital rules applicable to U.S. banking
organizations such as the Company and Republic. These guidelines are intended to reflect the relationship
between the banking organization’s capital and the degree of risk associated with its operations based on
transactions recorded on-balance sheet as well as off-balance sheet items. The Federal Reserve may from
time to time require that a banking organization maintain capital above the minimum levels discussed
below, due to the banking organization’s financial condition or actual or anticipated growth.
The capital adequacy rules define qualifying capital instruments and specify minimum amounts of
capital as a percentage of assets that banking organizations are required to maintain. Common equity Tier 1
capital generally includes common stock and related surplus, retained earnings and, in certain cases and
subject to certain limitations, minority interest in consolidated subsidiaries, less goodwill, other non-
qualifying intangible assets and certain other deductions. Tier 1 capital for banks and bank holding
companies generally consists of the sum of common equity Tier 1 elements, non-cumulative perpetual
preferred stock, and related surplus in certain cases and subject to limitations, minority interests in
consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less certain deductions. Tier 2
capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt
securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred
stock, and, subject to limitations, allowances for loan losses. The sum of Tier 1 and Tier 2 capital less
certain required deductions represents qualifying total risk-based capital. Prior to the effectiveness of
certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred
securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations. However, the
Federal Reserve’s capital rule applicable to bank holding companies permanently grandfathers
non-qualifying capital instruments, including trust preferred securities, issued before May 19, 2010 by
depository institution holding companies with less than $15 billion in total assets as of December 31, 2009,
subject to a limit of 25% of Tier 1 capital. In addition, under rules that became effective January 1, 2015,
accumulated other comprehensive income (positive or negative) must be reflected in Tier 1 capital;
however, we were permitted to make a one-time, permanent election to continue to exclude accumulated
other comprehensive income from capital. We have made this election.
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Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1,
Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet
credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk.
Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital
ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital
requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid
limitations on capital distributions (including dividend payments and certain discretionary bonus payments
to executive officers), a banking organization must hold a capital conservation buffer comprised of common
equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of
total risk-weighted assets. The capital conservation buffer, which is composed of common equity Tier 1
capital, began on January 1, 2016 at the 0.625% level and was phased in over a three year period (increasing
by that amount on each January 1, until it reached 2.5% on January 1, 2019). Implementation of the
deductions and other adjustments to common equity Tier 1 capital began on January 1, 2015 and were
phased-in over a three-year period.
The following table shows the required capital ratios with the conversation buffer over the phase-in
period.
Basel III Community Banks
Minimum Capital Ratio Requirements
2016
2017
2018
2019
Common equity tier 1 capital (CET1)
Tier 1 capital (to risk weighted assets)
Total capital (to risk-weighted assets)
5.125%
6.625%
8.625%
5.750%
7.250%
9.250%
6.375%
7.875%
9.875%
7.000%
8.500%
10.500%
Republic is considered “well capitalized” under the FDIC's prompt corrective action rules. The risk-
based capital standards are required to take adequate account of interest rate risk, concentration of credit
risk and the risks of non-traditional activities.
Economic Growth, Regulatory Relief, and Consumer Protection Act
The Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018 (the
“Regulatory Relief Act”), amended certain provisions of the Dodd-Frank Act, as well as certain other
statutes administered by the federal banking agencies. Some of the key provisions of the Regulatory Relief
Act as it relates to community banks and bank holding companies include: (i) designating mortgages held
in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain
documentation and product limitations; (ii) exempting banks with less than $10 billion in assets (and total
trading assets and trading liabilities of 5% or less of total assets) from Volcker Rule requirements relating
to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by
requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to
average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain
tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and
leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception
for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility
for use of short-form Call Reports from $1 billion to $5 billion in assets; (vi) clarifying definitions
pertaining to high volatility commercial real estate loans, which require higher capital allocations, so that
only loans with increased risk are subject to higher risk weightings; and (vii) changing the eligibility for
use of the small bank holding company policy statement from institutions with under $1 billion in assets to
institutions with under $3 billion in assets.
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In September 2019, the federal banking agencies approved the final rule to implement the provisions
of Section 201 of the Regulatory Relief Act relating to the community bank leverage ratio (“CBLR”). Under
the new rule, which became effective January 1, 2020, a qualifying community banking organization is
defined as a depository institution or depository institution holding company with less than $10 billion in
assets. A qualifying community banking organization has the option to elect the CBLR framework if its
CBLR is greater than 9%, it has off-balance sheet exposures of 25% or less of consolidated assets, and
trading assets and liabilities of 5% or less of total consolidated assets. The leverage ratio for purposes of
the CBLR is calculated as Tier I capital divided by average total assets, consistent with the manner banking
organizations calculate the leverage ratio under generally applicable capital rules. Qualifying community
banking organizations that exceed the CBLR level established by the agencies, and that elect to be covered
by the CBLR framework, will be considered to have met: (i) the generally applicable leverage and risk-
based capital requirements under the banking agencies’ capital rules; (ii) the capital ratio requirements
necessary to be considered “well capitalized” under the banking agencies’ prompt corrective action
framework in the case of insured depository institutions; and (iii) any other applicable capital or leverage
requirements. For institutions that fall below the 9% capital requirement but remain above 8%, are allowed
a two-quarter grace period to either meet the qualifying criteria again or to comply with the generally
applicable capital rules. We have not at this time opted to use the CBLR framework. We do not believe that
the changes resulting from the Regulatory Relief Act, including whether we elect to use the CBLR
framework, will materially impact our business, operations, or financial results.
Legislative and Regulatory Changes
We are heavily regulated by regulatory agencies at the federal and state levels. We, like most of our
competitors, have faced and expect to continue to face increased regulation and regulatory and political
scrutiny, which creates significant uncertainty for us as well as the financial services industry in general.
Future Legislative and Regulatory Developments
It is conceivable that compliance with current or future legislative and regulatory initiatives could
require us to change certain business practices, impose significant additional costs on us, limit the products
that we offer, result in a significant loss of revenue, limit our ability to pursue business opportunities in an
efficient manner, require us to increase our regulatory capital, cause business disruptions, impact the value
of assets that we hold or otherwise adversely affect our business, results of operations, or financial
condition. The extent of changes imposed by any future regulatory initiatives could make it more difficult
for us to comply in a timely manner, which could further limit our operations, increase compliance costs or
divert management attention or other resources. The long-term impact of legislative and regulatory
initiatives on our business practices and revenues will depend upon the successful implementation of our
strategies, consumer behavior, and competitors’ responses to such initiatives, all of which are difficult to
predict. Additionally, we may pursue, through appropriate avenues, legislative and regulatory advocacy to
provide our input on possible legislative and regulatory developments.
Profitability, Monetary Policy and Economic Conditions
In addition to being affected by general economic conditions, the earnings and growth of Republic will
be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking and
Securities, the FDIC, and the Federal Reserve. An important function of the Federal Reserve is to regulate
the supply of money and other credit conditions in order to manage interest rates. The monetary policies
and regulations of the Federal Reserve have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. The effects of such policies upon the
future business, earnings and growth of Republic cannot be determined.
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Employees
As of December 31, 2019, we had a total of 599 employees, including 537 full-time employees.
Item 1A: Risk Factors
In addition to the other information included elsewhere in this report and in “Management’s Discussion
and Analysis of Results of Operations and Financial Condition,” the following factors could significantly
affect our business, financial condition, results of operations, or future prospects. Any of the following
risks, either alone or taken together, could materially and adversely affect our business, financial condition,
results of operations, or future prospects. If one or more of these or other risks or uncertainties materialize,
or if our underlying assumptions prove to be incorrect, our actual results may be materially adversely
affected. There may be additional risks that we do not presently know or that we currently believe are
immaterial which could also materially adversely affect our business, financial condition, results of
operations, or future prospects.
We are subject to credit risk in connection with our lending activities, and our financial condition
and results of operations may be negatively impacted by economic conditions and other factors that
adversely affect our borrowers.
Our financial condition and results of operations are affected by the ability of our borrowers to repay
their loans, and in a timely manner. Lending money is a significant part of the banking
business. Borrowers, however, do not always repay their loans. The risk of non-payment is assessed
through our underwriting and loan review procedures based on several factors including credit risks of a
particular borrower, changes in economic conditions, the duration of the loan, and in the case of a
collateralized loan, uncertainties as to the future value of the collateral and other factors. Despite our
efforts, we do and will experience loan losses, and our financial condition and results of operations will be
adversely affected. Our non-performing assets were approximately $14.1 million at December 31, 2019.
Our allowance for loan losses was approximately $9.3 million at December 31, 2019. Our loans between
thirty and eighty-nine days delinquent totaled $1.9 million at December 31, 2019.
Our concentration of commercial real estate loans could result in increased loan losses and costs
of compliance.
A substantial portion of our loan portfolio is comprised of commercial real estate loans. The
commercial real estate market is cyclical and poses risks of loss to us because of the concentration of
commercial real estate loans in our loan portfolio, and the lack of diversity in risk associated with such a
concentration. Banking regulators have been giving and continue to give commercial real estate lending
greater scrutiny, and banks with larger commercial real estate loan portfolios are expected by their
regulators to implement improved underwriting, internal controls, risk management policies and portfolio
stress-testing practices to manage risks associated with commercial real estate lending. In addition,
commercial real estate lenders are making greater provisions for loan losses and accumulating higher capital
levels as a result of commercial real estate lending exposures. Additional losses or regulatory requirements
related to our commercial real estate loan concentration could materially adversely affect our business,
financial condition and results of operations.
13
Our allowance for loan losses may not be adequate to absorb actual loan losses, and we may be
required to make further provisions for loan losses and charge off additional loans in the future,
which could materially and adversely affect our business.
We attempt to maintain an allowance for loan losses, established through a provision for loan losses
accounted for as an expense, which is adequate to absorb losses inherent in our loan portfolio. If our
allowance for loan losses is inadequate, it may have a material adverse effect on our financial condition and
results of operations.
The determination of the allowance for loan losses inherently involves a high degree of subjectivity
and judgment and requires us to make significant estimates of current credit risks and future trends, all of
which may undergo material changes. Changes in economic conditions affecting borrowers, new
information regarding existing loans, identification of additional problem loans and other factors, both
within and outside of our control, may require us to increase our allowance for loan losses. Increases in
nonperforming loans have a significant impact on our allowance for loan losses. Our allowance for loan
losses may not be adequate to absorb actual loan losses. If trends in the real estate markets were to
deteriorate, we could experience increased delinquencies and credit losses, particularly with respect to real
estate construction and land acquisition and development loans and one-to-four family residential mortgage
loans. As a result, we may have to make provisions for loan losses and charge off loans in the future, which
could materially adversely affect our financial condition and results of operations.
In addition to our internal processes for determining loss allowances, bank regulatory agencies
periodically review our allowance for loan losses and may require us to increase the provision for loan
losses or recognize further loan charge-offs, based on judgments that differ from those of our
management. If loan charge-offs in future periods exceed the allowance for loan losses, we will need to
increase our allowance for loan losses. Furthermore, growth in our loan portfolio would generally lead to
an increase in the provision for loan losses. Any increases in our allowance for loan losses will result in a
decrease in net income and capital, and may have a material adverse effect on our financial condition,
results of operations and cash flows.
We are required to make significant estimates and assumptions in the preparation of our
financial statements, including our allowance for loan losses, and our estimates and assumptions may
not be accurate.
The preparation of our consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, or GAAP, require our management to make significant
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial statements, and the reported
amounts of income and expense during the reporting periods. Critical estimates are made by management
in determining, among other things, the allowance for loan losses, carrying values of other real estate
owned, assessment of other than temporary impairment (“OTTI”) of investment securities, fair value of
financial instruments, and the realization of deferred income taxes. If our underlying estimates and
assumptions prove to be incorrect, our financial condition and results of operations may be materially
adversely affected.
Our results of operations may be materially and adversely affected by other-than-temporary
impairment charges relating to our investment portfolio.
In prior years we recorded other-than-temporary impairment charges for certain bank pooled trust
preferred securities, and we may be required to record future impairment charges on our investment
securities if they suffer declines in value that we determine are other-than-temporary. Numerous factors,
including the lack of liquidity for re-sales of certain investment securities, the absence of reliable pricing
14
information for investment securities, adverse changes in the business climate, adverse regulatory actions
or unanticipated changes in the competitive environment, could have a negative effect on our investment
portfolio in future periods. If an impairment charge is significant enough, it could affect the Bank’s ability
to pay dividends, which could materially adversely affect us. Significant impairment charges could also
negatively impact our regulatory capital ratios and result in us not being classified as “well-capitalized” for
regulatory purposes.
Our net interest income, net income and results of operations are sensitive to fluctuations in
interest rates.
Our net income depends on the net income of Republic, and Republic is dependent primarily upon its
net interest income, which is the difference between the interest earned on its interest-earning assets, such
as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and
borrowings.
Our results of operations will be affected by changes in market interest rates and other economic factors
beyond our control. If our interest-earning assets have longer effective maturities than our interest-bearing
liabilities, the yield on our interest-earning assets generally will adjust more slowly than the cost of our
interest-bearing liabilities, and, as a result, our net interest income generally will be adversely affected by
material and prolonged increases in interest rates, and positively affected by comparable declines in interest
rates. Conversely, if liabilities re-price more slowly than assets, net interest income would be adversely
affected by declining interest rates, and positively affected by increasing interest rates. At any time, our
assets and liabilities will reflect interest rate risk of some degree.
Potential concerns for the longer term economic outlook include the continued flattening of the yield
curve and an increasingly inverted yield curve (which may or may not signal a future recession), the risk of
economic overheating in the near future, and concerns surrounding the long term fiscal position of the
United States. In addition to affecting interest income and expense, changes in interest rates also can affect
the value of our interest-earning assets, comprising fixed and adjustable-rate instruments, as well as the
ability to realize gains from the sale of such assets. Generally, the value of fixed-rate instruments fluctuates
inversely with changes in interest rates, and changes in interest rates may therefore have a material adverse
effect on our results of operations.
We are a holding company dependent for liquidity on payments from our banking subsidiary,
which payments are subject to restrictions.
We are a holding company and depend on dividends, distributions and other payments from Republic
to fund dividend payments, if any, and to fund all payments on obligations. Republic and its subsidiaries
are subject to laws that restrict dividend payments or authorize regulatory bodies to block or reduce the
flow of funds from those subsidiaries to us. Restrictions or regulatory actions of that kind could impede
our access to funds that we may need to make payments on our obligations or dividend payments, if any. In
addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization
is subject to the prior claims of the subsidiary’s creditors.
Our business is concentrated in and dependent upon the continued growth and welfare of our
primary market area.
Our primary service area consists of Greater Philadelphia and Southern New Jersey. Our success
depends upon the business activity, population, income levels, deposits and real estate activity in this
area. Although our customers’ businesses and financial interests may extend well beyond this area, adverse
economic conditions that affect our primary service area could reduce our growth rate, affect the ability of
our customers to repay their loans to us, and generally adversely affect our financial condition and results
15
of operations. Because of our geographic concentration, we are less able than other regional or national
financial institutions to diversify our credit risks across multiple markets.
Unfavorable economic and financial market conditions may adversely affect our financial
position and results of operations.
Economic pressure on consumers and businesses and any resulting lack of confidence in the financial
markets may adversely affect our business, financial condition, results of operations and stock price.
A worsening of current economic conditions would likely exacerbate the adverse effects of market
conditions on us and others in the industry. In particular, we may face the following risks in connection
with these events:
increased regulation of our industry and increased compliance costs;
hampering our ability to assess the creditworthiness of customers and to estimate the losses
inherent in our credit exposure, as such assessments are made more complex by these difficult
market and economic conditions;
increasing our credit risk, by increasing the likelihood that our major customers become insolvent
and unable to satisfy their obligations to us;
impairing our ability to originate loans, by making our customers and prospective customers less
willing to borrow, and making loans that meet our underwriting criteria difficult to find; and
limiting our interest income, by depressing the yields we are able to earn on our investment
portfolio.
Our ability to use net operating loss carryforwards to reduce future tax payments may be limited.
As of December 31, 2019, we had approximately $24.1 million of U.S. Federal net operating loss
carryforwards, referred to as “NOLs,” available to reduce taxable income in future years.
Utilization of the NOLs may be subject to a substantial annual limitation due to ownership change
limitations that may have occurred or that could occur in the future, as required by Section 382 of the
Internal Revenue Code of 1986, as amended, referred to as the “Code.” These ownership changes may limit
the amount of NOLs that can be utilized annually to offset future taxable income and tax, respectively.
In general, an ownership change, as defined by Section 382 of the Code results from a transaction or series
of transactions over a three-year period resulting in an ownership change of more than 50 percentage points
of the outstanding stock of a company by certain stockholders or public groups. In the event of an ownership
change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income
a corporation may offset with pre-ownership change NOLs. The limitation imposed by Section 382 for any
post-change year would be determined by multiplying the value of our stock immediately before the
ownership change (subject to certain adjustments) by the applicable long-term tax-exempt rate. Any unused
annual limitation may be carried over to later years, and the limitation may under certain circumstances be
increased by built-in gains which may be present with respect to assets held by us at the time of the
ownership change that are recognized in the five-year period after the ownership change.
In addition, the ability to use NOLs will be dependent on our ability to generate taxable income.
The NOLs may expire before we generate sufficient taxable income. There were no NOLs that expired in
the fiscal years ended December 31, 2019 and December 31, 2018. There are no NOLs that could expire if
not utilized for the year ending December 31, 2020.
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Our assets as of December 31, 2019 included a deferred tax asset and we may not be able to realize
the full amount of such asset.
We recognize deferred tax assets and liabilities based on differences between the financial statement
carrying amounts and the tax bases of assets and liabilities. At December 31, 2019, the net deferred tax
asset was $12.6 million, compared to a balance of $12.3 million at December 31, 2018.
We regularly review our deferred tax assets for recoverability to determine whether it is more likely
than not (i.e. likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be
realized within its life cycle, based on the weight of available evidence. If management makes a
determination based on the available evidence that it is more likely than not that some portion or all of the
deferred tax assets will not be realized in future periods, a valuation allowance is calculated and recorded.
These determinations are inherently subjective and dependent upon estimates and judgments concerning
management’s evaluation of both positive and negative evidence.
Based on the analysis of the available positive and negative evidence, we determined that a valuation
allowance should not be recorded as of December 31, 2019. We used projections of future taxable income,
exclusive of reversing temporary timing differences and carryforwards, as a factor to project recoverability
of the deferred tax asset balance. There can be no assurance as to when we will be in a position to fully
recapture the benefits of our deferred tax asset. Further discussion on the analysis of our deferred tax asset
can be found in the “Provision (Benefit) for Income Taxes” section of Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
We are required to adopt the FASB's accounting standard which requires measurement of
certain financial assets (including loans) using the current expected credit losses (CECL) beginning
in calendar year 2020.
Current GAAP requires an incurred loss methodology for recognizing credit losses that delays
recognition until it is probable a loss has been incurred. The FASB's amendment replaces the current
incurred loss methodology with a methodology that reflects expected credit losses and requires
consideration of a broader range of reasonableness and supportable information to inform credit loss
estimates. We are currently evaluating the impact of ASU 2016-13, continuing our implementation efforts
and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Calculations
of expected losses under the new guidance were run parallel to the calculations under existing guidance to
assess and evaluate the potential impact to our financial statements. The new model includes different
assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial
asset and considers expected future changes in macroeconomic conditions. The adoption of this ASU may
result in an increase to our allowance for loan losses which will depend upon the nature and characteristics
of our loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that
date. We expect an initial increase to the allowance for credit losses, in the range of 0% to 11% of the
December 31, 2019 allowance for credit losses, or an incremental increase to the allowance for credit losses
in the range of $0 up to approximately $1.0 million. When finalized, this one-time increase as a result of
the adoption of ASU 2016-13 will be recorded, net of tax, as an adjustment to retained earnings effective
January 1, 2020. This estimate is subject to change based on continuing refinement and validation of the
model and methodologies. This ASU became effective for us as of January 1, 2020.
Our mortgage lending business may not provide us with significant noninterest income.
In 2019, we originated $461 million residential mortgage loans and sold $328 million of those loans to
investors on the secondary market. The residential mortgage business is highly competitive, and highly
susceptible to changes in market interest rates, consumer confidence levels, employment statistics, the
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capacity and willingness of secondary market purchasers to acquire and hold or securitize loans, and other
factors beyond our control.
Because we sell a substantial number of the mortgage loans we originate, the profitability of our
mortgage banking business also depends in large part on our ability to aggregate a high volume of loans
and sell them in the secondary market at a gain. In fact, as rates rise, we expect increasing industry-wide
competitive pressures related to changing market conditions to reduce our pricing margins and mortgage
revenues generally. Thus, in addition to our dependence on the interest rate environment, we are dependent
upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans or securities
into that market. If our level of mortgage production declines, the profitability will depend upon our ability
to reduce our costs commensurate with the reduction of revenue from our mortgage operations.
Our ability to originate and sell mortgage loans readily is dependent upon the availability of an active
secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of
programs currently offered by government-sponsored entities (“GSEs”) and other institutional and non-
institutional investors. These entities account for a substantial portion of the secondary market in residential
mortgage loans. We are highly dependent on these purchasers continuing their mortgage purchasing
programs. Additionally, because the largest participants in the secondary market are Ginnie Mae, Fannie
Mae and Freddie Mac, GSEs whose activities are governed by federal law, any future changes in laws that
significantly affect the activity of these GSEs could, in turn, adversely affect our operations. In September
2008, Fannie Mae and Freddie Mac were placed into conservatorship by the U.S. government. The federal
government has for many years considered proposals to reform Fannie Mae and Freddie Mac, but the results
of any such reform, and their impact on us, are difficult to predict. To date, no reform proposal has been
enacted.
We may be required to repurchase mortgage loans or indemnify buyers against losses in some
circumstances, which could harm liquidity, results of operations and financial condition.
We sell a large portion of the mortgage loans that we originate. When mortgage loans are sold, whether
as whole loans or pursuant to a securitization, we are required to make customary representations and
warranties to purchasers, guarantors and insurers, including the GSEs, about the mortgage loans and the
manner in which they were originated. Whole loan sale agreements require repurchase or substitute
mortgage loans, or indemnify buyers against losses, in the event we breach these representations or
warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment
default of the borrower on a mortgage loan, resulting in these mortgage loans being placed on our books
and subjecting us to the risk of a potential default. If repurchase and indemnity demands increase and such
demands are valid claims and are in excess of our provision for potential losses, our liquidity, results of
operations and financial condition may be adversely affected.
Potential acquisitions may disrupt our business and dilute shareholder value.
We regularly evaluate opportunities to acquire and invest in banks and in other complementary
businesses. As a result, we may engage in negotiations or discussions that, if they were to result in a
transaction, could have a material effect on our operating results and financial condition, including short
and long-term liquidity and capital structure. Our acquisition activities could be material to us. For example,
we could issue additional shares of common stock in a purchase transaction, which could dilute current
shareholders’ ownership interest. These activities could require us to use a substantial amount of cash, other
liquid assets, and/or incur debt. In addition, if goodwill recorded in connection with our prior or potential
future acquisitions were determined to be impaired, then we would be required to recognize a charge against
our earnings, which could materially and adversely affect our results of operations during the period in
which the impairment was recognized. Any potential charges for impairment related to goodwill would not
impact cash flow, tangible capital or liquidity but would decrease shareholders' equity.
18
Our acquisition activities could involve a number of additional risks, including the risks of:
incurring time and expense associated with identifying and evaluating potential acquisitions and
negotiating potential transactions;
using inaccurate estimates and judgments to evaluate credit, operations, management, and market
risks with respect to the target institution or its assets;
the time and expense required to integrate the operations and personnel of the combined businesses;
creating an adverse short-term effect on our results of operations; and
losing key employees and customers as a result of an acquisition that is poorly conceived.
We may not be successful in overcoming these risks or any other problems encountered in connection
with potential acquisitions. Our inability to overcome these risks could have an adverse effect on our ability
to achieve our business strategy and maintain our market value.
We may not be able to manage our growth, which may adversely impact our financial results.
As part of our retail growth strategy, we may expand into additional communities or attempt to
strengthen our position in our current markets by opening new stores and acquiring existing stores of other
financial institutions. To the extent that we undertake additional stores openings and acquisitions, we are
likely to experience the effects of higher operating expenses relative to operating income from the new
operations, which may have an adverse effect on our levels of reported net income, return on average equity
and return on average assets. Other effects of engaging in such growth strategies may include potential
diversion of our management’s time and attention and general disruption to our business.
As part of our retail strategy, we plan to open new stores in our primary service area, including Southern
New Jersey, the Greater Philadelphia area, and New York City. We may not, however, be able to identify
attractive locations on terms favorable to us, obtain regulatory approvals, or hire qualified management to
operate new stores. In addition, the organizational and overhead costs may be greater than we
anticipate. New stores may take longer than expected to reach profitability, or may not become
profitable. The additional costs of starting new stores may adversely impact our financial results.
Our ability to manage growth successfully will depend on whether we can continue to fund our growth
while maintaining cost controls, as well as on factors beyond our control, such as national and regional
economic conditions and interest rate trends. If we are not able to control costs, such growth could
adversely impact our earnings and financial condition.
Our retail strategy relies heavily on our management team, and the unexpected loss of key
managers may adversely affect our operations.
In recent years, we have been successful in attracting new and talented employees to Republic, to add
to our management team. We believe that our ability to successfully implement our retail strategy will
require us to retain and attract additional management experienced in banking and financial services, and
familiar with the communities in our market. Our ability to retain executive officers, the current
management team, branch managers and loan officers of Republic will continue to be important to the
successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain
additional members of the management team and qualified loan officers with the appropriate level of
experience and knowledge about our market areas to implement the community-based operating strategy.
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The unexpected loss of services of any key management personnel, or the inability to recruit and retain
qualified personnel in the future, could have an adverse effect on our business, financial condition and
results of operations.
We are subject to numerous governmental regulations and to comprehensive examination and
supervision by regulators, which could have an adverse impact on our operations and could restrict
the scope of our operations.
Both the Company and Republic operate in a highly regulated environment and are subject to
supervision and regulation by several governmental regulatory agencies, including the Board of Governors
of the Federal Reserve System, the FDIC and the Pennsylvania Department of Banking and Securities
(“PDB”). We are subject to federal and state regulations governing virtually all aspects of our activities,
including lines of business, capital, liquidity, investments, payment of dividends, and others. Regulations
that apply to us are generally intended to provide protection for depositors and customers rather than
investors.
We are subject to extensive regulation and supervision under federal and state laws and regulations.
See Item 1. Business - Supervision and Regulation. The requirements and limitations imposed by such laws
and regulations limit the manner in which we conduct our business, undertake new investments and
activities and obtain financing. Financial institution regulation has been the subject of significant
legislation in recent years and may be the subject of further significant legislation in the future, none of
which is within our control. Compliance with these rules could impose additional costs on banking entities
and their holding companies. Management has reviewed the new standards and will continue to evaluate
all options and strategies to ensure ongoing compliance with the new standards, notwithstanding Republic’s
current status as well-capitalized.
New programs and proposals may subject us and other financial institutions to additional restrictions,
oversight and costs that may have an adverse impact on our business, financial condition, results of
operations or the price of our common stock. Federal and state regulatory agencies also frequently adopt
changes to their regulations or change the manner in which existing regulations are applied or enforced.
We cannot predict the substance or impact of future legislation, regulation or the application thereof.
Compliance with such current and potential regulation and scrutiny may significantly increase our costs,
impede the efficiency of our internal business processes, require us to increase our regulatory capital and
limit our ability to pursue business opportunities in an efficient manner.
We face significant competition in our market from other banks and financial institutions.
The banking and financial services industry in our market area is highly competitive. We may not be
able to compete effectively in our markets, which could adversely affect our results of operations. The
increasingly competitive environment is a result of changes in regulation, changes in technology and
product delivery systems, and consolidation among financial service providers. Larger institutions have
greater access to capital markets, with higher lending limits and a broader array of services. Competition
may require increases in deposit rates and decreases in loan rates, and adversely impact our net interest
margin.
We may not have the resources to effectively implement new technologies, which could adversely
affect our competitive position and results of operations.
The financial services industry is constantly undergoing technological changes with frequent
introductions of new technology-driven products and services. In addition to better serving customers, the
effective use of technology increases efficiency and enables financial institutions to reduce costs. Our
future success will depend in part upon our ability to address the needs of our customers by using technology
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to provide products and services that will satisfy customer demands for convenience as well as to create
additional efficiencies in our operations as we continue to grow and expand in our market. Many of our
larger competitors have substantially greater resources to invest in technological improvements. As a result,
they may be able to offer additional or superior products to those that we will be able to offer, which would
put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new
technology-driven products and services or be successful in marketing such products and services to our
customers. If we are unable to do so, our competitive position and results of operations could be adversely
affected.
Our disclosure controls and procedures and our internal control over financial reporting may
not achieve their intended objectives.
internal control over financial reporting. These controls may not achieve
We maintain disclosure controls and procedures designed to ensure that we timely report information
as specified in the rules and forms of the Securities and Exchange Commission. We also maintain a system
of
intended
objectives. Control processes that involve human diligence and compliance, such as our disclosure controls
and procedures and internal control over financial reporting, are subject to lapses in judgment and
breakdowns resulting from human failures. Controls can also be circumvented by collusion or improper
management override. Because of such limitations, there are risks that material misstatements due to error
or fraud may not be prevented or detected and that information may not be reported on a timely basis. If
our controls are not effective, it could have a material adverse effect on our financial condition, results of
operations, and market for our common stock, and could subject us to regulatory scrutiny.
their
We are subject to certain operational risks, including, but not limited to, customer or employee
fraud and data processing system failures and errors.
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and
seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities
from us, improper or unauthorized activities on behalf of our customers or improper use of confidential
information. It is not always possible to prevent employee errors and misconduct, and the precautions we
take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject
us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate operational risks,
including data processing system failures and errors, and customer or employee fraud. Should our internal
controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable
insurance limits, it could have a material adverse effect on our business, financial condition and results of
operations.
System failure or breaches of our network security could subject us to increased operating costs
as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems.
Our operations are dependent upon our ability to protect our computer equipment against damage from
physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from
security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by
hackers. Any damage or failure that causes an interruption in our operations could have a material adverse
effect on our financial condition and results of operations. Computer break-ins, phishing and other
disruptions could also jeopardize the security of information stored in and transmitted through our computer
systems and network infrastructure, which may result in significant liability to us and may cause existing
and potential customers to refrain from doing business with us. Although we, with the help of third-party
service providers, intend to continue to implement security technology and establish operational procedures
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to prevent such damage, these security measures may not be successful. In addition, advances in computer
capabilities, new discoveries in the field of cryptography or other developments could result in a
compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect
customer transaction data. A failure of such security measures could have a material adverse effect on our
financial condition and results of operations.
If we want to, or are compelled to, raise additional capital in the future, that capital may not be
available to us when it is needed or on terms that are favorable to us or current shareholders.
Federal banking regulators require us, and Republic, to maintain capital to support our
operations. Regulatory capital ratios are defined and required ratios are established by laws and regulations
promulgated by banking regulatory agencies. At December 31, 2019, our regulatory capital ratios were
above “well capitalized” levels under current bank regulatory guidelines. To be “well capitalized,” banking
companies generally must maintain a Tier 1 leverage ratio of at least 5%, a Common Equity Tier 1 ratio of
at least 6.5%, a Tier 1 risk-based capital ratio of at least 8%, and a total risk-based capital ratio of at least
10%. Regulators, however, may require us, or Republic, to maintain higher regulatory capital ratios.
Our ability to raise additional capital in the future will depend on conditions in the capital markets at
that time, which are outside of our control, on our financial performance and on other factors. Accordingly,
we may not be able to raise additional capital on terms and time frames acceptable to us, or at all. If we
cannot raise additional capital in sufficient amounts when needed, our ability to comply with regulatory
capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient
amounts may adversely affect our operations, financial condition and results of operations. Our ability to
borrow could also be impaired by factors that are nonspecific to us, such as disruption of the financial
markets or negative news and expectations about the prospects for the financial services industry. If we
raise capital through the issuance of additional shares of our common stock or other securities, we would
likely dilute the ownership interests of investors, and could dilute the per share book value and earnings per
share of our common stock. Furthermore, a capital raise through issuance of additional shares may have
an adverse impact on our stock price.
We may be exposed to environmental liabilities with respect to real estate that we have or had
title to in the past.
A significant portion of our loan portfolio is secured by real property. In the course of our business, we
may foreclose, accept deeds in lieu of foreclosure, or otherwise acquire real estate in connection with our
lending activities. We also acquire real estate in connection with our store expansion plans and growth
strategy. As a result, we could become subject to environmental liabilities with respect to these
properties. We may become responsible to a governmental agency or third parties for property damage,
personal injury, investigation and clean-up costs incurred by those parties in connection with environmental
contamination, or may be required to investigate or clean-up hazardous or toxic substances, or chemical
releases at a property. The costs associated with environmental investigation or remediation activities could
be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to
common law claims by third parties based on damages and costs resulting from environmental
contamination emanating from the property. Although we have policies and procedures to perform an
environmental review before acquiring title to any real property, these may not be sufficient to detect all
potential environmental hazards. If we were to become subject to significant environmental liabilities, it
could materially and adversely affect us.
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Our common stock is not insured by any governmental entity and, therefore, an investment in
our common stock involves risk.
Our common stock is not a deposit account or other obligation of any bank, and is not insured by the
FDIC or any other governmental entity, and is subject to investment risk, including possible loss.
There may be future sales of our common stock, which may materially and adversely affect the
market price of our common stock.
We are not restricted from issuing additional shares of our common stock, including securities that are
convertible into or exchangeable or exercisable for shares of our common stock. Our issuance of shares of
common stock in the future will dilute the ownership interests of our existing shareholders.
Additionally, the sale of substantial amounts of our common stock or securities convertible into or
exchangeable or exercisable for our common stock, whether directly by us or by existing common
shareholders in the secondary market, the perception that such sales could occur or the availability for future
sale of shares of our common stock or securities convertible into or exchangeable or exercisable for our
common stock could, in turn, materially and adversely affect the market price of our common stock and
our ability to raise capital through future offerings of equity or equity-related securities. The convertible
trust preferred securities of Republic First Bancorp Capital Trust IV were converted into 1.7 million shares
of our common stock in the years 2017 and 2018.
In addition, our Board of Directors is authorized to designate and issue preferred stock without further
shareholder approval, and we may issue other equity securities that are senior to our common stock in the
future for a number of reasons, including, without limitation, to support operations and growth, to maintain
our capital ratios and to comply with any future changes in regulatory standards.
Our common stock is currently traded on the Nasdaq Global Market. During 2019, the average daily
trading volume for our common stock was approximately 156,200 shares. Sales of our common stock may
place significant downward pressure on the market price of our common stock. Furthermore, it may be
difficult for holders to resell their shares at prices they find attractive, or at all.
Our common stock is subordinate to our existing and future indebtedness and any preferred
stock and effectively subordinated to all indebtedness and preferred equity claims against our
subsidiaries.
Shares of our common stock are common equity interests in us and, as such, will rank junior to all of
our existing and future indebtedness and other liabilities. Additionally, holders of our common stock may
become subject to the prior dividend and liquidation rights of holders of any classes or series of preferred
stock that our Board of Directors may designate and issue without any action on the part of the holders of
our common stock. Furthermore, our right to participate in a distribution of assets upon any of our
subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors and
preferred shareholders. As of December 31, 2019, we had $11.3 million of outstanding debt related to trust
preferred securities.
Our ability to pay dividends depends upon the results of operations of our subsidiaries.
We have never declared or paid cash dividends on our common stock. Our Board of Directors intends
to follow a policy of retaining earnings for the purpose of increasing our capital for the foreseeable future.
23
Holders of our common stock are entitled to receive dividends if, as and when declared from time to
time by our Board of Directors in its sole discretion out of funds legally available for that purpose, after
debt service payments and payments of dividends required to be paid on our outstanding preferred stock, if
any.
While we, as a bank holding company, are not subject to certain restrictions on dividends applicable to
Republic, our ability to pay dividends to the holders of our common stock will depend to a large extent
upon the amount of dividends paid by Republic to us. Regulatory authorities restrict the amount of cash
dividends Republic can declare and pay without prior regulatory approval. Presently, Republic cannot
declare or pay dividends in any one-year in excess of retained earnings for that year subject to risk based
capital requirements.
If we fail to maintain an effective system of internal control over financial reporting and
disclosure controls and procedures, current and potential shareholders may lose confidence in our
financial reporting and disclosures and could subject us to regulatory scrutiny.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, referred to as Section 404, we are required
to include in our Annual Reports on Form 10-K, our management’s report on internal control over financial
reporting. While we have reported no material weaknesses in the Form 10-K for the fiscal year ended
December 31, 2019, we cannot guarantee that we will not have any material weaknesses in the future.
Compliance with the requirements of Section 404 is expensive and time-consuming. If, in the future,
we fail to complete this evaluation in a timely manner we could be subject to regulatory scrutiny and a loss
of public confidence in our internal control over financial reporting. In addition, any failure to maintain an
effective system of disclosure controls and procedures could cause our current and potential shareholders
and customers to lose confidence in our financial reporting and disclosure required under the Exchange
Act, which could adversely affect our business.
Our governing documents, Pennsylvania law, and current policies of our Board of Directors
contain provisions, which may reduce the likelihood of a change in control transaction, which may
otherwise be available and attractive to shareholders.
Our articles of incorporation and bylaws contain certain anti-takeover provisions that may make it more
difficult or expensive or may discourage a tender offer, change in control or takeover attempt that is opposed
by our Board of Directors. In particular, the articles of incorporation and bylaws classify our Board of
Directors into three groups, so that shareholders elect only approximately one-third of the Board each
year; permit shareholders to remove directors only for cause and only upon the vote of the holders of at
least 75% of the voting shares; require our shareholders to give us advance notice to nominate candidates
for election to the Board of Directors or to make shareholder proposals at a shareholders’ meeting; require
the vote of the holders of at least 75% of our voting shares for shareholder amendments to our bylaws;
require the vote of the holders of at least 75% of our voting shares to approve certain business combinations;
and restrict the holdings and voting rights of shareholders who would acquire more than 10% of our
outstanding common stock without the approval of two-thirds of our Board of Directors. These provisions
of our articles of incorporation and bylaws could discourage potential acquisition proposals and could delay
or prevent a change in control, even though a majority of our shareholders may consider such proposals
desirable. Such provisions could also make it more difficult for third parties to remove and replace the
members of our Board of Directors. Moreover, these provisions could diminish the opportunities for
shareholders to participate in certain tender offers, including tender offers at prices above the then-current
market value of our common stock, and may also inhibit increases in the trading price of our common stock
that could result from takeover attempts or speculation.
24
In addition, anti-takeover provisions in Pennsylvania law could make it more difficult for a third party
to acquire control of us. These provisions could adversely affect the market price of our common stock and
could reduce the amount that shareholders might receive if we are sold. For example, Pennsylvania law
may restrict a third party’s ability to obtain control of us and may prevent shareholders from receiving a
premium for their shares of our common stock. Pennsylvania law also provides that our shareholders are
not entitled by statute to propose amendments to our articles of incorporation.
Uncertainty about the future of LIBOR may adversely affect our business.
LIBOR and certain other interest rate “benchmarks” are the subject of recent national, international,
and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to
perform differently than in the past or have other consequences which cannot be predicted. On July 27,
2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, publicly announced
that it intends to stop persuading or compelling banks to submit information to the administrator of LIBOR
after 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot be
guaranteed after 2021. While there is no consensus on what rate or rates may become accepted alternatives
to LIBOR, a group of market participants convened by the Federal Reserve, the Alternative Reference Rate
Committee, has selected the Secured Overnight Finance Rate as its recommended alternative to LIBOR.
The Federal Reserve Bank of New York started to publish the Secured Overnight Financing Rate in April
2018. The Secured Overnight Financing Rate is a broad measure of the cost of overnight borrowings
collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to
the depth and robustness of the U.S. Treasury repurchase market. At this time, it is impossible to predict
whether the Secured Overnight Financing Rate will become an accepted alternative to LIBOR.
The market transition away from LIBOR to an alternative reference rate, such as the Secured Overnight
Financing Rate, is complex and could have a range of adverse effects on our business, financial condition
and results of operations. In particular, any such transition could:
adversely affect the interest rates paid or received on, the revenue and expenses associated with or
the value of our LIBOR-based assets and liabilities, which include certain variable rate loans and
subordinated debt;
adversely affect the interest rates paid or received on, the revenue and expenses associated with or
the value of other securities or financial arrangements, given LIBOR’s role in determining market
interest rates globally;
prompt inquiries or other actions from regulators in respect of our preparation and readiness for the
replacement of LIBOR with an alternative reference rate; and
result in disputes, litigation or other actions with counterparties regarding the interpretation and
enforceability of certain fallback language in LIBOR-based contracts and securities.
The transition away from LIBOR to an alternative reference rate will require the transition to or
development of appropriate systems and analytics to effectively transition our risk management and other
processes from LIBOR-based products to those based on the applicable alternative reference rate, such as
the Secured Overnight Financing Rate. There can be no guarantee that these efforts will successfully
mitigate the operational risks associated with the transition away from LIBOR to an alternative reference
rate.
25
The manner and impact of the transition from LIBOR to an alternative reference rate, as well as the
effect of these developments on our funding costs, loan and investment and trading securities portfolios,
asset-liability management, and business, is uncertain.
Our financial results may be adversely affected by changes in U.S. and non-U.S. tax and other
laws and regulations.
On December 22, 2017, H.R.1, commonly known as the Tax Cuts and Jobs Act, was signed into law.
The Tax Act includes many provisions that effected our income tax expenses, including reducing its
corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result of the rate reduction, we
were required to re-measure, through income tax expense in the period of enactment, our deferred tax assets
and liabilities using the enacted rate at which we expected them to be recovered or settled. The
re-measurement of the net deferred tax asset resulted in additional income tax expense of $7.7 million
recorded in fourth quarter 2017.
The ongoing success of our growth and expansion strategy, along with the successful integration of the
mortgage company acquired in 2016 and the limited exposure remaining with current asset quality issues
put us in a position to rely on projections of future taxable income when evaluating the need for a valuation
allowance against deferred tax assets in the fourth quarter of 2017. Based on the guidance provided in ASC
740, we believed that the positive evidence considered at December 31, 2017 outweighed the negative
evidence and that it was more likely than not that all of our deferred tax assets would be realized within
their life cycle. Therefore, a valuation allowance was not required at December 31, 2017 and a $10.6 million
benefit for income taxes was recorded in the fourth quarter of 2017 to reflect the reversal of the valuation
allowance.
The $10.6 million tax benefit recognized when reversing the deferred tax asset valuation allowance
offset the $7.7 million charge related to the change in the corporate tax rate resulting in a net tax benefit
and increase in net income of $2.9 million during 2017.
Also on December 22, 2017, the SEC released SAB 118 to address any uncertainty or diversity of views
in practice in accounting for the income tax effects of the Act in situations where a registrant does not have
the necessary information available, prepared or analyzed in reasonable detail to complete this accounting
in the reporting period that includes the enactment date. SAB 118 allowed for a measurement period not to
extend beyond one year from the Act’s enactment date to complete the necessary accounting.
We recorded provisional amounts of deferred income taxes using reasonable estimates in three areas
where information necessary to complete the accounting was not available, prepared or analyzed as follows:
(i) the deferred tax liability for temporary differences between the tax and financial reporting bases of fixed
assets principally due to the accelerated depreciation under the Act which allowed for full expensing of
qualified property purchased and placed in service after September 27, 2017; (ii) the deferred tax asset for
temporary differences associated with accrued compensation was awaiting final determinations of amounts
that were paid and deducted on the 2017 income tax returns and (iii) the deferred tax liability for temporary
differences associated with equity investments in partnerships were awaiting receipt of Schedules K-1 from
outside preparers, which was necessary to determine the 2017 tax impact from these investments.
In a fourth area, we made no adjustments to deferred tax assets representing future deductions for
accrued compensation that were subject to new limitations under Internal Revenue Code Section 162(m)
which, generally, limits the annual deduction for certain compensation paid to certain team members to
$1 million. There was uncertainty in applying the newly enacted rules to existing contracts, and we were
seeking further clarifications before completing its analysis. We completed the calculations for the
provisional items with the completion of the 2017 tax returns and completed the analysis of the Section
26
162(m) rules after further guidance was issued. The impact of the completed calculations to the
re-measurement of the deferred taxes resulted in an immaterial change and the analysis of the 162(m) rules
resulted in no adjustment.
The outbreak of the recent coronavirus ("COVID-19"), or an outbreak of another highly
infectious or contagious disease, could adversely affect our business, financial condition and results
of operations.
Our business is dependent upon the willingness and ability of our customers to conduct banking and
other financial transactions. The spread of a highly infectious or contagious disease, such as COVID-19,
could cause severe disruptions in the U.S. economy, which could in turn disrupt the business, activities, and
operations of our customers, as well our business and operations. Moreover, ssince the beginning of
January 2020, the coronavirus outbreak has caused significant disruption in the financial markets both
globally and in the United States. The spread of COVID-19, or an outbreak of another highly infectious or
contagious disease, may result in a significant decrease in business and/or cause our customers to be unable
to meet existing payment or other obligations to us, particularly in the event of a spread of COVID-19 or
an outbreak of an infectious disease in our market area. Although we maintain contingency plans for
pandemic outbreaks, a spread of COVID-19, or an outbreak of another contagious disease, could also
negatively impact the availability of key personnel necessary to conduct our business. Such a spread or
outbreak could also negatively impact the business and operations of third party service providers who
perform critical services for our business. If COVID-19, or another highly infectious or contagious disease,
spreads or the response to contain COVID-19 is unsuccessful, we could experience a material adverse effect
on our business, financial condition, and results of operations.
Item 1B: Unresolved Staff Comments
None.
Item 2: Description of Properties
We currently have thirty-six locations that we utilize to conduct business. Seven of these locations are
utilized for loan production offices, storage facilities, operations and back office support, and our corporate
headquarters. Twenty nine properties are store locations that are open and operating as of December 31,
2019. We have another six locations under our control for future store locations. Of the forty-two total
locations, eighteen are owned by Republic. The remaining twenty-four locations are subject to land and
building leases. The spaces covered by these leases range in size from 1,700 to 10,590 square feet with the
exception of our corporate headquarters which consists of approximately 53,000 square feet. Please see
Note 25 “Leases” in the Consolidated Financial Statements for further information regarding the leases.
Management believes these properties and facilities are adequate to meet our present and immediately
foreseeable needs from a real estate perspective.
Item 3: Legal Proceedings
The Company and Republic are from time to time parties (plaintiff or defendant) to lawsuits in the
normal course of business. While any litigation involves an element of uncertainty, management is of the
opinion that the liability of the Company and Republic, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the Company and Republic.
Item 4: Mine Safety Disclosures
Not applicable.
27
PART II
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Market Information
Shares of the Company’s class of common stock are listed on the Nasdaq Global Market under the
symbol “FRBK.” As of March 10, 2020, there were approximately 100 record holders.
Dividend Policy
The Company has not paid any cash dividends on its common stock and has no plans to pay cash
dividends during 2020. The Company’s ability to pay dividends depends primarily on receipt of dividends
from the Company’s subsidiary, Republic. Dividend payments from Republic are subject to legal and
regulatory limitations. The ability of Republic to pay dividends is also subject to profitability, financial
condition, capital expenditures and other cash flow requirements.
28
Item 6: Selected Financial Data
(dollars in thousands, except per
share data)
INCOME STATEMENT
DATA
Total interest income
Total interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expenses
Income (loss) before provision
(benefit) for income taxes
Provision (benefit) for income
taxes
Net income (loss)
PER SHARE DATA
Basic earnings (loss) per share
Diluted earnings (loss) per
share
Book value per share
Tangible book value per share
(1)
BALANCE SHEET DATA
Total assets
Total loans, net
Total investment securities
Total deposits
Short-term borrowings
Subordinated debt
Total shareholders’ equity
PERFORMANCE RATIOS
Return on average assets
Return on average
shareholders’ equity
Net interest margin
Total non-interest expenses as
a percentage of average
assets
ASSET QUALITY RATIOS
Allowance for loan losses as a
percentage of loans
Allowance for loan losses as a
percentage of non-
performing loans
Non-performing loans as a
percentage of total loans
Non-performing assets as a
percentage of total assets
Net charge-offs as a percentage
of average loans, net
LIQUIDITY AND CAPITAL
RATIOS
Average equity to average
assets
Leverage ratio
CET 1 capital to risk-weighted
assets
Tier 1 capital to risk-weighted
assets
Total capital to risk-weighted
assets
(1) A Non-GAAP Disclosure
As of or for the Years Ended December 31,
2019
2018
2017
2016
2015
$
$
$
$
$
$
$
104,864
27,057
77,807
1,905
23,738
104,490
(4,850 )
(1,350 )
(3,500 )
(0.06 )
(0.06 )
4.23
4.15
3,341,290
1,738,929
1,186,630
2,999,163
-
11,265
249,168
(0.12 %)
(1.41 %)
2.85 %
$
$
$
$
$
$
$
92,074
16,170
75,904
2,300
20,322
83,721
10,205
1,578
8,627
0.15
0.15
4.17
4.09
2,753,297
1,427,983
1,088,331
2,392,867
91,422
11,259
245,189
0.34 %
3.69 %
3.16 %
$
$
$
$
$
$
$
70,849
8,784
62,065
900
20,097
75,276
5,986
(2,919 )
8,905
0.16
0.15
3.97
3.89
2,322,347
1,153,679
938,561
2,063,295
-
21,681
226,460
0.43 %
4.02 %
3.23 %
$
$
$
$
$
$
$
54,227
6,863
47,364
1,557
15,312
56,293
4,826
(119 )
4,945
0.13
0.12
3.79
3.70
1,923,931
955,817
803,604
1,677,670
-
21,881
215,053
0.30 %
3.97 %
3.14 %
$
$
$
$
$
$
$
45,436
5,381
40,055
500
9,943
47,091
2,407
(26 )
2,433
0.06
0.06
3.00
3.00
1,438,824
866,066
460,131
1,249,298
47,000
21,857
113,375
0.19 %
2.14 %
3.29 %
3.51 %
3.28 %
3.64 %
3.45 %
3.59 %
0.53 %
0.60 %
0.74 %
0.95 %
0.99 %
74.65 %
83.31 %
57.93 %
48.45 %
68.95 %
1.28 %
0.94 %
0.13 %
10.72 %
10.64 %
14.75 %
16.13 %
16.70 %
1.96 %
1.51 %
0.12 %
7.63 %
12.74 %
16.59 %
18.28 %
18.99 %
1.44 %
1.66 %
0.41 %
8.67 %
9.65 %
10.42 %
12.40 %
13.19 %
0.71 %
0.42 %
0.08 %
8.36 %
7.83 %
11.41 %
11.93 %
12.37 %
0.72 %
0.60 %
0.17 %
9.16 %
9.35 %
13.90 %
14.53 %
15.03 %
29
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the results of operations and financial condition should be
read in conjunction with Item 6 “Selected Financial Data” and the consolidated financial statements and
the notes thereto included in Item 8 of this report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors,
including but not limited to those set forth in Item 1A, entitled, “Risk Factors” and elsewhere in this report
may cause actual results to differ materially from those projected in the forward-looking statements.
Executive Summary
“The Power of Red is Back” expansion campaign continues to produce impressive results from a
balance sheet perspective. During 2019 total assets grew by $588 million or 21% driven by the success of
our customer centric banking philosophy of turning customers into “FANS”. Deposit balances increased
by 25% as our network of stores continues to drive new customer relationships. Loan production was also
significant as outstanding balances increased by 22%.
Earnings during 2019 were negatively impacted by compression of our net interest margin caused by a
flat and, at times, an inverted yield curve. The shape of the yield curve is driving lower yields on interest
earning assets and higher rates on interest bearing liabilities. In the midst of this challenging interest rate
environment we have also incurred costs required to expand into New York City. In addition to new hires,
training, advertising, and occupancy expenses for the opening of our first two stores in New York this year,
we have also established a management and lending team for this new market.
As we enter the new year, a number of cost control measures have been implemented to offset the
challenges faced in growing revenue as a result of compression in the net interest margin. These measures
will begin to take effect during the first quarter of 2020.
Additional highlights for the year ended December 31, 2019 were as follows:
Total deposits increased by $606 million, or 25%, to $3.0 billion as of December 31, 2019
compared to $2.4 billion as of December 31, 2018.
New stores opened since the beginning of the “Power of Red is Back” expansion campaign are
currently growing deposits at an average rate of $30 million per year, while the average deposit
growth for all stores over the last twelve months was approximately $22 million per store.
Expansion into New York City began in 2019 with the opening of our first two stores located at the
corner of 14th Street and 5th Avenue and the corner of 51st Street and 3rd Avenue.
Total loans grew $312 million, or 22%, to $1.7 billion as of December 31, 2019 compared to
$1.4 billion at December 31, 2018. The success of our relationship banking strategy continues to
produce growth rates far in excess of industry standards.
Total assets increased by $588 million, or 21%, to $3.3 billion as of December 31, 2019 compared
to $2.8 billion as of December 31, 2018.
We had twenty-nine convenient store locations open at December 31, 2019. During 2019 we
celebrated the grand opening of four new stores. In addition to the two stores opened in New York
City, we added locations in Lumberton, NJ and Feasterville, PA.
30
A new store was opened in Northfield, NJ early in 2020. Construction on a new store in Bensalem,
PA is ongoing and expected to be complete during the second quarter of 2020. There are also
multiple sites in various stages of development for future store locations.
Profitability declined during 2019. We recorded a net loss of $3.5 million, or ($0.06) per share, for
the twelve months ended December 31, 2019 compared to net income of $8.6 million, or $0.15 per
share for the twelve months ended December 31, 2018.
The net interest margin decreased by 31 basis points to 2.85% for the twelve months ended
December 31, 2019 compared to 3.16% for the twelve months ended December 31, 2018. Margin
compression was driven by a flat and inverted yield curve experienced during 2019.
The ratio of non-performing assets to total assets declined to 0.42% as of December 31, 2019
compared to 0.60% as of December 31, 2018. The Company was able to successfully liquidate the
single largest non-performing asset on its books during the fourth quarter of 2019.
The Company’s residential mortgage division, Oak Mortgage, is serving the home financing needs
of customers throughout its footprint. The Oak Mortgage team originated more than $450 million
in mortgage loans during 2019.
Meeting the needs of small business customers continued to be an important part of the Company’s
lending strategy. More than $55 million in new SBA loans were originated during the twelve month
period ended December 31, 2019. We continue to be a top SBA lender in our market area based on
the dollar volume of loan originations.
The Total Risk-Based Capital ratio was 12.37% and Tier I Leverage Ratio was 7.83% at December
31, 2019.
Book value per common share increased to $4.23 as of December 31, 2019 compared to $4.17 as
of December 31, 2018.
Non-GAAP Based Financial Measures
Our selected financial data contains a non-GAAP financial measure calculated using non-GAAP
amounts. This measure is tangible book value per common share. Tangible book value per share adjusts
the numerator by the amount of Goodwill and Other Intangible Assets (as a reduction of Shareholders’
Equity). Management uses non-GAAP measures to present historical periods comparable to the current
period presentation. In addition, management believes the use of non-GAAP measures provides additional
clarity when assessing our financial results and use of equity. Disclosures of this type should not be viewed
as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily
comparable to non-GAAP performance measures that may be presented by other entities.
31
The following table provides a reconciliation of tangible book value per common share as of
December 31, 2019 and December 31, 2018.
(dollars in thousands)
Total shareholders’ equity
Reconciling items:
Goodwill
Tangible common equity
Common shares outstanding
Tangible book value per common share
December 31, 2019
December 31, 2018
$ 249,168
$ 245,189
(5,011)
$ 244,157
58,842,778
$ 4.15
(5,011)
$ 240,178
58,789,228
$ 4.09
Critical Accounting Policies, Judgments and Estimates
In reviewing and understanding our financial information, you are encouraged to read and understand
the significant accounting policies used in preparing the consolidated financial statements. These policies
are described in Note 2 – Summary of Significant Accounting Policies of the Notes to Consolidated
Financial Statements. The accounting and financial reporting policies conform to accounting principles
generally accepted in the United States of America and to general practices within the banking industry.
The preparation of the consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of income and expenses during
the reporting period. Management evaluates these estimates and assumptions on an ongoing basis including
those related to the allowance for loan losses, carrying values of other real estate owned, other than
temporary impairment of securities, fair value of financial instruments and deferred income taxes.
Management bases its estimates on historical experience and various other factors and assumptions that are
believed to be reasonable under the circumstances. These form the basis for making judgments on the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We have identified the policies related to the allowance for loan losses, other-than-temporary
impairment of securities, loans receivable, mortgage loans held for sale, interest rate lock commitments,
forward loan sale commitments, goodwill, other real estate owned, and deferred income taxes as being
critical.
Allowance for Loan Losses - Management’s ongoing evaluation of the adequacy of the allowance for
loan losses is based on our past loan loss experience, the volume and composition of our lending, adverse
situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral,
current economic conditions and other factors affecting the known and inherent risk in the portfolio. The
allowance for loan losses is increased by charges to income through the provision for loan losses and
decreased by charge-offs (net of recoveries). The allowance is maintained at a level that management, based
upon its evaluation, considers adequate to absorb losses inherent in the loan portfolio. This evaluation is
inherently subjective as it requires material estimates including, among others, the amount and timing of
expected future cash flows on impacted loans, exposure at default, value of collateral, and estimated losses
on our commercial and residential loan portfolios. All of these estimates may be susceptible to significant
change.
The allowance consists of specific allowances for impaired loans, a general allowance on the remainder
of the portfolio, and an unallocated component to account for a level of imprecision in management’s
estimation process. Although management determines the amount of each element of the allowance
separately, the allowance for loan losses as a whole is available for the entire loan portfolio.
32
Management establishes an allowance on certain impaired loans for the amount by which the
discounted cash flows, observable market price, or fair value of collateral if the loan is collateral dependent,
is lower than the carrying value of the loan. A loan is considered to be impaired when, based upon current
information and events, it is probable that we will be unable to collect all amounts due according to the
contractual terms of the loan. A delay or shortfall in amount of payments does not necessarily result in the
loan being identified as impaired.
Management also establishes a general allowance on non-impaired loans to recognize the inherent
losses associated with lending activities, but which, unlike specific allowances, have not been allocated to
particular loans. This general valuation allowance is determined by segregating the loans by loan category
and assigning allowance percentages based on our historical loss experience, delinquency trends, and
management’s evaluation of the collectability of the loan portfolio.
Management also evaluates classified loans, which are not impaired. We segregate these loans by
category and assign qualitative factors to each loan based on inherent losses associated with each type of
lending and consideration that these loans, in the aggregate, represent an above-average credit risk and that
more of these loans will prove to be uncollectible compared to loans in the general portfolio. Classification
of a loan within this category is based on identified weaknesses that increase the credit risk of the loan.
The allowance is adjusted for significant factors that, in management’s judgment, affect the
collectability of the portfolio as of the evaluation date. These significant factors may include changes in
lending policies and procedures, changes in existing general economic and business conditions affecting its
primary lending areas, credit quality trends, collateral value, loan volumes and concentrations, seasoning
of the loan portfolio, loss experience in particular segments of the portfolio, duration of the current business
cycle, and bank regulatory examination results. The applied loss factors are re-evaluated each reporting
period to ensure their relevance in the current economic environment.
While management uses the best information known to it in order to make loan loss allowance
valuations, adjustments to the allowance may be necessary based on changes in economic and other
conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times
of economic slowdown, either regional or national, the risk inherent in the loan portfolio could increase
resulting in the need for additional provisions to the allowance for loan losses in future periods. An increase
could also be necessitated by an increase in the size of the loan portfolio or in any of its components even
though the credit quality of the overall portfolio may be improving. Historically, the estimates of the
allowance for loan loss have provided adequate coverage against actual losses incurred. In addition, the
Pennsylvania Department of Banking and Securities and the FDIC, as an integral part of their examination
processes, periodically review the allowance for loan losses. The Pennsylvania Department of Banking and
Securities or the FDIC may require the recognition of adjustment to the allowance for loan losses based on
their judgment of information available to them at the time of their examinations. To the extent that actual
outcomes differ from management’s estimates, additional provisions to the allowance for loan losses may
be required that would adversely impact earnings in future periods.
Other-Than-Temporary Impairment of Securities - Securities are evaluated on at least a quarterly
basis, and more frequently when market conditions warrant such an evaluation, to determine whether a
decline in their value is other-than-temporary. To determine whether a loss in value is other-than-temporary,
management utilizes criteria such as the reasons underlying the decline, the magnitude and duration of the
decline and our intent and ability to retain its investment in the security for a period of time sufficient to
allow for an anticipated recovery in the fair value. The term “other-than-temporary” is not intended to
indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater
33
than the carrying value of the investment. Once a decline in value is determined to be other-than-temporary,
the value of the security is reduced and a corresponding charge to earnings is recognized.
Mortgage Banking Activities and Mortgage Loans Held for Sale – Mortgage loans held for sale are
originated and held until sold to permanent investors. Management elected to adopt the fair value option in
accordance with FASB Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and
Disclosures, and record loans held for sale at fair value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are
recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing
quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking
income in the statements of income. Direct loan origination costs are recognized when incurred and are
included in non-interest expense in the statements of income.
Interest Rate Lock Commitments - Mortgage loan commitments known as interest rate locks that
relate to the origination of a mortgage that will be held for sale upon funding are considered derivative
instruments under the derivatives and hedging accounting guidance FASB ASC 815, Derivatives and
Hedging. Loan commitments that are classified as derivatives are recognized at fair value on the balance
sheet as other assets and other liabilities with changes in their fair values recorded as mortgage banking
income and included in non-interest income in the statements of income. Outstanding IRLCs are subject to
interest rate risk and related price risk during the period from the date of issuance through the date of loan
funding, cancellation or expiration. Loan commitments generally range between 30 and 90 days; however,
the borrower is not obligated to obtain the loan. Republic is subject to fallout risk related to IRLCs, which
is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. Republic
uses best efforts commitments to substantially eliminate these risks. The valuation of the IRLCs issued by
Republic includes the value of the servicing released premium. Republic sells loans servicing released, and
the servicing released premium is included in the market price. See Note 23 Derivatives and Risk
Management Activities for further detail on IRLCs.
Forward Loan Sale Commitments - Forward loan sale commitments are commitments to sell
individual mortgage loans at a fixed price to an investor at a future date. Forward loan sale commitments
are accounted for as derivatives and carried at fair value, determined as the amount that would be necessary
to settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities
are recorded as other assets and other liabilities with changes in fair value during the period recorded as
mortgage banking income and included in non-interest income in the statements of income.
Goodwill - Goodwill represents the excess of cost over the identifiable net assets of businesses
acquired. Goodwill is recognized as an asset and is to be reviewed for impairment annually. The Company
completed an annual impairment test for goodwill as of July 31, 2019 and 2018. Future impairment testing
will be conducted each year as of July 31, unless a triggering event occurs in the interim that would suggest
impairment, in which case it would be tested as of the date of the triggering event. During the twelve months
ended December 31, 2019 and 2018, there was no goodwill impairment recorded. There can be no assurance
that future impairment assessments or tests will not result in a charge to earnings. There was $5.0 million of
goodwill at December 31, 2019 and 2018.
Other Real Estate Owned - Other real estate owned consists of assets acquired through, or in lieu of,
loan foreclosure. They are held for sale and are initially recorded at fair value less cost to sell at the date
of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying amount or fair value, less the
cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in
net expenses from other real estate owned.
34
Income Taxes - Management makes estimates and judgments to calculate various tax liabilities and
determine the recoverability of various deferred tax assets, which arise from temporary differences between
the tax and financial statement recognition of revenues and expenses. Management also estimates a reserve
for deferred tax assets if, based on the available evidence, it is more likely than not that some portion or all
of the recorded deferred tax assets will not be realized in future periods. These estimates and judgments are
inherently subjective. Historically, management’s estimates and judgments to calculate the deferred tax
accounts have not required significant revision.
In evaluating our ability to recover deferred tax assets, management considers all available positive and
negative evidence, including the past operating results and forecasts of future taxable income. In
determining future taxable income, management makes assumptions for the amount of taxable income, the
reversal of temporary differences and the implementation of feasible and prudent tax planning strategies.
These assumptions require management to make judgments about the future taxable income and are
consistent with the plans and estimates used to manage the business. Any reduction in estimated future
taxable income may require management to record a valuation allowance against the deferred tax assets.
An increase in the valuation allowance would result in additional income tax expense in the period and
could have a significant impact on future earnings.
Results of Operations
For the year ended December 31, 2019 as compared to the year ended December 31, 2018
We reported a net loss of $3.5 million, or ($0.06) per diluted share, for the twelve months ended
December 31, 2019 compared to net income of $8.6 million, or $0.15 per diluted share, for the twelve
months ended December 31, 2018. Earnings in 2019 were negatively impacted by compression of the net
interest margin caused by a flat and inverted yield curve which drove lower yields on interest earning assets
and higher rates on interest bearing liabilities. In the midst of this challenging rate environment we have
also incurred costs to execute our expansion strategy in New York City. In addition to new hires, training,
advertising, and occupancy expenses related to the opening of our first two stores in New York, we also
established a management and lending team for this new market.
Net interest income for the twelve months ended December 31, 2019 increased $1.9 million to
$77.8 million as compared to $75.9 million for the twelve months ended December 31, 2018. Total assets
grew by $588 million, or 21%, during 2019 to $3.3 billion. However, growth in net interest income of
$8.8 million driven by the increase in interest earning assets was offset by a decrease of $6.9 million as a
result of interest rate changes resulting in a net increase of only $1.9 million in net interest income. For
comparison purposes net interest income increased by $13.5 million during 2018 on growth in assets of
$431 million. Interest income increased $12.8 million, or 14%, due primarily to an increase in average
interest-earning assets, primarily loans receivable. Interest expense increased $10.9 million, or 67%,
primarily due to an increase in the rate on average interest-bearing liabilities and average deposit balances.
The net interest margin decreased by 31 basis points to 2.85% during the twelve months ended December
31, 2019 compared to 3.16% during the twelve months ended December 31, 2018.
We recorded a loan loss provision in the amount of $1.9 million, a decrease of $395,000 for the twelve
months ended December 31, 2019 compared to a provision of $2.3 million during the twelve months ended
December 31, 2018. The provision recorded for the twelve months ended December 31, 2019 is charged to
operations in an amount necessary to bring the total allowance for loan losses to a level that management
believes is adequate to absorb inherent losses in the loan portfolio. The decrease in the provision year over
year was primarily a result of a decrease in the allowance required for loans individually evaluated for
35
impairment during 2019 and is supported by the steady decline in the ratio of non-performing assets to total
assets.
Non-interest income increased $3.4 million to $23.7 million during the twelve months ended December
31, 2019 as compared to $20.3 million during the twelve months ended December 31, 2018. The increase
was primarily driven by higher service fees on deposit accounts and gains on sale of investment securities
during the twelve months ended December 31, 2019.
Non-interest expenses increased $20.8 million to $104.5 million during the twelve months ended
December 31, 2019 as compared to $83.7 million during the twelve months ended December 31, 2018.
The increase was primarily driven by higher salaries, employee benefits, occupancy, and equipment
expenses associated with the addition of new stores related to our expansion strategy which we refer to as
“The Power of Red is Back”.
Return on average assets and average equity were (0.12%) and (1.41%), respectively, during the twelve
months ended December 31, 2019 compared to 0.34% and 3.69%, respectively, for the twelve months
ended December 31, 2018.
36
Average Balances and Net Interest Income
Historically, our earnings have depended primarily upon Republic’s net interest income, which is the
difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and
interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized
basis, setting forth for the periods average assets, liabilities, and shareholders’ equity, interest income
earned on interest-earning assets and interest expense on interest-bearing liabilities, average yields earned
on interest-earning assets and average rates on interest-bearing liabilities, and Republic’s net interest margin
(net interest income as a percentage of average total interest-earning assets). Averages are computed based
on daily balances. Non-accrual loans are included in average loans receivable. Yields are adjusted for tax
equivalency, a non-GAAP measure, using a rate of 21% in 2019, 21% in 2018, and 35% in 2017.
Average Balances and Net Interest Income
For the Year Ended
December 31, 2019
For the Year Ended
December 31, 2018
For the Year Ended
December 31, 2017
Average
Balance
Interest
Income/
Expense
Yield/
Rate(1)
Average
Balance
Interest
Income/
Expense
Yield/
Rate(1)
Average
Balance
Interest
Income/
Expense
Yield/
Rate(1)
$
129,528 $
2,571 1.98%
$
40,931 $
847 2.07%
$
48,148 $
577 1.20%
27,886 2.59%
74,946 4.85%
105,403 3.83%
15,621 1.32%
6,796 0.96%
3,850 2.02%
26,267 1.00%
26,267 1.26%
790 3.45%
27,057 1.29%
27,057 1.02%
1,074,706
1,544,904
2,749,138
229,767
$ 2,978,905
$
555,385
1,184,530
705,445
190,567
2,635,927
2,080,542
22,911
2,103,453
2,658,838
71,131
248,936
$ 2,978,905
27,316 2.63%
64,455 4.81%
92,618 3.83%
7,946 0.87%
4,898 0.70%
1,588 1.23%
14,432 0.65%
14,432 0.83%
1,738 2.36%
16,170 0.89%
16,170 0.70%
1,037,810
1,340,117
2,418,858
131,369
$ 2,550,227
$
488,995
918,508
697,135
128,892
2,233,530
1,744,535
73,573
1,818,108
2,307,103
9,431
233,693
$ 2,550,227
811,269
1,090,851
1,950,268
115,770
$ 2,066,038
$
372,171
687,586
629,464
110,952
1,800,173
1,428,002
35,429
1,463,431
1,835,602
8,942
221,494
$ 2,066,038
20,466 2.52%
50,687 4.65%
71,730 3.68%
3,020 0.44%
3,160 0.50%
1,238 1.12%
7,418 0.41%
7,418 0.52%
1,366 3.86%
8,784 0.60%
8,784 0.48%
$ 78,346
$ 76,448
$ 62,946
2.54%
2.85%
2.94%
3.16%
3.08%
3.23%
(dollars in thousands)
Interest-earning assets:
Federal funds sold and other
interest earning assets
Investment securities and restricted
stock
Loans receivable
Total interest-earning assets
Other assets
Total assets
Interest bearing liabilities:
Demand – non-interest bearing
Demand – interest bearing
Money market & savings
Time deposits
Total deposits
Total interest bearing deposits
Other borrowings
Total interest-bearing liabilities
Total deposits and other borrowings
Non-interest bearing other liabilities
Shareholders’ equity
Total liabilities and shareholders’
equity
Net interest income(2)
Net interest spread
Net interest margin(2)
(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 $539, $544,
and $881 in 2019, 2018, and 2017, respectively, to adjust for tax equivalency. The tax equivalent net
interest margin is calculated by dividing tax equivalent net interest income by average total interest
earning assets.
37
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and rate components of interest
income and interest expense. The following table sets forth an analysis of volume and rate changes in net
interest income for the periods indicated. For purposes of this table, changes in interest income and expense
are allocated to volume and rate categories based upon the respective changes in average balances and
average rates. Net interest income and net interest margin are presented on a tax equivalent basis, a Non-
GAAP measure.
(dollars in thousands)
Interest earned:
Federal funds sold and other
interest-earning assets
Securities
Loans
Total interest-earning assets
Interest expense:
Deposits
Interest-bearing demand deposits
Money market and savings
Time deposits
Total deposit interest expense
Other borrowings
Total interest expense
Net interest income
Year ended
December 31, 2019 vs. 2018
Changes due to:
Year ended
December 31, 2018 vs. 2017
Changes due to:
Average
Volume
Average
Rate
Total
Change
Average
Volume
Average
Rate
Total
Change
$
$
$
1,759 $
958
9,439
12,156
$
(35)
(388)
1,052
629
1,724
570
10,491
12,785
$
(149)
5,963
11,596
17,410
$
419
887
2,172
3,478
$
270
6,850
13,768
20,888
3,508 $
46
1,246
4,800
(1,402)
3,398
8,758 $
4,167 $
1,852
1,016
7,035
454
7,489
(6,860) $
7,675
1,898
2,262
11,835
(948)
10,887
1,898
$
1,998
516
221
2,735
742
3,477
$ 13,933
$
$
2,928 $
1,222
129
4,279
(370)
3,909
(431) $
4,926
1,738
350
7,014
372
7,386
13,502
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the twelve months ended
December 31, 2019 increased by $1.9 million, or 2%, over twelve months ended December 31, 2018.
Interest income on interest-earning assets totaled $105.4 million for the twelve months ended December
31, 2019, an increase of $12.8 million, compared to $92.6 million for the twelve months ended December
31, 2018. The increase in interest income earned was primarily the result of an increase in average interest-
earning balances, primarily loans receivable. Total interest expense for the twelve months ended December
31, 2019 increased $10.9 million, or 67%, to $27.1 million from $16.2 million for the twelve months ended
December 31, 2018. Interest expense on deposits increased by $11.8 million, or 82%, for the twelve months
ended December 31, 2019 versus the twelve months ended December 31, 2018 due to higher rates and
increases in average deposit balances. Interest expense on other borrowings decreased by $948,000 for the
twelve months ended December 31, 2019 compared to the twelve months ended December 31, 2018 due
primarily to a $48.2 million decrease in average 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 2.54% during the twelve months ended December 31, 2019 versus 2.94%
during the twelve months ended December 31, 2018. Net interest margin represents the difference between
interest income, including net loan fees earned, and interest expense, reflected as a percentage of average
interest-earning assets. For the twelve months ended December 31, 2019 and 2018, the fully tax-equivalent
net interest margin was 2.85% and 3.16%, respectively. Compression in the net interest margin was driven
38
by flattening of the yield curve resulting in a more rapid increase in our cost of funds compared to the yield
on interest earning assets.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $1.9 million, a decrease of $395,000, for the
twelve months ended December 31, 2019 compared to a $2.3 million provision for the twelve months ended
December 31, 2018. The provision for loan losses is charged to operations in an amount necessary to bring
the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses
in the loan portfolio. The provision recorded for the twelve months ended December 31, 2019 compared to
the twelve months ended December 31, 2018 decreased primarily as a result of a decrease in the allowance
required for loans individually evaluated for impairment. Non-performing assets as a percentage of total
assets declined to 0.42% as of December 31, 2019 compared to 0.60% as of December 31, 2018. This is
the fifth consecutive year that this ratio has declined. Net charge-offs as a percentage of average loans also
declined during 2019.
Non-Interest Income
Total non-interest income for the twelve months ended December 31, 2019 increased by $3.4 million,
or 17%, compared to the twelve months ended December 31, 2018. Service fees on deposit accounts totaled
$7.5 million for the twelve months ended December 31, 2019 which represents an increase of $2.1 million
compared to the twelve months ended December 31, 2018. This increase was driven by growth in customer
deposit accounts and transaction volume. We recognized gains of $1.1 million on the sale of securities
during the twelve months ended December 31, 2019, an increase of $1.2 million, compared to losses of
$67,000 on the sales of securities for the twelve months ended December 31, 2018. Loan and servicing fees
totaled $1.6 million for the twelve months ended December 31, 2019 which represents an increase of
$167,000 compared to the twelve months ended December 31, 2018. Gains on the sale of SBA loans totaled
$3.2 million for the twelve months ended December 31, 2019, an increase of $82,000, versus $3.1 million
for the twelve months ended December 31, 2018. Mortgage banking income totaled $10.1 million and
$10.2 million for the twelve months ended December 31, 2019 and 2018.
Non-Interest Expenses
Non-interest expenses increased by $20.8 million, or 25%, for the twelve months ended December 31,
2019, compared to the twelve months ended December 31, 2018. An explanation of changes of non-interest
expenses for certain categories is presented in the following paragraphs.
Salary expenses and employee benefits for the twelve months ended December 31, 2019 increased by
$9.8 million, or 22%, compared to the twelve months ended December 31, 2018. The increase was primarily
driven by annual merit increases along with increased staffing levels related to our growth strategy of adding
and relocating stores, which we refer to as “The Power of Red is Back”. There were twenty-nine stores
open as of December 31, 2019 compared to twenty-five stores open at December 31, 2018. The strategic
decision to expand into New York City was also a significant factor driving the increase in salaries and
employee benefits.
Occupancy expense, including depreciation and amortization expense, increased by $4.6 million, or
34%, for the twelve months ended December 31, 2019 compared to the twelve months ended December
31, 2018, also as a result of our continuing growth and expansion strategy.
39
Other real estate owned expenses totaled $2.1 million during the twelve months ended December 31,
2019, an increase of $521,000, when compared to the twelve months ended December 31, 2018. This
increase was a result of higher costs to carry foreclosed properties on foreclosed assets during the twelve
months ended December 31, 2019.
All other non-interest expenses for the twelve months ended December 31, 2019 increased $5.8 million
compared to the twelve months ended December 31, 2018. Increases in expenses related to data processing,
advertising, automated teller machine expenses, and professional fees were mainly associated with our
growth strategy.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the
ratio of annualized net non-interest expenses to average assets, a non-GAAP measure. For purposes of this
calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the twelve
months ended December 31, 2019, the ratio equaled 2.71% compared to 2.49% for the twelve months ended
December 31, 2018, respectively. The increase in this ratio was mainly due to our growth and expansion
strategy which drives the addition of new stores, along with additional employees to support the growth
strategy.
Another productivity measure utilized by management is the operating efficiency ratio, another non-
GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus
non-interest income. The efficiency ratio equaled 102.90% for the twelve months ended December 31,
2019, compared to 87.0% for the twelve months ended December 31, 2018. The increase for the twelve
months ended December 31, 2019 versus the twelve months ended December 31, 2018 was due to non-
interest expenses increasing at a faster rate than net interest income and non-interest income.
Provision (Benefit) for Income Taxes
We recorded a benefit for income taxes of $1.4 million for the twelve months ended December 31,
2019 compared to a provision of $1.6 million for the twelve months ended December 31, 2018. The
effective tax rates for the twelve month periods ended December 31, 2019 and 2018 were (28%) and 15%,
respectively. The effect of permanent deductions increases the effective tax benefit percentage when in a
pre-tax loss position and decreases the effective tax rate when in a pre-tax income position.
We evaluate the carrying amount of our deferred tax assets on a quarterly basis or more frequently, if
necessary, in accordance with the guidance provided in Financial Accounting Standards Board (FASB)
Accounting Standards Codification Topic 740 (ASC 740), in particular, applying the criteria set forth
therein to determine whether it is more likely than not (i.e. a likelihood of more than 50%) that some portion,
or all, of the deferred tax asset will not be realized within its life cycle, based on the weight of available
evidence. If management makes a determination based on the available evidence that it is more likely than
not that some portion or all of the deferred tax assets will not be realized in future periods, a valuation
allowance is calculated and recorded. These determinations are inherently subjective and dependent upon
estimates and judgments concerning management’s evaluation of both positive and negative evidence.
In conducting the deferred tax asset analysis, we believe it is important to consider the unique
characteristics of an industry or business. In particular, characteristics such as business model, level of
capital and reserves held by a financial institution and the ability to absorb potential losses are important
distinctions to be considered for bank holding companies like us. In addition, it is also important to consider
that net operating loss carryforwards (“NOLs”) calculated for federal income tax purposes can generally be
carried back two years and carried forward for a period of twenty years, for NOLs created prior to January 1,
40
2018. Federal NOLs generated after December 31, 2017 can be carried forward indefinitely. In order to
realize our deferred tax assets, we must generate sufficient taxable income in such future years.
In assessing the need for a valuation allowance, the Company carefully weighed both positive and
negative evidence currently available. Judgment is required when considering the relative impact of such
evidence. The weight given to the potential effect of positive and negative evidence must be commensurate
with the extent to which it can be objectively verified.
The Company is in a 3-year cumulative profit position factoring in pre-tax GAAP income and
permanent book/tax differences. Strong growth in interest-earning assets is expected to continue and is
supported by the capital raise completed at the end of 2016. The ratio of non-performing assets to total
assets along with other credit quality metrics continue to improve. A number of cost control measures have
been implemented to offset the challenges faced in growing revenue as a result of compression in the net
interest margin. The Company has added 10 store locations in the past 3 years and since the inception of
the “Power of Red is Back” growth and expansion strategy in 2014 almost every new store location has
met or exceeded expectations. The success of the expansion into New York, combined with the stabilization
of interest rates and continued loan growth are expected to improve profitability going forward.
Conversely, the Company generated a loss in the current year when factoring in pre-tax GAAP income
and permanent book/tax differences. The Bank’s net interest margin declined during 2019 as a result of the
challenging interest rate environment which appears to be consistent across the financial services industry.
Non-accrual loans increased by 20 percent during 2019. Rising interest rates and a downturn in the economy
could significantly decrease the volume of mortgage loan originations.
The Company has experienced a growing balance sheet driven by the growth and expansion strategy
over the last several years. Loans and deposits have consistently grown at rates far above industry standards
generating a higher level of interest earning assets. Assets quality metrics have improved to levels not seen
in more than 20 years. From 2014 to 2018, the Company demonstrated consistent and steady improvement
in earnings despite the investments required to initiate the expansion plan which put it in a position to
comfortably rely on projections of future taxable income when evaluating the need for a valuation
allowance against its deferred tax assets for the years ended December 31, 2018 and 2017.
In 2019, the Company began opening branches in New York City. Management was aware of the initial
costs and investments required to expand into this new market. As a result of the flat and inverted yield
curve experienced in 2019, the net interest margin compressed and revenue did not grow at the rate
necessary to support the increased expense levels which caused a decline in earnings. Management and the
Board of Directors have engaged in detailed discussions on how to improve profitability going forward.
During the preparation of the 2020 budget, several cost reduction and control initiatives were identified and
incorporated into the projections. These initiatives include, but are not limited to, a reduction of store hours
and slowing of the number of locations to be opened in the coming years. Efforts to reduce high cost
deposits and increase loan production to improve the net interest margin have also been initiated. The
Company’s multi-year budget plan projects future taxable income will be more than sufficient to support
the realization of the deferred tax assets.
Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740),
the Company believed that the positive evidence considered at December 31, 2019 outweighed the negative
evidence and that it was more likely than not that all of the Company’s deferred tax assets would be realized
within their life cycle. Therefore, a valuation allowance was not required at December 31, 2019.
41
The net deferred tax asset balance was $12.6 million as of December 31, 2019, $12.3 million as of
December 31, 2018, and $12.7 million as of December 31, 2017. The deferred tax asset will continue to be
analyzed on a quarterly basis for changes affecting realizability.
Net Income and Net Income per Common Share
The net loss for the twelve months ended December 31, 2019 was $3.5 million, compared to net income
of $8.6 million for the twelve months ended December 31, 2018. For the twelve months ended December
31, 2019, basic and fully-diluted net loss per common share was ($0.06), compared to basic and fully-
diluted net income per common share of $0.15, respectively for the twelve months ended December 31,
2018.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The
ROA for the twelve months ended December 31, 2019 and 2018 was (0.12%) and 0.34%, respectively.
Return on average equity (ROE) indicates how effectively we can generate net income on the capital
invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders'
equity. The ROE for the twelve months ended December 31, 2019 was (1.41%), compared to 3.69% for the
twelve months ended December 31, 2018.
Results of Operations
For the year ended December 31, 2018 as compared to the year ended December 31, 2017
We reported net income of $8.6 million, or $0.15 per diluted share, for the twelve months ended
December 31, 2018 compared to net income of $8.9 million, or $0.15 per diluted share, for the twelve
months ended December 31, 2017. The decrease in net income of $278,000 was related to an increase in
total non-interest expense and the provision for income taxes partially offset by an increase in net interest
income and non-interest income. Net income before tax grew by 70%, or $4.2 million to $10.2 million for
the twelve months December 31, 2018 compared to net income before tax of $6.0 million for the twelve
months ended December 31, 2017.
Net interest income for the twelve months ended December 31, 2018 increased $13.8 million to
$75.9 million as compared to $62.1 million for the twelve months ended December 31, 2017. Interest
income increased $21.2 million, or 30.0%, due primarily to an increase in average loans receivable and
investment securities balances. Interest expense increased $7.4 million, or 84.1%, primarily due to an
increase in the cost of average interest-bearing liabilities and the balance of average interest-bearing
liabilities. The increase in interest rates associated with the cost of interest-bearing liabilities was mainly
driven by the increases in the Fed Funds rate during 2018.
We recorded a loan loss provision in the amount of $2.3 million, an increase of $1.4 million for the
twelve months ended December 31, 2018 compared to a provision of $900,000 during the twelve months
ended December 31, 2017. The higher provision recorded for the twelve months ended December 31, 2018
is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that
management believes is adequate to absorb inherent losses in the loan portfolio. The increase was primarily
a result of an increase in the allowance required for loans collectively evaluated for impairment due to
growth in outstanding loans during 2018.
Non-interest income increased $225,000 to $20.3 million during the twelve months ended December
31, 2018 as compared to $20.1 million during the twelve months ended December 31, 2017. The increase
42
was primarily driven by service fees on deposit accounts, partially offset by a decrease in mortgage banking
income, gains on the sale of SBA loans, and loan and servicing fees recorded during the twelve months
ended December 31, 2017.
Non-interest expenses increased $8.4 million to $83.7 million during the twelve months ended
December 31, 2018 as compared to $75.3 million during the twelve months ended December 31, 2017.
The increase was primarily driven by higher salaries, employee benefits, occupancy and equipment
expenses associated with the addition of new stores related to our expansion strategy which we refer to as
“The Power of Red is Back”.
Return on average assets and average equity were 0.34% and 3.69%, respectively, during the twelve
months ended December 31, 2018 compared to 0.43% and 4.02%, respectively, for the twelve months
ended December 31, 2017.
Net Interest Income and Net Interest Margin
Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the twelve months ended
December 31, 2018 increased by $13.5 million, or 21.5%, over twelve months ended December 31, 2017.
Interest income on interest-earning assets totaled $92.6 million for the twelve months ended December 31,
2018, an increase of $20.9 million, compared to $71.7 million for the twelve months ended December 31,
2017. The increase in interest income earned was primarily the result of an increase in the average balances
of loans receivable and investment securities. Total interest expense for the twelve months ended December
31, 2018 increased $7.4 million, or 84.1%, to $16.2 million from $8.8 million for the twelve months ended
December 31, 2017. Interest expense on deposits increased by $7.0 million, or 94.6%, for the twelve months
ended December 31, 2018 versus the twelve months ended December 31, 2017 due to increases in average
deposit balances and higher rates. Interest expense on other borrowings increased by $372,000 for the
twelve months ended December 31, 2018 compared to the twelve months ended December 31, 2017 due
primarily to a $46.1 million increase in average overnight borrowings balances.
Changes in net interest income are frequently measured by two statistics: net interest rate spread and
net interest margin. Net interest rate spread is the difference between the average rate earned on interest-
earning assets and the average rate incurred on interest-bearing liabilities. Our net interest rate spread on a
fully tax-equivalent basis was 2.94% during the twelve months ended December 31, 2018 versus 3.08%
during the twelve months ended December 31, 2017. Net interest margin represents the difference between
interest income, including net loan fees earned, and interest expense, reflected as a percentage of average
interest-earning assets. For the twelve months ended December 31, 2018 and 2017, the fully tax-equivalent
net interest margin was 3.16% and 3.23%, respectively. The net interest margin for the twelve months
ended December 31, 2018 decreased primarily as a result of the cost of funds associated with interest-
bearing liabilities rising at a faster rate than the yield earned on interest-earning assets.
Provision for Loan Losses
We recorded a provision for loan losses in the amount of $2.3 million, an increase of $1.4 million, for
the twelve months ended December 31, 2018 compared to a $900,000 provision for the twelve months
ended December 31, 2017. The provision for loan losses is charged to operations in an amount necessary
to bring the total allowance for loan losses to a level that management believes is adequate to absorb
inherent losses in the loan portfolio. The provision recorded for the twelve months ended December 31,
2018 as compared to the twelve months ended December 31, 2017 increased primarily as a result of an
increase in the allowance required for loans collectively evaluated for impairment driven by an increase in
loans receivable.
43
Non-Interest Income
Total non-interest income for the twelve months ended December 31, 2018 increased by $225,000, or
1.1%, compared to the twelve months ended December 31, 2017. Service fees on deposit accounts totaled
$5.5 million for the twelve months ended December 31, 2018 which represents an increase of $1.6 million
compared to the twelve months ended December 31, 2017. This increase was driven by growth in customer
deposit accounts and transaction volume. We recognized losses of $67,000 on the sale of securities during
the twelve months ended December 31, 2018, a decrease of $79,000, compared to losses of $146,000 on
the sales of securities for the twelve months ended December 31, 2017. Mortgage banking income totaled
$10.2 million and $11.2 million for the twelve months ended December 31, 2018 and 2017. The decrease
of $937,000 is primarily driven by fair adjustments on loans held for sale and IRLCs. Gains on the sale of
SBA loans totaled $3.1 million for the twelve months ended December 31, 2018, a decrease of $273,000,
versus $3.4 million for the twelve months ended December 31, 2017.
Non-Interest Expenses
Non-interest expenses increased by $8.4 million, or 11.2%, for the twelve months ended December 31,
2018, compared to the twelve months ended December 31, 2017. An explanation of changes of non-interest
expenses for certain categories is presented in the following paragraphs.
Salary expenses and employee benefits for the twelve months ended December 31, 2018 increased by
$6.1 million, or 16.1%, compared to the twelve months ended December 31, 2017. The increase was
primarily driven by annual merit increases along with increased staffing levels related to our growth strategy
of adding and relocating stores, which we refer to as “The Power of Red is Back”. There were twenty-five
stores open as of December 31, 2018 compared to twenty-two stores open at December 31, 2017.
Occupancy expense, including depreciation and amortization expense, increased by $1.7 million, or
14.6%, for the twelve months ended December 31, 2018 compared to the twelve months ended December
31, 2017, also as a result of our continuing growth and expansion strategy.
Other real estate owned expenses totaled $1.6 million during the twelve months ended December 31,
2018, a decrease of $2.5 million, when compared to the twelve months ended December 31, 2017. This
decrease was primarily due to the writedown of a single OREO property in the amount of $2.7 million
during 2017. This writedown was driven by our decision to aggressively pursue a resolution for our largest
non-performing asset.
All other non-interest expenses for the twelve months ended December 31, 2018 increased $3.1 million
compared to the twelve months ended December 31, 2017. Increases in expenses related to data processing,
automated teller machine expenses, professional fees, and regulatory assessments which were mainly
associated with our growth strategy.
One key measure that management utilizes to monitor progress in controlling overhead expenses is the
ratio of annualized net non-interest expenses to average assets, a non-GAAP measure. For purposes of this
calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the twelve
months ended December 31, 2018, the ratio equaled 2.49% compared to 2.67% for the twelve months ended
December 31, 2017, respectively. The decrease in this ratio was mainly due to our growth in average assets.
Another productivity measure utilized by management is the operating efficiency ratio, another non-
GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus
non-interest income. The efficiency ratio equaled 87.0% for the twelve months ended December 31, 2018,
compared to 91.6% for the twelve months ended December 31, 2017. The decrease for the twelve months
44
ended December 31, 2018 versus the twelve months ended December 31, 2017 was due to net interest
income increasing at a faster rate than non-interest expenses.
Provision (Benefit) for Income Taxes
We recorded a provision for income taxes of $1.6 million for the twelve months ended December 31,
2018, an increase of $4.2 million, compared to a benefit of $2.9 million for the twelve months ended
December 31, 2017. We began recognizing an increased provision for federal and state income taxes during
the first quarter of 2018 after reversing our deferred tax asset valuation allowance during the fourth quarter
of 2017. We initially recorded a deferred tax asset valuation allowance in 2011 and continued to carry this
allowance after determining that some portion of the deferred tax asset balance may not be realized within
its life cycle based on the weight of available evidence. Adjustments to the valuation allowance resulted in
the recognition of a minimal provision for income taxes in each period until its reversal in 2017. The
effective tax rates for the twelve month periods ended December 31, 2018 and 2017 were 15% and 27%,
respectively. The effective tax rate for December 31, 2017 excluded the adjustment to the deferred tax asset
valuation allowance and offsets for the impact of the new tax legislation.
Net Income and Net Income per Common Share
Net income for the twelve months ended December 31, 2018 was $8.6 million, a decrease of $278,000,
compared to $8.9 million for the twelve months ended December 31, 2017. For the twelve months ended
December 31, 2018, basic and fully-diluted net income per common share was $0.15, compared to basic
and fully-diluted net income per common share of $0.16 and $0.15, respectively for the twelve months
ended December 31, 2017.
Return on Average Assets and Average Equity
Return on average assets (ROA) measures our net income in relation to our total average assets. The
ROA for the twelve months ended December 31, 2018 and 2017 was 0.34% and 0.43%, respectively. Return
on average equity (ROE) indicates how effectively we can generate net income on the capital invested by
our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity.
The ROE for the twelve months ended December 31, 2018 was 3.69%, compared to 4.02% for the twelve
months ended December 31, 2017.
Financial Condition
December 31, 2019 compared to December 31, 2018
Total assets increased by $588 million to $3.3 billion at December 31, 2019, compared to $2.8 billion
at December 31, 2018.
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 increased by $95.8 million to
$168.3 million at December 31, 2019, from $72.5 million at December 31, 2018.
Loans Held for Sale
Loans held for sale are comprised of loans guaranteed by the U.S. Small Business Administration
(“SBA”) which we usually originate with the intention of selling in the future and residential mortgage
45
loans, which we also intend to sell in the future. Total SBA loans held for sale were $3.0 million at
December 31, 2019, a decrease of $2.4 million, compared to $5.4 million at December 31, 2018. Residential
mortgage loans held for sale totaled $10.3 million at December 31, 2019, a decrease of $10.5 million, versus
$20.9 million at December 31, 2018. Loans held for sale, as a percentage of our total assets, were less than
1% at December 31, 2019.
Loans Receivable
The loan portfolio represents our largest asset category and is our most significant source of interest
income. Our lending strategy is focused on small and medium sized businesses and professionals that seek
highly personalized banking services. The loan portfolio consists of secured and unsecured commercial
loans including commercial real estate, construction loans, residential mortgages, home improvement loans,
home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range
between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal
lending limit to a customer, which was approximately $38.2 million at December 31, 2019. Loans made to
one individual customer, even if secured by different collateral, are aggregated for purposes of the lending
limit. There were no loans in excess of the legal lending limit at December 31, 2018. A $25.4 million
threshold, which amounts to approximately 10% of total regulatory capital, reflects an additional internal
monitoring guideline. We had one loan relationship in excess of $25.4 million at December 31, 2019 that
amounted to $28.0 million.
Loans increased $310.9 million, or 22%, to $1.7 billion at December 31, 2019, versus $1.4 billion at
December 31, 2018. This growth was the result of an increase in loan demand in all loan categories driven
by the successful execution of our relationship banking strategy which focuses on customer service.
Investment Securities
Investment securities considered available-for-sale are investments that may be sold in response to
changing market and interest rate conditions, and for liquidity and other purposes. Our investment securities
classified as available-for-sale consist primarily of U.S. Government agency Small Business
Administration (“SBA”) bonds, U.S. Government agency collateralized mortgage obligations (“CMO”),
agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Available-for-sale
securities totaled $539.0 million at December 31, 2019 as compared to $321.0 million at December 31,
2018. The $218.0 million increase was primarily due to the purchase of securities totaling $338.5 million
partially offset by sales, paydowns, maturities, and calls of securities totaling $122.7 million by during
2019. At December 31, 2019, the portfolio had a net unrealized loss of $1.7 million compared to a net
unrealized loss of $5.7 million at December 31, 2018. The $4.0 million decrease in the unrealized loss of
the investment portfolio was driven by a decrease in market interest rates which drove an increase in value
of the securities held in our portfolio during 2019.
Investment securities held-to-maturity are investments for which there is the intent and ability to hold
the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio
consists primarily of U.S. Government agency Small Business Investment Company bonds (SBIC) and
Small Business Administration (SBA) bonds, CMO’s and MBS’s. The fair value of securities held-to-
maturity totaled $653.1 million and $747.3 million at December 31, 2019 and December 31, 2018,
respectively. The $94.2 million decrease was primarily due to paydowns, maturities, and calls of securities
held in the portfolio totaling $116.5 million partially offset by an increase in the value of securities classified
as held-to-maturity of $22.5 million during the year ended December 31, 2019.
ASC 320 “Investments – Debt Securities” requires an entity to determine how to classify a security at
the time of acquisition. The appropriateness of the original classification should be reassessed at each
46
reporting period. The transfer of investment securities from available-for-sale to held-to maturity category
during the quarter ended December 31, 2018 was completed after an extensive analysis of the characteristics
of all securities held in the portfolio, in addition to a review of our liquidity position under multiple
scenarios including varying interest rate environments. Twenty-three of the twenty-five securities
transferred from available-to-sale to held-to-maturity were collateralized mortgage obligations. Thirteen
securities transferred were GNMA collateralized mortgage obligations which are backed by the full faith
and credit of the U.S. government. The remaining ten collateralized mortgage obligations were issued by
FNMA or FHLMC. Bonds issued by GNMA receive favorable risk rating when calculating regulatory risk-
based capital ratios. In addition, GNMA, FNMA, AND FHLMC securities are often pledged as collateral
as required to hold certain government deposits and are accepted as collateral as a result of the high quality
and low-risk nature of these bonds. The other two securities transferred from available-for sale to held-to-
maturity were FNMA agency mortgage backed securities.
After completion of these analyses and consideration of the factors mentioned above, management
determined that it had the intent and ability to hold specific securities until maturity and it was appropriate
to transfer them to the held-to-maturity category during the fourth quarter of 2018.
The fair value of the securities transferred to the held-to-maturity category was $230.1 million. The
book value of the securities on the date of transfer was $239.5 million. The unrealized holding gain or loss
on each individual security calculated at the time of transfer was reported as a component of shareholders’
equity in the accumulated other comprehensive income account and will be amortized as an adjustment to
yield over the remaining life of each security.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks
related to available credit facilities, is carried at cost as of December 31, 2019 and December 31, 2018. As
of those dates, restricted stock consisted of investments in the capital stock of the Federal Home Loan Bank
of Pittsburgh (“FHLB”) and Atlantic Community Bankers Bank (“ACBB”).
At December 31, 2019 and December 31, 2018, the investment in FHLB stock totaled $2.6 million and
$5.6 million, respectively. The $3.0 million decrease was due to a lower required investment in FHLB stock
during 2019. At both December 31, 2019 and December 31, 2018, ACBB stock totaled $143,000.
Other Real Estate Owned
The balance of other real estate owned decreased to $1.7 million at December 31, 2019 from
$6.2 million at December 31, 2018. The decrease was primarily the result of the disposition of a single
OREO property totaling $4.9 million during 2019.
Operating Leases – Right of Use Asset
Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new
lease accounting standard published by the FASB. ASC 842 represents a significant modification to the
accounting treatment for leases, with the most significant change being that most leases, including operating
leases, will now be capitalized on the balance sheet. Under the previous guidance (ASC 840), FASB
permitted operating leases to be reported only in the footnotes of corporate financial statements. Under
ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than
or equal to twelve months in length.
47
The right-of-use asset is valued as the initial amount of the lease liability obligation adjusted for any
initial direct costs, prepaid or accrued rent, and any lease incentives. At December 31, 2019, the balance of
the operating lease right-of-use asset was $64.8 million.
Goodwill
Goodwill amounted to $5.0 million at both December 31, 2019 and December 31, 2018. We completed
an annual impairment test for goodwill as of July 31, 2019 and 2018. Future impairment testing will be
conducted as of July 31 on an annual basis, unless a triggering event occurs in the interim that would suggest
impairment, in which case it would be tested as of the date of the triggering event. During the year ended
December 31, 2019 and 2018, there was no goodwill impairment recorded. There can be no assurance that
future impairment assessments or tests will not result in a charge to earnings.
Impairment is a condition that exists when the carrying amount of goodwill exceeds its implied fair
value. As of July 31, 2019, the fair value of the Reporting Unit exceeded its carrying value by 21%. The
determination of the fair value of the Reporting Unit incorporates assumptions that marketplace participants
would use in their estimates of fair value of the Reporting Unit in a change of control transaction, as
prescribed by ASC Topic 820.
To arrive at a conclusion of fair value, we utilize both the Income and Market Approach and then apply
weighting factors to each result. Weighting factors represent our best business judgment of the weightings
a market participant would utilize in arriving at a fair value for the reporting unit. In performing our
analyses, we also made numerous assumptions with respect to industry performance, business, economic
and market conditions and various other matters, many of which cannot be predicted and are beyond our
control. With respect to financial projections, projections reflect the best currently available estimates and
judgments as to the expected future financial performance of the Reporting Unit.
Premises and Equipment
The balance of premises and equipment increased to $117.0 million at December 31, 2019 from
$87.7 million at December 31, 2018. The $29.3 million increase was primarily due to premises and
equipment expenditures of $35.7 million less depreciation and amortization expenses of $6.5 million. New
stores were opened in Lumberton, NJ, Feasterville, PA, and New York City during 2019 bringing the total
store count to twenty-nine. We ended the year with stores under construction in Northfield, NJ and
Bensalem, PA. Northfield was opened in January 2020 with Bensalem scheduled to be completed by mid-
2020.
Deposits
Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and
time deposits, are Republic’s major source of funding. Deposits are generally solicited from our market
area through the offering of a variety of products to attract and retain customers, with a primary focus on
multi-product relationships.
Total deposits increased by $606.3 million to $3.0 billion at December 31, 2019, from $2.4 billion at
December 31, 2018. The increase was primarily the result of significant growth in demand deposit balances.
We constantly focus our efforts on the growth of deposit balances through the successful execution of our
relationship banking model which is based upon a high level of customer service and satisfaction. This
strategy has also allowed us to build a stable core-deposit base and nearly eliminate our dependence upon
the more volatile sources of funding found in brokered and internet certificates of deposit.
48
Short-term Borrowings
As of December 31, 2019, we had no short-term borrowings with the FHLB compared to $91.4 million
at December 31, 2018. The short-term borrowings were paid off in 2019 as a result of growth in deposit
balances.
Operating Lease Liability Obligation
Accounting Standards Codification Topic 842, also known as ASC 842 and ASU 2016-02, is the new
lease accounting standard published by the FASB. ASC 842 represents a significant modification to the
accounting treatment for leases, with the most significant change being that most leases, including operating
leases, will now be capitalized on the balance sheet. Under the previous guidance (ASC 840), FASB
permitted operating leases to be reported only in the footnotes of corporate financial statements. Under
ASC 842, the only leases that are exempt from the capitalization requirement are short-term leases less than
or equal to twelve months in length.
The operating lease liability obligation is calculated as the present value of the lease payments, using
the discount rate specified in the lease, or if that is not available, our incremental borrowing rate. At
December 31, 2019, the balance of the operating lease liability obligation was $68.9 million.
Shareholders’ Equity
Total shareholders’ equity increased $4.0 million to $249.2 million at December 31, 2019 compared to
$245.2 million at December 31, 2018. The increase was primarily due to $4.6 million decrease in
accumulated other comprehensive losses associated with an increase in the market value of investments in
the portfolio, stock based compensation of $2.6 million, and stock option exercises of $261,000, partially
offset by a $3.5 million net loss during the year ended December 31, 2019.
Investment Securities Portfolio
Republic’s investment securities portfolio is intended to provide liquidity and contribute to earnings
while diversifying credit risk. We attempt to maximize earnings while minimizing our exposure to interest
rate risk. The securities portfolio consists primarily of U.S. Government agency collateralized mortgage
obligations (CMO), agency mortgage-backed securities (MBS), corporate bonds, municipal securities, U.S.
Government agency Small Business Investment Company bonds (SBIC), and Small Business
Administration (SBA) bonds. Our ALCO committee monitors and reviews all security purchases.
49
A summary of investment securities available-for-sale and investment securities held-to-maturity at
December 31, 2019, 2018, and 2017 is as follows:
(dollars in thousands)
Available for sale
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Municipal securities
Corporate bonds
Asset-backed securities
Trust preferred securities
Total amortized cost of securities
At December 31,
2019
2018
2017
$ 38,743
329,492
98,953
4,064
69,499
-
-
$ 540,751
$ -
197,812
39,105
20,807
62,583
6,433
-
$ 326,740
$ -
327,972
55,664
15,142
62,670
13,414
725
$ 475,587
Total fair value of investment securities
$ 539,042
$ 321,014
$ 464,430
Held to maturity
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Other securities
Total amortized cost of securities
$ 94,913
416,177
133,752
-
$ 644,842
$ 107,390
500,690
153,483
-
$ 761,563
$ 112,605
215,567
143,041
1,000
$ 472,213
Total fair value of investment securities
$ 653,109
$ 747,323
$ 463,799
The total amortized cost of the investment securities portfolio has grown to $1.2 billion at December 31,
2019 compared to $1.1 billion at December 31, 2018, and $947.8 million at December 31, 2017. Investment
securities represented 35% of total assets at December 31, 2019 and 39% of total assets at December 31,
2018. We evaluate our investment securities portfolio on a continual basis in light of the interest rate
environment and changing market conditions and when appropriate, take necessary actions to improve and
enhance our overall positioning. We consider the portfolio to be well structured and of high quality. At
December 31, 2019, 94% of the portfolio consisted of U.S. government debt securities or U.S. government
agency issued mortgage-backed securities which were rated Aaa /AA+ by the major credit rating agencies.
The investment securities portfolio includes securities classified as both available for sale and held to
maturity. During 2019 and 2018, we designated a portion of our securities portfolio as held to maturity
based our intent and ability to hold those securities until they mature.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility
and liquidity conditions. The fair value of investment securities generally decreases when interest rates rise
and increases when interest rates fall. In addition, the fair value generally decreases when credit spreads
widen and increases when credit spreads tighten. Net unrealized gains in the total investment securities
portfolio were $6.6 million at December 31, 2019 compared to net unrealized losses of $20.0 million at
December 31, 2018. The increase was a result of a decrease in market interest rates in 2019. The comparable
amounts for the securities classified as available for sale were unrealized losses of $1.7 million at
December 31, 2019 and unrealized losses of $5.7 million at December 31, 2018.
No single issuer of securities (excluding government agencies and Goldman Sachs corporate bonds) in
the portfolio exceeded more than 10% of shareholders’ equity at December 31, 2019 and December 31,
2018.
50
We held nine U.S. Government agency securities, thirty-two collateralized mortgage obligations and
seventeen agency mortgage-backed securities that were in an unrealized loss position at December 31,
2019. Principal and interest payments of the underlying collateral for each of these securities carry minimal
credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized
losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered
temporary as of December 31, 2019.
At December 31, 2019, the investment portfolio included seven municipal securities with a total market
value of $4.1 million. These securities are reviewed quarterly for impairment. Each bond carries an
investment grade rating by either Moody’s or Standard & Poor’s. In addition, we periodically conduct our
own independent review on each issuer to ensure the financial stability of the municipal entity. The largest
geographic concentration was in Pennsylvania and New Jersey where five municipal securities had a market
value of $3.3 million. As of December 31, 2019, management found no evidence of other than temporary
impairment (“OTTI”) on any of the municipal securities held in the investment securities portfolio.
At December 31, 2019, the investment portfolio included seven corporate bonds that were in an
unrealized loss position. Management believes the unrealized losses on these securities were also driven by
changes in market interest rates and not a result of credit deterioration. The seven corporate bonds are with
four of the largest U.S. financial institutions. Each financial institution is well capitalized.
Proceeds associated with the sale of securities available for sale in 2019 were $54.7 million. Gross
gains of $1.2 million and gross losses of $67,000 were realized on these sales. The tax provision applicable
to the net gains of $1.1 million for the year ended December 31, 2019 amounted to $280,000.
Proceeds associated with the sale of securities available for sale in 2018 were $6.4 million. Gross losses
of $67,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended
December 31, 2018 amounted to $18,000. Included in the 2018 sales activity was the sale of one CDO
security. Proceeds from the sale of the CDO security totaled $660,000. A gross loss of $66,000 was realized
on this sale. The tax benefit applicable to the net losses for the twelve months ended December 31, 2018
amounted to $17,000. Management had previously stated that it did not intend to sell CDO securities prior
to their maturity or the recovery of their cost bases, nor would it be forced to sell these securities prior to
maturity or recovery of the cost bases. This statement was made over a period of several years where there
was limited trading activity in the pooled trust preferred CDO market resulting in fair market value
estimates well below the book values. During 2018, management received several inquiries regarding the
availability of the remaining CDO security and noted an increased level of trading in this type of security.
As a result of the increased activity and the level of bids received, management elected to sell the remaining
CDO security resulting in a net loss of $66,000 during 2018.
Proceeds associated with the sale of securities available for sale in 2017 were $31.2 million. Gross
gains of $652,000 and gross losses of $798,000 were realized on these sales. The tax benefit applicable to
the net losses for the year ended December 31, 2017 amounted to $52,000. Included in the 2017 sales
activity were the sales of two CDO securities. Proceeds from the sale of the CDO securities totaled
$1.5 million. Gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net
losses for the twelve months ended December 31, 2017 amounted to $287,000. As a result of the increased
activity and the level of bids received, management elected to sell two CDOs resulting in a net loss of
$798,000 during 2017 which was offset by gains on sales of agency mortgage-backed securities,
collateralized mortgage obligations and corporate bonds.
51
The following table presents the maturity distribution and weighted average yield by holding type and
year of maturity of our investment securities portfolio at December 31, 2019. Collateralized mortgage
obligations and agency mortgage-backed securities have expected maturities that differ from contractual
maturities because borrowers have the right to call or prepay and, therefore, these securities are classified
separately with no specific maturity date.
Within
One Year
One to
Five Years
Five to Ten
Years
Past Ten
Years
No Specific
Maturity
December 31, 2019
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Total
Amortized
Cost
Fair
value
Yield
$ -
-
$ 28,167 2.73%
$10,138 3.33%
$ -
-
-
-
-
-
-
-
-
$ -
-
$ 38,305 $ 38,743
2.89%
331,438 2.27%
331,438
329,492 2.27%
-
-
792 4.13%
3,003 3.09%
-
-
2,694 2.07%
8,574 3.21%
-
596 3.29%
51,883 2.42%
-
-
-
-
2,820 4.21%
98,937 2.73%
-
-
-
-
98,937
4,082
66,280
98,953
2.73%
4,064 2.65%
69,499 2.62%
$ 3,795 3.31%
$ 39,435 2.79%
$62,617 2.58%
$ 2,820 4.21%
$ 430,375 2.38%
$539,042 $ 540,751 2.45%
$ -
-
$ 20,073 2.46%
$75,028 2.45%
$ -
-
-
$ -
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$ -
-
$ 95,101 $ 94,913
2.45%
422,987
2.40%
422,987
416,177
2.40%
135,021
2.42%
135,021
133,752 2.42%
$ 20,073 2.46%
$75,028 2.45%
$ -
-
$ 558,008 2.40%
$653,109 $ 644,842 2.41%
(dollars in thousands)
Available for Sale
U.S. Government
Agencies
Collateralized
mortgage
obligations
Agency mortgage-
backed securities
Municipal securities
Corporate bonds
Total AFS
securities
Held to Maturity
U.S. Government
Agencies
Collateralized
mortgage
obligations
Agency mortgage-
backed securities
Total HTM
securities
Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of our financial instruments; however,
there are inherent weaknesses in any estimation technique. Therefore, for substantially all financial
instruments, the fair value estimates herein are not necessarily indicative of the amounts we could have
realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured
as of their respective year-ends and have not been re-evaluated or updated for purposes of these financial
statements subsequent to those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than the amounts reported at each
year-end.
We follow the guidance issued under ASC 820, Fair Value Measurement, which defines fair value,
establishes a framework for measuring fair value under GAAP, and identifies required disclosures on fair
value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs
(Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
52
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or
indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported with little or no market activity).
An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement.
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at
amortized cost) are determined by obtaining quoted market prices on nationally recognized securities
exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted market prices for the specific
securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain
securities, which are not traded in active markets or are subject to transfer restrictions, valuations are
adjusted to reflect illiquidity and/or non-transferability, and such adjustments, are generally based on
available market evidence (Level 3). In the absence of such evidence, management’s best estimate is
used. Management’s best estimate consists of both internal and external support on certain Level 3
investments. Internal cash flow models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from broker/dealers (where available)
were used to support fair values of certain Level 3 investments.
The types of instruments valued based on matrix pricing in active markets include all of our U.S.
government and agency securities, corporate bonds, and municipal obligations. Such instruments are
generally classified within Level 2 of the fair value hierarchy. As required by ASC 820-10, we do not adjust
the matrix pricing for such instruments.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and
may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on
available market evidence. In the absence of such evidence, management’s best estimate is used.
Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by
evidence such as transactions in similar instruments, completed or pending third-party transactions in the
underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other
transactions across the capital structure, offerings in the equity or debt markets, and changes in financial
ratios or cash flows. There was one Level 3 investment security classified as available-for-sale at December
31, 2019. This security is a corporate bond.
The trust preferred securities held during 2018 and 2017 were pools of similar securities that are
grouped into an asset structure commonly referred to as collateralized debt obligations (“CDOs”) which
consist of the debt instruments of various banks, diversified by the number of participants in the security as
well as geographically. The secondary market for these securities had become inactive, and therefore the
securities were classified as a Level 3 securities. The fair value analysis did not reflect or represent the
actual terms or prices at which any party could purchase the securities. The last trust preferred security was
sold in 2018.
53
The following table presents a reconciliation of the securities available for sale measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2019,
2018, and 2017:
Level 3 Investments Only
(dollars in thousands)
Balance, January 1,
Unrealized gains (losses)
Paydowns
Proceeds from sales
Realized losses
Impairment charges on Level 3
Balance, December 31,
$
Year Ended
December 31, 2019
Trust
Preferred
Securities
-
-
-
-
-
-
-
Corporate
Bonds
$ 3,069
(250)
-
-
-
-
$ 2,819
$
Year Ended
December 31, 2018
Trust
Preferred
Securities
489
$
237
-
(660)
(66)
-
-
Corporate
Bonds
$ 3,086
(17)
-
-
-
-
$ 3,069
$
Corporate
Bonds
Year Ended
December 31, 2017
Trust
Preferred
Securities
1,820
$
1,006
-
(1,539)
(798)
-
489
2,971
115
-
-
-
-
3,086
$
$
$
An independent, third party pricing service was used to estimate the current fair market value of the
CDO previously held in the investment securities portfolio. The calculations used to determine fair value
were based on the attributes of the trust preferred security, the financial condition of the issuers of the trust
preferred security, and market based assumptions. The INTEX CDO Deal Model Library was utilized to
obtain information regarding the attributes of the security and its specific collateral as of December 31,
2017. Financial information on the issuers was also obtained from Bloomberg, the FDIC, and S&P Global
Market Intelligence. Both published and unpublished industry sources were utilized in estimating fair value.
Such information includes loan prepayment speed assumptions, discount rates, default rates, and loss
severity percentages.
The fair market valuation for the CDO was determined based on discounted cash flow analyses. The
cash flows were primarily dependent on the estimated speeds at which the trust preferred security was
expected to prepay, the estimated rates at which the trust preferred security were expected to defer
payments, the estimated rates at which the trust preferred security were expected to default, and the severity
of the related losses on the security.
Increases (decreases) in actual or expected issuer defaults tended to decrease (increase) the fair value
of our senior and mezzanine tranches of CDOs. The values of our mezzanine tranches of CDOs were also
affected by expected future interest rates. However, due to the structure of each security, timing of cash
flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes
in future interest rates on the fair value of our holdings were not quantifiably estimable.
The remaining Level 3 investment security classified as available for sale is a corporate bond that is
not actively traded. Impairment would depend on the repayment ability of the underlying issuer, which is
assessed through a detailed quarterly review of the issuer’s financial statements. The issuer is a “well
capitalized” financial institution as defined by federal banking regulations and has demonstrated the ability
to raise additional capital, when necessary, through the public capital markets. The fair value of this
corporate bond is estimated by obtaining a price of a comparable floating rate debt instrument through
Bloomberg.
54
Loan Portfolio
Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate
loans, construction and land development loans, commercial and industrial loans, owner occupied real
estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured
term loans made to small to medium-sized businesses and professionals for working capital, asset
acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with
typical terms of 1 to 5 years. Republic’s commercial loans typically range between $250,000 and
$5.0 million, but customers may borrow significantly larger amounts up to Republic’s legal lending limit
of approximately $38.2 million at December 31, 2019. Management has established an internal monitoring
guideline for loan relationships in the amount of $25.4 million which approximates 10% of capital and
reserves. Individual customers may have several loans often secured by different collateral. We had one
loan relationship in excess of $25.4 million at December 31, 2019 that amounted to $28.0 million. There
were two relationships in excess of $22.9 million at December 31, 2018 that amounted to $52.0 million on
a combined basis.
The majority of loans outstanding are with borrowers in our marketplace, Philadelphia and the
surrounding suburbs, Southern New Jersey, and New York City. In addition, we have loans to customers
whose assets and businesses are concentrated in real estate. Repayment of our loans is in part dependent
upon general economic conditions affecting our market place and specific industries in which our customers
operate. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral
obtained is based on management’s credit evaluation of the customer. Collateral varies but primarily
includes residential, commercial and income-producing properties.
At December 31, 2019, we had loan concentrations exceeding 10% of total loans for credits extended
to lessors of nonresidential real estate in the aggregate amount of $345.2 million, which represented 20%
of gross loans receivable, private households in the aggregate amount of $451.1 million which represented
26% of gross loans receivable, and lessors of residential real estate in the aggregate amount of
$178.9 million, which represented 10% of gross loans receivable. Loan concentrations are considered to
exist when amounts are loaned to multiple numbers of borrowers engaged in similar activities that
management believes would cause them to be similarly impacted by economic or other conditions. At
December 31, 2019, we had no foreign loans outstanding.
55
The following table sets forth gross loans by major categories for the periods indicated:
(dollars in thousands)
2019
2018
At December 31,
2017
2016
2015
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total loans
$ 613,631
121,395
223,906
424,400
101,320
263,444
$ 1,748,096
$ 515,738
121,042
200,423
367,895
91,152
140,364
$ 1,436,614
$ 433,304
104,617
173,343
309,838
76,183
64,764
$ 1,162,049
$ 378,519
61,453
174,744
276,986
63,660
9,682
$ 965,044
$ 349,726
46,547
181,850
246,398
48,126
2,380
$ 875,027
Deferred loan costs (fees)
Total loans, net of deferred loan
fees
99
(16)
229
(72)
(258)
$ 1,748,195
$ 1,436,598
$ 1,162,278
$ 964,972
$ 874,769
Total loans, net of deferred loan costs, increased $311.6 million, or 22%, to $1.7 billion at December
31, 2019, versus $1.4 billion at December 31, 2018. This growth was the result of an increase in loan
demand across all loan categories driven by the successful execution of our relationship banking strategy
which focuses on customer service.
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of the dates indicated, which are due in: (i) one year
or less, (ii) more than one year through five years, and (iii) over five years, is shown in the following table.
Loan balances are also categorized according to their sensitivity to changes in interest rates.
(dollars in thousands)
Fixed rate:
1 year or less
1-5 years
After 5 years
Total fixed rate
Adjustable rate:
1 year or less
1-5 years
After 5 years
Total adjustable rate
Total
Commercial
Real Estate
Construction
and Land
Development
Commercial
and
Industrial
Owner
Occupied
Real Estate
Consumer
and Other
Residential
Mortgage
Total
$
$
$
$
53,008
368,783
171,530
593,321
$
5,561
35,021
24,104
64,686
9,377
10,382
551
20,310
613,631
$
$
34,615
21,963
131
56,709
121,395
$
$
15,991
84,497
53,914
154,402
54,159
10,437
4,908
69,504
223,906
$
38,198
184,678
120,882
343,758
$
952
1,783
17,008
19,743
$
-
-
261,296
261,296
$ 113,710
674,762
648,734
1,437,206
$
4,033
16,897
59,712
80,642
$ 424,400
$
767
3,550
77,260
81,577
$ 101,320
$
-
-
2,148
2,148
$ 263,444
$ 102,951
63,229
144,710
310,890
$ 1,748,096
In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part,
as to principal amount, and at interest rates prevailing at the date of renewal. At December 31, 2019, 82%
of total loans were fixed rate compared to 77% at December 31, 2018.
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.
56
Loans, including impaired loans, are generally classified as non-accrual if they are past due as to
maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-
secured and in the process of collection. Loans that are on a current payment status or past due less than
90 days may also be classified as non-accrual if repayment of principal and/or interest in full is in doubt.
Loans may be returned to accrual status when all principal and interest amounts contractually due are
reasonably assured of repayment within an acceptable period of time, and there is a sustained period of
repayment performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual, any collections of interest and principal are generally applied
as a reduction to principal outstanding. When the future collectability of the recorded loan balance is
expected, interest income may be recognized on a cash basis. For non-accrual loans, which have been
partially charged off, recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been
fully recovered.
The following summary shows information concerning loan delinquency and non-performing assets at
the dates indicated:
(dollars in thousands)
Loans accruing, but past due 90 days or more
Non-accrual loans:
2019
$
At December 31,
2017
2018
2016
2015
-
$
-
$
-
$
302
$
-
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total non-accrual loans
Total non-performing loans(1)
Other real estate owned
Total non-performing assets(1)
Non-performing loans as a percentage of
total loans, net of unearned income(1)
Non-performing assets as a percentage of
total assets
4,159
-
3,087
3,337
1,062
768
12,413
12,413
1,730
$ 14,143
4,631
-
3,661
1,188
861
-
10,341
10,341
6,223
$ 16,564
8,963
-
2,895
2,136
851
-
14,845
14,845
6,966
$ 21,811
13,089
-
3,151
1,546
808
-
18,594
18,896
10,174
$ 29,070
5,913
117
3,156
2,894
542
-
12,622
12,622
11,313
$ 23,935
0.71%
0.72%
1.28%
1.96%
1.44%
0.42%
0.60%
0.94%
1.51%
1.66%
(1) Non-performing loans are comprised of (i) loans that are on non-accrual basis and (ii) accruing loans
that are 90 days or more past due. Non-performing assets are composed of non-performing loans and
other real estate owned.
Problem loans can consist of loans that are performing, but for which potential credit problems of the
borrowers have caused management to have serious doubts as to the ability of such borrowers to continue
to comply with present repayment terms. At December 31, 2019, all identified problem loans included in
the preceding table are internally classified and have been evaluated for a specific reserve allocation in the
allowance for loan losses (see discussion on “Allowance for Loan Losses”).
Non-performing assets decreased by $2.4 million, or 15%, to $14.1 million at December 31, 2019,
compared to $16.6 million at December 31, 2018. An increase in non-performing loans was driven by
additions to non-performing loans of $6.4 million during 2019, offset by payments of $1.8 million, charge-
57
offs of $1.4 million and transfers to other real estate owned of $1.2 million. The reduction in other real
estate owned was the result of the disposition of a single OREO property totaling $4.9 million.
The following summary shows the impact on interest income of non-accrual loans, subsequent to being
placed on non-accrual for the periods indicated:
(dollars in thousands)
2019
2018
2017
2016
2015
For the Year Ended December 31,
Interest income that would have been
recorded had the loans been in
accordance with their original terms
Interest income included in net income
Allowance for Loan Losses
$ 548
$ -
-
$ 498
$ -
$ 590
$ -
$ 1,024
$ -
$ 765
$ -
The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio.
We evaluate the need to establish an allowance against loan losses on a quarterly basis. When an increase
in this allowance is necessary, a provision for loan losses is charged to earnings. The allowance for loan
losses consists of three components. The first component is allocated to individually evaluated loans found
to be impaired and is calculated in accordance with ASC 310 Receivables. The second component is
allocated to all other loans that are not individually identified as impaired pursuant to ASC 310-10 (“non-
impaired loans”). This component is calculated for all non-impaired loans on a collective basis in
accordance with ASC 450 Contingencies. The third component is an unallocated allowance to account for
a level of imprecision in management’s estimation process.
We evaluate loans for impairment and potential charge-off on a quarterly basis. Management regularly
monitors the condition of borrowers and assesses both internal and external factors in determining whether
any loan relationships have deteriorated. Any loan rated as substandard or lower will have an individual
collateral evaluation analysis prepared to determine if a deficiency exists. We first evaluate the primary
repayment source. If the primary repayment source is determined to be insufficient and unlikely to repay
the debt, we then look to the secondary repayment sources. Secondary sources are conservatively reviewed
for liquidation values. Updated appraisals and financial data are obtained to substantiate current values. If
the reviewed sources are deemed to be inadequate to cover the outstanding principal and any costs
associated with the resolution of a troubled loan, an estimate of the deficient amount will be calculated and
a specific allocation of loan loss reserve is recorded.
Factors considered in the calculation of the allowance for non-impaired loans include several qualitative
and quantitative factors such as historical loss experience, trends in delinquency and nonperforming loan
balances, changes in risk composition and underwriting standards, experience and ability of management,
and general economic conditions along with other external factors. Historical loss experience is analyzed
by reviewing charge-offs over a three year period to determine loss rates consistent with the loan categories
depicted in the allowance for loan loss table below.
The factors supporting the allowance for loan losses do not diminish the fact that the entire allowance
for loan losses is available to absorb losses in the loan portfolio and related commitment portfolio,
respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses. The
allowance for loan losses is subject to review by banking regulators on a regular basis. Our primary bank
regulators regularly conduct examinations of the allowance for loan losses and make assessments regarding
the adequacy and the methodology employed in their determination.
58
A detailed analysis of our allowance for loan losses for the years ended December 31, 2019, 2018,
2017, 2016, and 2015 is as follows:
(dollars in thousands)
2019
For the Year Ended December 31,
2018
2017
2016
2015
Balance at beginning of period
Charge-offs:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total charge-offs
Recoveries:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
$
8,615
$
8,599
$
9,155
$
8,703
$
11,536
-
-
1,356
-
126
-
1,482
-
-
217
2
9
-
228
1,254
1,905
9,266
$
1,603
-
151
465
219
-
2,438
50
-
81
20
3
-
154
2,284
2,300
8,615
$
-
-
1,366
157
53
-
1,576
54
-
64
-
2
-
120
1,456
900
8,599
$
-
60
143
1,052
11
10
1,276
6
-
163
-
2
-
171
1,105
1,557
9,155
2,624
260
408
133
-
-
3,425
4
5
49
-
34
-
92
3,333
500
8,703
$
$
Average loans outstanding(1)
$ 1,544,904
$ 1,340,117
$ 1,090,851
$ 936,492
$ 820,820
As a percent of average loans:(1)
Net charge-offs
Provision for loan losses
Allowance for loan losses
Allowance for loan losses to:
Total loans, net of unearned
income
Total non-performing loans
(1) Includes non-accruing loans.
0.08%
0.12%
0.60%
0.17%
0.17%
0.64%
0.13%
0.08%
0.79%
0.12%
0.17%
0.98%
0.41%
0.06%
1.06%
0.53%
74.65%
0.60%
83.31%
0.74%
57.93%
0.95%
48.45%
0.99%
68.95%
The provision for loan losses is charged to operations in an amount necessary to bring the total
allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the
loan portfolio. We recorded a loan loss provision in the amount of $1.9 million in 2019 compared to a
$2.3 million provision in 2018. The decrease in the provision during 2019 was driven a decrease in the
allowance required for loans individually evaluated for impairment. The ratio of non-performing assets to
total assets declined to 0.42% as of December 31, 2019 compared to 0.60% as of December 31, 2018. Net
charge-offs as a percentage of average loans outstanding declined to 0.08% for the year ended December
31, 2019 from 0.17% for the year ended December 31, 2018.
The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 75% at
December 31, 2019 as compared to 83% at December 31, 2018 and 58% at December 31, 2017. The
decrease in the coverage ratio during 2019 was mainly driven by the decrease in the allowance required for
59
loans individually evaluated for impairment. All loans individually evaluated for impairment are adequately
secured with collateral and/or specific reserves. Coverage is considered adequate by management as of
December 31, 2019.
Management makes at least a quarterly determination as to an appropriate provision from earnings to
maintain an allowance for loan losses that it determines is adequate to absorb inherent losses in the loan
portfolio. The Board of Directors periodically reviews the status of all non-accrual and impaired loans and
loans classified by the management team. The Board of Directors also considers specific loans, pools of
similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the
adequacy of the allowance for loan losses. Any additions deemed necessary to the allowance for loan losses
are charged to operating expenses.
We evaluate loans for impairment and potential charge-offs on a quarterly basis. Any loan rated as
substandard or lower will have a collateral evaluation analysis completed in accordance with the guidance
under generally accepted accounting principles (GAAP) on impaired loans to determine if a deficiency
exists. Our credit monitoring process assesses the ultimate collectability of an outstanding loan balance
from all potential sources. When a loan is determined to be uncollectible it is charged-off against the
allowance for loan losses. Unsecured commercial loans and all consumer loans are charged-off immediately
upon reaching the 90-day delinquency mark unless they are well secured and in the process of collection.
The timing on charge-offs of all other loan types is subjective and will be recognized when management
determines that full repayment, either from the cash flow of the borrower, collateral sources, and/or
guarantors, will not be sufficient and that repayment is unlikely. A full or partial charge-off is recognized
equal to the amount of the estimated deficiency calculation.
Serious delinquency is often the first indicator of a potential charge-off. Reductions in appraised
collateral values and deteriorating financial condition of borrowers and guarantors are factors considered
when evaluating potential charge-offs. The likelihood of possible recoveries or improvements in a
borrower’s financial condition is also assessed when considering a charge-off.
Partial charge-offs of non-performing and impaired loans can significantly reduce the coverage ratio
and other credit loss statistics due to the fact that the balance of the allowance for loan losses will be reduced
while still carrying the remainder of a non-performing loan balance in the impaired loan category. The
amount of non-performing loans for which partial charge-offs have been recorded during the year amounted
to $3.6 million at December 31, 2019 compared to $4.4 million at December 31, 2018. This decrease was
primarily driven by full charge-offs during 2019.
Our charge-off policy is reviewed on an annual basis and updated as necessary. During the twelve
months ended December 31, 2019, there have been no changes made to this policy.
We have an existing loan review program, which monitors the loan portfolio on an ongoing basis. A
loan review officer who reviews both the loan portfolio and overall adequacy of the allowance for loan
losses conducts this loan review on a quarterly basis and reports directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any given date is difficult,
particularly in a continually changing economy. In management’s opinion, the allowance for loan losses
was appropriate at December 31, 2019. However, there can be no assurance that, if asset quality deteriorates
in future periods, additions to the allowance for loan losses will not be required.
Management is unable to determine in which loan category future charge-offs and recoveries may
occur. The following schedule sets forth the allocation of the allowance for loan losses among various
categories. The allocation is based on management’s evaluation of historical charge-off experience and
60
adjusted for several qualitative factors. The entire allowance for loan losses is available to absorb loan
losses in any loan category.
The allocation of the allowance for loan losses for the past five years is as follows:
(dollars in thousands)
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Unallocated
Total allowance for loan
losses
2019
2018
At December 31,
2017
2016
2015
Amount
$ 3,043
% of
Loans
35.1%
Amount
$ 2,462
% of
Loans
35.9%
Amount
$ 3,774
% of
Loans
37.3%
Amount
$ 3,254
% of
Loans
39.2%
Amount
$ 2,393
% of
Loans
40.0%
688
931
2,292
590
1,705
17
6.9%
12.8%
24.3%
5.8%
15.1%
-
777
1,754
2,033
577
894
118
8.4%
14.0%
25.6%
6.3%
9.8%
-
725
1,317
1,737
573
392
81
9.0%
14.9%
26.7%
6.5%
5.6%
-
557
2,884
1,382
588
58
432
6.4%
18.1%
28.7%
6.6%
1.0%
-
338
2,932
2,030
295
14
701
5.3%
20.8%
28.1%
5.5%
0.3%
-
$ 9,266
100%
$ 8,615
100%
$ 8,599
100%
$ 9,155
100%
$ 8,703
100%
The allowance for loan losses is an amount that represents management’s estimate of known and
inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for
loan losses is dependent, to a great extent, on the general economy and other conditions that may be beyond
our control, the estimate of the allowance for loan losses could differ materially in the near term.
The allowance consists of specific, general and unallocated components. The specific component
relates to impaired loans. For such loans, an allowance is established when the discounted cash flows,
collateral value, or observable market price of the impaired loan is lower than the carrying value of that
loan. The general component covers the remainder of the portfolio and is based on historical loss
experience adjusted for several qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management’s estimate of probable losses. The unallocated component of
the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio. All identified losses are
immediately charged off and therefore no portion of the allowance for loan losses is restricted to any
individual loan or group of loans, and the entire allowance is available to absorb any and all loan losses.
In estimating the allowance for loan losses, management considers current economic conditions, past
loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews
and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of
underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and
qualitative risk factors. These qualitative risk factors include:
1. Lending policies and procedures, including underwriting standards and collection, charge-off and
recovery practices.
2. National, regional and local economic and business conditions as well as the condition of various
segments.
3. Nature and volume of the portfolio and terms of loans.
4. Experience, ability and depth of lending management and staff.
5. Volume and severity of past due, classified and nonaccrual loans as well as other loan
modifications.
6. Quality of our loan review system, and the degree of oversight by our
Board of Directors.
7. Existence and effect of any concentration of credit and changes in the level of such
concentrations.
8. Effect of external factors, such as competition and legal and regulatory requirements.
61
Each factor is assigned a value to reflect improving, stable or declining conditions based on
management’s best judgment using relevant information available at the time of the evaluation.
Adjustments to the factors are supported through documentation of changes in conditions in a narrative
accompanying the allowance for loan loss calculation.
We also provide specific reserves for impaired loans to the extent the estimated realizable value of the
underlying collateral is less than the loan balance, when the collateral is the only source of repayment. Also,
we estimate and recognize reserve allocations on loans identified as “internally classified accruing loans”
based upon any factor that might impact loss estimates. Those factors include but are not limited to the
impact of economic conditions on the borrower and management’s potential alternative strategies for loan
or collateral disposition. An unallocated allowance is established for losses that have not been identified
through the formulaic and other specific components of the allowance as described above. Management
has identified several factors that impact credit losses that are not considered in either the formula or the
specific allowance segments. These factors consist of macro and micro economic conditions, industry and
geographic loan concentrations, changes in the composition of the loan portfolio, changes in underwriting
processes and trends in problem loan and loss recovery rates. The impact of the above is considered in light
of management’s conclusions as to the overall adequacy of underlying collateral and other factors.
The majority of our loan portfolio represents loans made for commercial purposes, while significant
amounts of residential property may serve as collateral for such loans. We attempt to evaluate larger loans
individually, on the basis of our loan review process, which scrutinizes loans on a selective basis and other
available information. Even if all commercial purpose loans could be reviewed, information on potential
problems might not be available. Our portfolio of loans made for purposes of financing residential
mortgages and consumer loans are evaluated in groups.
A loan is considered impaired, in accordance with ASC 310, when based on current information and
events, it is probable that we will be unable to collect all amounts due from the borrower in accordance
with the contractual terms of the loan. Impaired loans include nonperforming loans, but also include
internally classified accruing loans. As of December 31, 2019, management identified a total of one
troubled debt restructuring in the loan portfolio in the amount of $6.2 million. Five troubled debt
restructurings in the amount of $7.8 million were identified as of December 31, 2018.
The following table presents our impaired loans at December 31, 2019, 2018, and 2017:
(dollars in thousands)
Impaired loans without a valuation allowance
Impaired loans with a valuation allowance
Total impaired loans
Valuation allowance related to impaired loans
Total nonaccrual loans
Total loans past-due ninety days or more and
still accruing
2019
December 31,
2018
2017
$
$
$
$
$
$
12,862
6,020
18,882
556
12,413
-
$
$
$
10,602
7,428
18,030
1,473
10,341
-
15,270
9,446
24,716
2,790
14,845
-
For the years ended December 31, 2019, 2018, and 2017, the average recorded investment in impaired
loans was approximately $18.1 million, $22.8 million, and $25.4 million, respectively. Republic earned
$386,000, $451,000, and $607,000 of interest income on impaired loans (internally classified accruing
loans) in 2019, 2018, and 2017, respectively. There were no commitments to extend credit to any borrowers
with impaired loans as of the end of the periods presented herein.
62
Total impaired loans increased by $852,000, or 5%, during the year ended December 31, 2019. This
increase was primarily loans determined to be impaired during 2019. The valuation allowance related to
impaired loans decreased to $556,000 at December 31, 2019 compared to $1.5 million at December 31,
2018. At December 31, 2019 and 2018, internally classified accruing loans totaled approximately
$2.3 million and $3.7 million, respectively.
The following table presents our 30 to 89 days past due loans at December 31, 2019, 2018, and 2017:
(dollars in thousands)
30 to 59 days past due
60 to 89 days past due
Total loans 30 to 89 days past due
2019
December 31,
2018
2017
$
$
112
1,823
1,935
$
$
1,135
1,574
2,709
$
$
1,113
-
1,113
Management has engaged in active discussions with all delinquent relationships to address
delinquencies and is confident that acceptable resolutions will be achieved in the near term.
Deposits
Total deposits at December 31, 2019 were $3.0 billion, an increase of $606.3 million or 25% from total
deposits of $2.4 billion at December 31, 2018. Total deposits by account type at December 31, 2019, 2018,
and 2017 are as follows:
(dollars in thousands)
Demand deposits, non-interest bearing
Demand deposits, interest bearing
Money market & savings deposits
Time deposits
Total deposits
2019
$
661,431
1,352,360
761,793
223,579
$ 2,999,163
At December 31,
2018
$
519,056
1,042,561
676,993
154,257
$ 2,392,867
2017
$
438,500
807,736
700,322
116,737
$ 2,063,295
In general, Republic pays higher interest rates on time deposits compared to other deposit categories.
Republic’s various deposit liabilities may fluctuate from period-to-period, reflecting customer behavior and
strategies to optimize net interest income. The increase in total deposits to $3.0 billion at December 31,
2019 from $2.4 billion at December 31, 2018 was primarily the result of a $452.2 million increase in
demand deposits, which reflects the success of our strategy based on a high level of customer service and
satisfaction, which drives the gathering of low-cost core deposits. This strategy has also allowed us to
eliminate our dependence on the more volatile source of funding in brokered and internet based certificates
of deposit.
The average balances and weighted average rates of Republic’s deposits for the last three years are as
follows:
(dollars in thousands)
Demand deposits:
Non-interest bearing
Interest bearing
Money market & savings deposits
Time deposits
Total deposits
2019
Average
Balance
For the Years Ended December 31,
2018
2017
Rate
Average
Balance
Rate
Average
Balance
Rate
$ 555,385
1,184,530 1.32%
705,445 0.98%
190,567 2.02%
$ 2,635,927 1.00%
$ 488,995
918,508 0.87%
697,135 0.70%
128,892 1.23%
$ 2,233,530 0.65%
$ 372,171
687,586 0.44%
629,464 0.50%
110,952 1.12%
$ 1,800,173 0.41%
63
The remaining maturity of certificates of deposit for $100,000 or more as of December 31, 2019 is as
follows:
(dollars in thousands)
Maturity:
3 months or less
3 to 6 months
6 to 12 months
Over 12 months
Total
$ 24,262
68,026
51,984
41,623
$ 185,895
The following is a summary of the remaining maturity of time deposits, which includes certificates of
deposits of $100,000 or more, as of December 31, 2019:
(dollars in thousands)
Maturity:
2020
2021
2022
2023
2024
Thereafter
Total
$ 170,562
50,079
1,130
1,071
737
-
$ 223,579
Off-Balance Sheet Arrangements
We are a party to financial instruments with off-balance-sheet risk in the normal course of business to
meet the financing needs of our customers. These financial instruments include commitments to extend
credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a
financial instrument to perform in accordance with the terms of the contract. The maximum exposure to
credit loss under commitments to extend credit and standby letters of credit is represented by the contractual
amount of these instruments. We use the same underwriting standards and policies in making credit
commitments as we do for on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are commitments to extend
credit of approximately $329.9 million and $286.4 million and standby letters of credit of approximately
$17.2 million and $13.9 million at December 31, 2019 and 2018, respectively. Commitments often expire
without being drawn upon. The $329.9 million of commitments to extend credit at December 31, 2019,
substantially all were variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and many require the payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of
collateral obtained upon extension of credit is based on management’s credit evaluation of the customer.
Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and
accounts receivable.
64
Standby letters of credit are conditional commitments issued that guarantee the performance of a
customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is
essentially the same as that involved in extending loan commitments. The amount of collateral obtained is
based on management’s credit evaluation of the customer. Collateral held varies but may include real estate,
marketable securities, pledged deposits, equipment and accounts receivable.
Contractual Obligations and Other Commitments
The following table sets forth contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2019:
(dollars in thousands)
Minimum annual rentals or
non-cancellable operating
leases
Branch construction
commitments
Remaining contractual
maturities of time deposits
Subordinated debt
Director and Officer
retirement plan obligations
Loan commitments
Standby letters of credit
Total
Less than
One Year
One to
Three
Years
Total
Three to
Five Years
After Five
Years
$ 99,355
$
7,221
$
11,385
$ 10,028
$ 70,721
5,300
5,300
-
-
-
225,175
11,375
172,158
34
51,209
-
1,808
-
-
11,341
1,111
329,874
17,211
$ 689,401
672
144,236
16,279
$ 345,900
103
48,068
932
$ 111,697
104
34,690
-
$ 46,630
232
102,880
-
$ 185,174
As of December 31, 2019, we had entered into non-cancelable lease agreements for our main office
and operations center, seventeen current and pending retail branch facilities, five loan offices, one storage
facility, and thirteen equipment leases expiring on various dates through December 31, 2058. The leases
are accounted for as operating leases. The minimum rental payments required under these leases are
$99.4 million through the year 2058.
We have retirement plan agreements with certain directors and officers. At December 31, 2019, the
accrued benefits under the plan were approximately $1.1 million, with a minimum age of 65 established to
qualify for the payments.
Interest Rate Risk Management
We attempt to manage our assets and liabilities in a manner that optimizes net interest income in a range
of interest rate environments. Management uses an “interest sensitivity gap” (“GAP”) analysis and
simulation models to monitor behavior of its interest sensitive assets and liabilities. A GAP analysis is the
difference between interest-sensitive assets and interest-sensitive liabilities. Adjustments to the mix of
assets and liabilities are made periodically in an effort to provide steady growth in net interest income.
65
Management presently believes that the effect of any future reduction in interest rates, reflected in lower
yielding assets, could be detrimental since we may not have the immediate ability to commensurately
decrease rates on interest bearing liabilities, primarily time deposits, other borrowings and certain
transaction accounts. An increase in interest rates could have a negative effect due to a possible lag in the
re-pricing of core deposits not taken into account in the static GAP analysis. Interest rate risk management
involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched.
We attempt to optimize net interest income while managing period-to-period fluctuations therein. We
typically define interest-sensitive assets and interest-sensitive liabilities as those that re-price within one
year or less. Generally, we limit long-term fixed rate assets and liabilities in our efforts to manage interest
rate risk.
A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities re-pricing in
the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-
sensitive assets re-pricing in the same time periods. A negative GAP ratio suggests that a financial
institution may be better positioned to take advantage of declining interest rates rather than increasing
interest rates, and a positive GAP ratio suggests the converse. Static GAP analysis describes interest rate
sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in
net interest income as changes in interest rates do not impact all categories of assets and liabilities equally
or simultaneously. Interest rate sensitivity analysis also requires assumptions about re-pricing certain
categories of assets and liabilities. For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at their contractual maturity, estimated likely call date, or earliest re-pricing opportunity. Mortgage-
backed securities and amortizing loans are scheduled based on their anticipated cash flow, including
prepayments based on historical data and current market trends. Savings, money market and interest-
bearing demand accounts do not have a stated maturity or re-pricing term and can be withdrawn or re-priced
at any time. Management estimates the re-pricing characteristics of these accounts based upon decay rates
and run off projections obtained in a deposit study performed by an independent third party, along with
management’s estimates of when rates would have to be increased to retain balances in response to
competition. Such estimates are necessarily arbitrary and wholly judgmental. As a result of the run off
projections, these deposits are not considered to re-price simultaneously and, accordingly, a portion of the
deposits are moved into time brackets exceeding one year. However, management may choose not to
re-price liabilities proportionally to changes in market interest rates, for competitive or other reasons.
Shortcomings, inherent in a simplified and static GAP analysis, may result in an institution with a
negative GAP having interest rate behavior associated with an asset-sensitive balance sheet. For example,
although certain assets and liabilities may have similar maturities or periods to re-pricing, they may react
in different degrees to changes in market interest rates. Furthermore, re-pricing characteristics of certain
assets and liabilities may vary substantially within a given time period. In the event of a change in interest
rates, prepayments and other cash flows could also deviate significantly from those assumed in calculating
GAP in the manner presented in the table below.
66
The following tables present a summary of our GAP analysis at December 31, 2019. Amounts shown
in the table include both estimated maturities and instruments scheduled to re-price, including prime based
loans. For purposes of these tables, we have used assumptions based on industry data and historical
experience to calculate the expected maturity of loans because, statistically, certain categories of loans are
prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally, certain
prepayment assumptions were made with regard to investment securities based upon the expected
prepayment of the underlying collateral of the mortgage-backed securities.
Interest Rate Sensitivity Gap
As of December 31, 2019
(dollars in thousands)
0 – 90 Days
91-180 Days
181-365 Days
1-2
Years
2-3
Years
3-5
Years
More than 5
Years
Financial
Statement
Total
Fair Value
Interest sensitive
assets:
Investment securities
and other interest-
bearing balances
Loans receivable
Total
Cumulative totals
Interest sensitive
liabilities:
Demand interest
bearing(1)
Savings accounts(1)
Money market
accounts(1)
Time deposits
Subordinated debt
Total
$
$
$
301,719
401,153
702,872
$
96,337
73,232
$ 169,569
$
$
121,419
148,363
269,782
$ 163,180
248,266
$ 411,446
$ 116,077
208,621
$ 324,698
$ 167,639
358,606
$ 526,245
$ 357,490
300,688
$ 658,178
$ 1,323,861 $ 1,322,292
1,731,876
$ 3,062,790 $ 3,054,168
1,738,929
702,872
$ 872,441
$ 1,142,223
$ 1,553,669
$ 1,878,367
$ 2,404,612
$ 3,062,790
$ 1,352,360
216,793
545,000
32,414
11,265
$ 2,157,832
$
$
-
-
-
72,487
-
72,487
$
$
-
-
-
65,661
-
65,661
$
$
-
-
-
50,079
-
50,079
$
$
-
-
-
1,130
-
1,130
$
$
-
-
-
1,808
-
1,808
-
-
-
-
-
-
$ 1,352,360 $ 1,352,360
216,793
216,793
545,000
223,579
11,265
545,000
224,095
8,540
$ 2,348,997 $ 2,346,788
Cumulative totals
$ 2,157,832
$ 2,230,319
$ 2,295,980
$ 2,346,059
$ 2,347,189
$ 2,348,997
2,348,997
Interest rate sensitivity
GAP
Cumulative GAP
Interest sensitive
assets/Interest
sensitive liabilities
Cumulative GAP/
$ (1,454,960 )
$ (1,454,960 )
$
97,082
$ (1,357,878 )
$
204,121
$ (1,153,757 )
$ 361,367
$ (792,390 )
$ 323,568
$ (468,822 )
$ 524,437
55,615
$
658,178
713,793
32.57 %
39.12 %
49.75 %
66.22 %
80.03 %
102.37 %
130.39
%
Total earning assets
(47.50 )%
(44.33 )%
(37.67 )%
(25.87 )%
(15.31 )%
1.82 %
23.31 %
(1) Demand, savings and money market accounts are scheduled to reprice based upon decay rate and run
off percentage estimates obtained through a deposit study performed by an independent third party,
along with management’s estimates of when rates would have to be increased to retain balances in
response to competition. Such estimates are necessarily arbitrary and wholly judgmental.
67
In addition to the GAP analysis, we utilize income simulation modeling in measuring our interest rate
risk and managing our interest rate sensitivity. Income simulation considers not only the impact of changing
market interest rates on forecasted net interest income, but also other factors such as yield curve
relationships, the volume and mix of assets and liabilities and general market conditions.
Net Portfolio Value and Net Interest Income Analysis
The income simulation models management used to measure interest rate risk and manage interest rate
sensitivity generates estimates of the change in net portfolio value (NPV) and net interest income (NII) over
a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities,
and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in
that scenario divided by the market value of assets in the same scenario. The following table sets forth our
NPV as of December 31, 2019 and reflects the changes to NPV as a result of immediate and sustained
changes in interest rates as indicated (dollars in thousands):
Change in
Interest Rates
in Basis Points
(Rate Shock)
Net Portfolio Value
Amount
$
Change
%
Change
+400
+300
+200
+100
Static
-100
$ 498,587
533,717
555,758
560,188
527,268
464,134
$ (28,681)
6,449
28,490
32,920
-
(63,134)
(5.44)%
1.22%
5.40%
6.24%
0.00%
(11.97)%
NPV as a % of Portfolio
Value of Assets
NPV
Ratio
Change
(in Basis Points)
17.04%
17.60%
17.72%
17.29%
15.84%
13.65%
120
176
188
145
-
(219)
In addition to modeling changes in NPV, we also analyze potential changes to NII for a forecasted
twelve-month period under rising and falling interest rate scenarios. The following table shows the NII
model as of December 31, 2019 (dollars in thousands):
Change in Interest Rates in
Basis Points(1)
Net Interest
Income
$
Change
%
Change
+400
+300
+200
+100
Static
-100
$
81,477
83,011
84,132
84,782
83,602
80,201
(2,125)
(591)
530
1,180
-
(3,401)
(2.54)%
(0.71)%
0.63%
1.41%
0.00%
(4.06)%
(1) The net interest income results were calculated assuming a rate ramp, achieving the rate change
over a 12-month period, not an immediate and sustained rate shock.
As is the case with the GAP table, certain shortcomings are inherent in the methodology used in the
above interest rate risk measurements. Modeling changes in NPV and NII require the making of certain
assumptions, which may or may not reflect the manner in which actual yields and costs respond to changes
in market interest rates. In this regard, the models presented assume that the composition of our interest
sensitive assets and liabilities existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or re-pricing of specific assets and liabilities. Accordingly,
68
although the NPV measurements and net interest income models provide an indication of interest rate risk
exposure at a particular point in time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on net interest income and will differ from actual
results.
Management believes that the assumptions utilized in evaluating our estimated net interest income are
reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial
instruments as well as the estimated effect of changes in interest rates on estimated net interest income
could vary substantially if different assumptions are used or actual experience differs from the experience
on which the assumptions were based. Periodically, we may and do make significant changes to underlying
assumptions, which are wholly judgmental. Prepayments on residential mortgage loans and mortgage-
backed securities have increased over historical levels in recent years due to the lower interest rate
environment, and may result in reductions in margins.
Capital Resources
We have sponsored two outstanding issues of corporation-obligated mandatorily redeemable capital
securities of a subsidiary trust holding solely junior subordinated debentures of the Corporation more
commonly known as trust preferred securities. The subsidiary trusts are not consolidated for financial
reporting purposes. The purpose of the issuances of these securities was to increase capital. The trust
preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1
capital.
On December 27, 2006, Republic Capital Trust II (Trust II) issued $6.0 million of trust preferred
securities to investors and $0.2 million of common securities to us. Trust II purchased $6.2 million of our
floating rate junior subordinated debentures due 2037, and we used the proceeds to call the securities of
Republic Capital Trust I (Trust I). The debentures purchased by Trust II have a variable interest rate,
adjustable quarterly, at 1.73% over the 3-month LIBOR. We may redeem the debentures on any interest
payment date without a prepayment penalty.
On June 28, 2007, Republic Capital Trust III (Trust III), issued $5.0 million of trust preferred securities
to one investor and $0.2 million common securities to us. Trust III purchased $5.2 million of our floating
rate junior subordinated debentures due 2037, which have a variable interest rate, adjustable quarterly, at
1.55% over the 3 month LIBOR. We have the ability to redeem the debentures on any interest payment
date without a prepayment penalty.
On June 10, 2008, Republic First Bancorp Capital Trust IV (Trust IV) issued $10.8 million of
convertible trust preferred securities as part of our strategic capital plan. The securities were purchased by
investors, including Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp, and as of
December 5, 2016, our chairman. The investor group also included a family trust of Harry D. Madonna,
chairman, president and chief executive officer of Republic Bank, and Theodore J. Flocco, Jr., who has
been elected by the shareholders to our Board of Directors and serves as the Chairman of our Audit
Committee. Trust IV also issued $0.3 million of common securities to us. Trust IV purchased $11.1
million of our fixed rate junior subordinated convertible debentures due 2038, which paid interest at an
annual rate of 8.0% and were considered redeemable on any interest payment date (a) at any time on or
after June 13, 2013 if the closing price of our common stock for 20 trading days in the period of 30
consecutive trading days ending on the trading day prior to the mailing of the notice of redemption exceeds
120% of the then-applicable conversion price, or (b) on or after June 30, 2018, without a prepayment
penalty. The trust preferred securities of Trust IV were convertible into approximately 1.7 million shares
of our common stock, which is subject to customary adjustments. One independent director converted
$240,000 of trust preferred securities into 37,000 shares of common stock in 2017. On January 31, 2018,
69
we notified the existing holders of its intent to fully redeem these securities in accordance with the Optional
Redemption terms included in the Indenture Agreement. The remaining securities were redeemed on March
31, 2018 at a price equal to the outstanding principal amount. After redemption of the remaining securities,
Trust IV was dissolved.
Deferred issuance costs included in subordinated debt were $76,000 and $82,000 at December 31, 2019
and December 31, 2018, respectively. Amortization of deferred issuance costs were $6,000, $6,000, and
$29,000 for the years ended December 31, 2019, 2018, and 2017, respectively. Deferred issuance costs in
the amount of $467,000 were recorded against additional paid in capital during the first quarter of 2018 as
a result of the conversion of trust preferred securities into common stock in accordance with ASC 470-20.
Shareholders’ equity as of December 31, 2019 totaled approximately $249.2 million compared to
approximately $245.2 million as of December 31, 2018. The book value per share of our common stock
increased to $4.23 as of December 31, 2019, based upon 58,842,778 shares outstanding, from $4.17 as of
December 31, 2018, based upon 58,789,228 shares outstanding at December 31, 2018. Outstanding shares
are adjusted for treasury stock and deferred compensation plan shares.
Regulatory Capital Requirements
We are required to comply with certain “risk-based” capital adequacy guidelines issued by the FRB
and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by
a bank. The guidelines also assign weights to the “credit-equivalent” amounts of certain off-balance sheet
items, such as letters of credit and interest rate and currency swap contracts.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1,
Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet
credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk.
Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital
ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital
requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid
limitations on capital distributions (including dividend payments and certain discretionary bonus payments
to executive officers), a banking organization must hold a capital conservation buffer comprised of common
equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of
total risk-weighted assets. The capital conservation buffer, which is composed of common equity Tier 1
capital, began on January 1, 2016 at the 0.625% level and was phased in over a three year period (increasing
by that amount on each January 1, until it reached 2.5% on January 1, 2019). Implementation of the
deductions and other adjustments to common equity Tier 1 capital began on January 1, 2015 and were
phased-in over a three-year period.
The following table shows the required capital ratios with the conservation buffer over the phase-in
period.
Basel III Community Banks
Minimum Capital Ratio Requirements
2016
2017
2018
2019
Common equity tier 1 capital (CET1)
Tier 1 capital (to risk weighted assets)
Total capital (to risk-weighted assets)
5.125%
6.625%
8.625%
5.750%
7.250%
9.250%
6.375%
7.875%
9.875%
7.000%
8.500%
10.500%
70
The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of its assets
and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt corrective action”
or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators also consider
other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or
earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities;
effectiveness of bank policies; and management’s overall ability to monitor and control risks.
Management believes that the Company and Republic met, as of December 31, 2019 and 2018, all
capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis as if all such
requirements were currently in effect. In the current year, the FDIC categorized Republic as well capitalized
under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance
Act. There are no calculations or events since that notification which management believes would have
changed Republic’s category.
The Company and Republic’s ability to maintain the required levels of capital is substantially dependent
upon the success of their capital and business plans, the impact of future economic events on Republic’s
loan customers and Republic’s ability to manage its interest rate risk, growth and other operating expenses.
71
The following table presents the Company’s and Republic’s capital regulatory ratios calculated based
on Basel III guidelines at December 31, 2019 and 2018:
(dollars in thousands)
Actual
Minimum Capital
Adequacy
Minimum Capital
Adequacy with
Capital Buffer
Amount
Ratio
Amount
Ratio
Amount
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
At December 31, 2019:
Total risk based capital
Republic
Company
Tier one risk based
capital
Republic
Company
CET 1 risk based capital
$ 252,307 11.94 %
261,759 12.37 %
$ 169,016
169,251
8.00 %
8.00 %
$ 221,833 10.50 %
222,141 10.50 %
$ 211,270 10.00 %
- %
-
243,041 11.50 %
252,493 11.93 %
126,762
126,938
6.00 %
6.00 %
179,579
179,829
8.50 %
8.50 %
169,016
-
8.00 %
- %
Republic
Company
243,041 11.50 %
241,493 11.41 %
95,071
95,203
4.50 %
4.50 %
147,889
148,094
7.00 %
7.00 %
137,325
-
6.50 %
- %
Tier one leveraged capital
Republic
Company
245,158
249,168
7.54 %
7.83 %
128,935
129,058
4.00 %
4.00 %
128,935
129,058
4.00 %
4.00 %
161,169
-
5.00 %
- %
At December 31, 2018:
Total risk based capital
Republic
Company
Tier one risk based
capital
Republic
Company
CET 1 risk based capital
Republic
Company
Tier one leveraged capital
Republic
Company
Liquidity
$ 231,610 13.26 %
262,964 15.03 %
$ 139,722
140,009
8.00 %
8.00 %
$ 172,489 9.875 %
172,824 9.875 %
$ 174,652 10.00 %
- %
-
222,995 12.77 %
254,349 14.53 %
104,791
105,007
6.00 %
6.00 %
137,539 7.875 %
137,821 7.875 %
139,722
-
8.00 %
- %
222,995 12.77 %
243,349 13.90 %
78,594
78,755
4.50 %
4.50 %
111,341 6.375 %
111,570 6.375 %
113,524
-
6.50 %
- %
222,995
254,349
8.21 %
9.35 %
108,685
108,800
4.00 %
4.00 %
108,685
108,800
4.00 %
4.00 %
135,857
-
5.00 %
- %
A financial institution must maintain and manage liquidity to ensure it has the ability to meet its
financial obligations. These obligations include the payment of deposits on demand or at their contractual
maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become
due; the ability to fund new and existing loans and other funding commitments; and the ability to take
advantage of new business opportunities. Liquidity needs can be met by either reducing assets or increasing
liabilities. Our most liquid assets consist of cash, amounts due from banks and federal funds sold.
Regulatory authorities require us to maintain certain liquidity ratios in order for funds to be available
to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, we
have formed an asset/liability committee (ALCO), comprised of certain members of Republic’s Board of
Directors and senior management to monitor such ratios. The ALCO committee is responsible for managing
the liquidity position and interest sensitivity. That committee’s primary objective is to maximize net interest
income while configuring Republic’s interest-sensitive assets and liabilities to manage interest rate risk and
provide adequate liquidity for projected needs. The ALCO committee meets on a quarterly basis or more
frequently if deemed necessary.
72
Our target and actual liquidity levels are determined by comparisons of the estimated repayment and
marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our
most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $168.3 million at
December 31, 2019, compared to $72.5 million at December 31, 2018. Loan maturities and repayments are
another source of asset liquidity. At December 31, 2019, Republic estimated that more than $100 million
of loans would mature or repay in the six-month period ending June 30, 2020. Additionally, a significant
portion of our investment securities are available to satisfy liquidity requirements through sales on the open
market or by pledging as collateral to access credit facilities. At December 31, 2019, we had outstanding
commitments (including unused lines of credit and letters of credit) of $347.1 million. Certificates of
deposit scheduled to mature in one year totaled $170.6 million at December 31, 2019. 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 $860.5 million at December 31, 2019. As of December 31, 2019, we had no outstanding
overnight borrowings. At December 31, 2019, FHLB had issued a letter on Republic’s behalf, totaling
$150.0 million against our available credit. As of December 31, 2018, we had outstanding overnight
borrowings of $91.4 million at an interest rate of 2.65%. At December 31, 2018, FHLB had issued a letter
on Republic’s behalf, totaling $100.0 million against our available credit. We also 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 December 31, 2019 and December 31, 2018.
Variable Interest Entities
We follow the guidance under ASC 810, Consolidation, with regard to variable interest entities. ASC
810 clarifies the application of consolidation principles for certain legal entities in which voting rights are
not effective in identifying the investor with the controlling financial interest. An entity is subject to
consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support, are unable to direct the entity’s activities, or
are not exposed to the entity’s losses or entitled to its residual returns ("variable interest entities"). Variable
interest entities within the scope of ASC 810 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs
a majority of the entity's expected losses, receives a majority of its expected returns, or both.
We do not consolidate our subsidiary trusts. ASC 810 precludes consideration of the call option
embedded in the preferred securities when determining if we have the right to a majority of the trusts’
expected residual returns. The non-consolidation results in the investment in the common securities of the
trusts to be included in other assets with a corresponding increase in outstanding debt of $341,000. In
addition, the income received on our investment in the common securities of the trusts is included in other
income.
73
Effects of Inflation
The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a
financial institution differs greatly from most commercial and industrial companies that have significant
investments in fixed assets or inventories. Management believes that the most significant impact of inflation
on financial results is our need and ability to react to changes in interest rates. As discussed previously,
management attempts to maintain an essentially balanced position between rate sensitive assets and
liabilities over a one-year time horizon in order to protect net interest income from being affected by wide
interest rate fluctuations.
Item 7A: Quantitative and Qualitative Disclosure about Market Risk
See “Management Discussion and Analysis of Results of Operations and Financial Condition – Interest
Rate Risk Management”.
Item 8: Financial Statements and Supplementary Data
The Consolidated Financial Statements of the Company begin on page 77.
74
Tel: 215-564-1900
Fax: 215-564-3940
www.bdo.com
Ten Penn Center
1801 Market Street, Suite 1700
Philadelphia, PA 19103
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Republic First Bancorp, Inc.
(the “Company”) and subsidiaries as of December 31, 2019 and 2018, the related consolidated
statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows
for each of the three years in the period ended December 31, 2019, and the related notes
(collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of
the Company and subsidiaries at December 31, 2019 and 2018, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2019, in
conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) and our report dated March 16, 2020 expressed an unqualified opinion
thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement, whether due to error or
fraud.
Our audits included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements.
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the
international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
75
Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Philadelphia, Pennsylvania
March 16, 2020
We have served as the Company's auditor since 2013.
76
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2019 and 2018
(Dollars in thousands, except per share data)
December 31,
2019
December 31,
2018
ASSETS
Cash and due from banks
Interest bearing deposits with banks
Cash and cash equivalents
$
$
41,928
126,391
168,319
Investment securities available for sale, at fair value
Investment securities held to maturity, at amortized cost (fair value of $653,109 and
539,042
$747,323, respectively)
Restricted stock, at cost
Mortgage loans held for sale, at fair value
Other loans held for sale
Loans receivable (net of allowance for credit losses of $9,266 and $8,615, respectively)
Premises and equipment, net
Other real estate owned, net
Accrued interest receivable
Operating lease right-of-use asset
Goodwill
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Demand – non-interest bearing
Demand – interest bearing
Money market and savings
Time deposits
Total Deposits
Short-term borrowings
Accrued interest payable
Other liabilities
Operating lease liability
Subordinated debt
Total Liabilities
$
$
644,842
2,746
10,345
3,004
1,738,929
116,956
1,730
9,934
64,805
5,011
35,627
3,341,290
661,431
1,352,360
761,793
223,579
2,999,163
-
1,630
11,208
68,856
11,265
3,092,122
$
$
35,685
36,788
72,473
321,014
761,563
5,754
20,887
5,404
1,427,983
87,661
6,223
9,025
-
5,011
30,299
2,753,297
519,056
1,042,561
676,993
154,257
2,392,867
91,422
558
12,002
-
11,259
2,508,108
Shareholders’ Equity
Preferred stock, par value $0.01 per share: 10,000,000 shares authorized; no shares
issued and outstanding
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued
59,371,623 as of December 31, 2019 and 59,318,073 as of December 31, 2018; shares
outstanding 58,842,778 as of December 31, 2019 and 58,789,228 as of December 31,
2018
Additional paid in capital
Accumulated deficit
Treasury stock at cost (503,408 shares as of December 31, 2019 and December 31, 2018)
Stock held by deferred compensation plan (25,437 shares as of December 31, 2019 and
December 31, 2018)
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
$
(See notes to consolidated financial statements)
-
-
594
272,039
(12,216)
(3,725)
(183)
(7,341)
249,168
3,341,290
$
593
269,147
(8,716)
(3,725)
(183)
(11,927)
245,189
2,753,297
77
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands, except per share data)
Interest income
Interest and fees on taxable loans
Interest and fees on tax-exempt loans
Interest and dividends on taxable investment securities
Interest and dividends on tax-exempt investment securities
Interest on federal funds sold and other interest-earning assets
Total interest income
Interest expense
Demand- interest bearing
Money market and savings
Time deposits
Other borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Loan and servicing fees
Mortgage banking income
Gain on sales of SBA loans
Service fees on deposit accounts
Gain (loss) on sale of investment securities
Other non-interest income
Total non-interest income
Non-interest expenses
Salaries and employee benefits
Occupancy
Depreciation and amortization
Legal
Other real estate owned
Appraisal and other loan expenses
Advertising
Data processing
Insurance
Professional fees
Debit card processing
Regulatory assessments and costs
Taxes, other
Other operating expenses
Total non-interest expense
Years Ended December 31,
2018
2017
2019
$ 72,808
1,689
27,459
337
2,571
104,864
$ 62,502
1,543
26,677
505
847
92,074
$ 48,993
1,101
19,643
535
577
70,849
15,621
6,796
3,850
790
27,057
77,807
1,905
75,902
1,568
10,125
3,187
7,541
1,103
214
23,738
53,888
11,565
6,482
1,335
2,109
1,829
1,930
5,220
1,070
2,589
2,467
1,228
837
11,941
104,490
(4,850)
(1,350)
(3,500)
(0.06)
(0.06)
7,946
4,898
1,588
1,738
16,170
75,904
2,300
73,604
1,401
10,233
3,105
5,476
(67)
174
20,322
44,082
8,046
5,447
985
1,588
1,840
1,211
3,855
996
2,048
1,868
1,675
796
9,284
83,721
10,205
1,578
8,627
0.15
0.15
$
$
$
3,020
3,160
1,238
1,366
8,784
62,065
900
61,165
1,614
11,170
3,378
3,904
(146)
177
20,097
37,959
7,156
4,618
984
4,092
1,878
1,279
3,134
982
1,893
1,264
1,367
817
7,853
75,276
5,986
(2,919)
8,905
0.16
0.15
$
$
$
Income (loss) before benefit for income taxes
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) per share
Basic
Diluted
$
$
$
(See notes to consolidated financial statements)
78
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands)
Net income (loss)
$
(3,500)
$
8,627
$
8,905
2019
Years Ended December 31,
2018
2017
Other comprehensive, net of tax
Unrealized gain/(loss) on securities (pre-tax
$5,120, $5,364, and $(646), respectively)
Reclassification adjustment for securities losses
(gains) (pre-tax $(1,103), $67 and $146,
respectively)
Net unrealized gains/(losses) on securities
Net unrealized holding losses on securities
transferred from available-for-sale to held-to-
maturity (pre-tax $-, $(9,362), $-, respectively)
Amortization of net unrealized holding
losses during the period (pre-tax $1,658, $137, and
$163, respectively)
Total other comprehensive income (loss)
4,284
(823)
3,461
3,927
49
3,976
-
(6,855)
1,125
4,586
101
(2,778)
(413)
94
(319)
-
104
(215)
Total comprehensive income
$
1,086
$
5,849
$
8,690
(See notes to consolidated financial statements)
79
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands)
Cash flows from operating activities
Net (loss) income
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
2019
2018
2017
$
(3,500)
$
8,627
$
8,905
Provision for loan losses
Write down of other real estate owned
Depreciation and amortization
Deferred income taxes
Stock based compensation
Loss (gain) on sale of investment securities
Amortization of premiums on investment securities
Accretion of discounts on retained SBA loans
Fair value adjustments on SBA servicing assets
Proceeds from sales of SBA loans originated for sale
SBA loans originated for sale
Gains on sales of SBA loans originated for sale
Proceeds from sales of mortgage loans originated for sale
Mortgage loans originated for sale
Fair value adjustment for mortgage loans originated for sale
Gains on mortgage loans originated for sale
Amortization of intangible assets
Amortization of debt issuance costs
Non-cash expense related to leases
Increase in accrued interest receivable and other assets
Net increase in accrued interest payable and other liabilities
Net cash provided by (used in) operating activities
Cash flows from investing activities
Purchase of investment securities available for sale
Purchase of investment securities held to maturity
Proceeds from the sale of securities available for sale
Proceeds from the paydown, maturity, or call of securities available for sale
Proceeds from the paydown, maturity, or call of securities held to maturity
Net redemption (purchase) of restricted stock
Net increase in loans
Net proceeds from sale of other real estate owned
Premises and equipment expenditures
Net cash used in investing activities
Cash flows from financing activities
Net proceeds from exercise of stock options
Net increase in demand, money market and savings deposits
Net increase in time deposits
Increase (repayment) in short-term borrowings
Net cash provided by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures
Interest paid
Income taxes paid
Non-cash transfers from loans to other real estate owned
Conversion of subordinated debt to common stock
Transfer of available-for-sale securities to held-to-maturity securities
1,905
286
6,482
1,744
2,632
(1,103)
3,730
(1,411)
1,364
46,951
(41,364)
(3,187)
335,991
(317,881)
454
(8,117)
-
6
1,128
(8,464)
1,687
19,333
(338,500)
-
54,742
69,012
116,486
3,008
(312,665)
5,072
(35,777)
(438,622)
261
536,974
69,322
(91,422)
515,135
95,846
72,473
$
168,319
$
$
$
$
$
$
25,985
-
1,225
-
-
$
$
$
$
$
2,300
563
5,447
1,527
2,116
67
2,878
(1,332)
1,458
42,726
(42,700)
(3,105)
322,264
(291,870)
513
(8,378)
-
6
-
(5,047)
1,570
39,630
(149,209)
(123,265)
6,439
48,796
63,565
(3,836)
(275,587)
495
(18,161)
(450,763)
670
292,053
37,519
91,422
421,664
10,531
61,942
72,473
15,905
-
315
10,094
230,094
900
3,000
4,618
(5,056)
1,842
146
2,469
(1,088)
1,187
42,269
(37,062)
(3,378)
311,187
(321,222)
(846)
(8,128)
61
29
-
(2,330)
1,513
(984)
(165,065)
(89,350)
31,197
48,547
37,315
(552)
(197,965)
499
(22,525)
(357,899)
646
380,052
5,573
-
386,271
27,388
34,554
61,942
8,935
75
291
229
-
$
$
$
$
$
$
(See notes to consolidated financial statements)
80
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2019, 2018, and 2017
(Dollars in thousands)
Common
Additional
Paid in
Capital
Accumulated
Deficit
Stock
Stock Held by
Deferred
Compensation
Plan
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Treasury
Stock
Balance January 1, 2017
$
573 $ 253,570
$ (27,888)
$ (3,725)
$
(183)
$
(7,294)
$ 215,053
Net income
Other comprehensive loss, net of tax
Stock based compensation
Conversion of subordinated debt to
common stock (36,922 shares)
Options exercised (197,975 shares)
8,905
1,842
229
644
2
(215)
8,905
(215)
1,842
229
646
Balance December 31, 2017
575
256,285
(18,983)
(3,725)
(183)
(7,509)
226,460
Reclassification due to the
adoption of ASU 2018-02
Net income
Other comprehensive loss, net of tax
Stock based compensation
Conversion of subordinated debt to
common stock (1,624,614 shares)
Options exercised (174,850 shares)
1,640
8,627
2,116
10,078
668
16
2
(1,640)
(2,778)
-
8,627
(2,778)
2,116
10,094
670
Balance December 31, 2018
593
269,147
(8,716)
(3,725)
(183)
(11,927)
245,189
Net loss
Other comprehensive income, net of tax
Stock based compensation
Options exercised (53,550 shares)
(3,500)
2,632
260
1
4,586
(3,500)
4,586
2,632
261
Balance December 31, 2019
$
594 $
272,039
$ (12,216)
$ (3,725)
$
(183)
$
(7,341)
$ 249,168
(See notes to consolidated financial statements)
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Republic First Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of Operations
Republic First Bancorp, Inc. (the “Company”) is a one-bank holding company organized and
incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised of one wholly-owned
subsidiary, Republic First Bank, which does business under the name of Republic Bank (“Republic”).
Republic is a Pennsylvania state chartered bank that offers a variety of banking services to individuals and
businesses throughout the Greater Philadelphia, Southern New Jersey, and New York City markets through
its offices and store locations in Philadelphia, Montgomery, Delaware, Bucks, Camden, Burlington,
Atlantic, Gloucester, and New York Counties. On July 28, 2016, Republic acquired all of the issued and
outstanding limited liability company interests of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as
a result, Oak Mortgage became a wholly owned subsidiary of Republic on that date. Oak Mortgage is
headquartered in Marlton, NJ and is licensed to do business in Pennsylvania, Delaware, New Jersey, and
Florida. On January 1, 2018, Oak Mortgage was merged into Republic and restructured as a division of
Republic. The Oak Mortgage name is still utilized for marketing and branding purposes. The Company also
has two unconsolidated subsidiaries, which are statutory trusts established by the Company in connection
with its sponsorship of two separate issuances of trust preferred securities.
The Company and Republic encounter vigorous competition for market share in the geographic areas
they serve from bank holding companies, national, regional and other community banks, thrift institutions,
credit unions and other non-bank financial organizations, such as mutual fund companies, insurance
companies and brokerage companies.
The Company and Republic are subject to federal and state regulations governing virtually all aspects
of their activities, including but not limited to, lines of business, liquidity, investments, the payment of
dividends and others. Such regulations and the cost of adherence to such regulations can have a significant
impact on earnings and financial condition.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary, Republic. The Company follows accounting standards set by the Financial Accounting
Standards Board (“FASB”). The FASB sets accounting principles generally accepted in the United States
of America (“US GAAP”) that are followed to ensure consistent reporting of financial condition, results of
operations, and cash flows. All material inter-company transactions have been eliminated. Events occurring
subsequent to the date of the balance sheet have been evaluated for potential recognition or disclosure in
the consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend primarily on the earnings of Republic. The earnings of Republic
are heavily dependent upon the level of net interest income, which is the difference between interest earned
on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the Company’s results of operations are subject
to risks and uncertainties surrounding Republic’s exposure to changes in the interest rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans and mortgage-backed securities
vary significantly and may cause significant fluctuations in interest margins.
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The preparation of financial statements in conformity with U.S. GAAP requires management to make
significant estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Significant estimates are made by management in determining the allowance for credit losses, carrying
values of other real estate owned, assessment of other than temporary impairment (“OTTI”) of investment
securities, fair value of financial instruments, and the realization of deferred income tax assets.
Consideration is given to a variety of factors in establishing these estimates.
Significant Group Concentrations of Credit Risk
Most of the Company’s activities are with customers located within the Greater Philadelphia
region. Note 3 – Investment Securities discusses the types of investment securities that the Company
invests in. Note 4 – Loans Receivable discusses the types of lending that the Company engages in, as well
as loan concentrations. The Company does not have a significant concentration of credit risk with any one
customer.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all cash and due from banks,
interest-bearing deposits with an original maturity of ninety days or less and federal funds sold, maturing
in ninety days or less, to be cash and cash equivalents.
Restrictions on Cash and Due from Banks
Republic is required to maintain certain average reserve balances as established by the Federal Reserve
Board. The amounts of those balances for the reserve computation periods that include December 31, 2019
and 2018 were approximately $57.2 million and $51.4 million, respectively. These requirements were
satisfied through the restriction of vault cash and a balance held by the Federal Reserve Bank of
Philadelphia.
Investment Securities
Held to Maturity – Certain debt securities that management has the positive intent and ability to hold
until maturity are classified as held to maturity and are carried at their remaining unpaid principal balances,
net of unamortized premiums or unaccreted discounts. Premiums are amortized and discounts are accreted
using the interest method over the estimated remaining term of the underlying security.
Available for Sale – Debt securities that will be held for indefinite periods of time, including securities
that may be sold in response to changes in market interest or prepayment rates, needs for liquidity, and
changes in the availability of and in the yield of alternative investments, are classified as available for
sale. These assets are carried at fair value. Unrealized gains and losses are excluded from operations and
are reported net of tax as a separate component of other comprehensive income until realized. Realized
gains and losses on the sale of investment securities are reported in the consolidated statements of income
and determined using the adjusted cost of the specific security sold on the trade date.
Investment securities are evaluated on at least a quarterly basis, and more frequently when market
conditions warrant such an evaluation, to determine whether a decline in their value is other-than-
temporary. To determine whether a loss in value is other-than-temporary, management utilizes criteria such
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as the reasons underlying the decline, the magnitude and duration of the decline, the intent to hold the
security and the likelihood of the Company not being required to sell the security prior to an anticipated
recovery in the fair value. The term “other-than-temporary” is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is not necessarily favorable,
or that there is a lack of evidence to support a realizable value equal to or greater than the carrying value of
the investment. Once a decline in value is determined to be other-than-temporary, the portion of the decline
related to credit impairment is charged to earnings.
Restricted Stock
Restricted stock, which represents a required investment in the capital stock of correspondent banks
related to available credit facilities, was carried at cost as of December 31, 2019 and 2018. As of those
dates, restricted stock consisted of investments in the capital stock of the FHLB of Pittsburgh and Atlantic
Community Bankers Bank (“ACBB”). The required investment in the capital stock of the FHLB is
calculated based on outstanding loan balances and open credit facilities with the FHLB. Excess investments
are returned to Republic on a quarterly basis.
At December 31, 2019 and December 31, 2018, the investment in FHLB stock totaled $2.6 million and
$5.6 million, respectively. The increase was due primarily to a higher membership stock requirement by
FHLB at December 31, 2018 which resulted in a higher required investment as of that date. At both
December 31, 2019 and December 31, 2018, ACBB stock totaled $143,000.
Mortgage Banking Activities and Mortgage Loans Held for Sale
Mortgage loans held for sale are originated and held until sold to permanent investors. On July 28,
2016, management elected to adopt the fair value option in accordance with FASB Accounting Standards
Codification (“ASC”) 820, Fair Value Measurements and Disclosures, and record loans held for sale at fair
value.
Mortgage loans held for sale originated on or subsequent to the election of the fair value option, are
recorded on the balance sheet at fair value. The fair value is determined on a recurring basis by utilizing
quoted prices from dealers in such securities. Changes in fair value are reflected in mortgage banking
income in the statements of income. Direct loan origination costs are recognized when incurred and are
included in non-interest expense in the statements of income.
Interest Rate Lock Commitments
Mortgage loan commitments known as interest rate locks that relate to the origination of a mortgage
that will be held for sale upon funding are considered derivative instruments under the derivatives and
hedging accounting guidance FASB ASC 815, Derivatives and Hedging. Loan commitments that are
classified as derivatives are recognized at fair value on the balance sheet as other assets and other liabilities
with changes in their fair values recorded as mortgage banking income and included in non-interest income
in the statements of income. Outstanding IRLCs are subject to interest rate risk and related price risk during
the period from the date of issuance through the date of loan funding, cancellation or expiration. Loan
commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the
loan. Republic is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose
not to close on the loans within the terms of the IRLCs. Republic uses best efforts commitments to
substantially eliminate these risks. The valuation of the IRLCs issued by Republic includes the value of the
servicing released premium. Republic sells loans where the servicing is released, and the servicing released
premium is included in the market price. See Note 23 Derivatives and Risk Management Activities for
further detail of IRLCs.
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Best Efforts Forward Loan Sale Commitments
Best efforts forward loan sale commitments are commitments to sell individual mortgage loans at a
fixed price to an investor at a future date. Best efforts forward loan sale commitments are accounted for as
derivatives and carried at fair value, determined as the amount that would be necessary to settle the
derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are recorded
as other assets and other liabilities with changes in fair value during the period recorded as mortgage
banking income and included in non-interest income in the statements of income.
Mandatory Forward Loan Sales Commitments
Mandatory forward loan sales commitments are based on fair values of the underlying mortgage loans
and the probability of such commitments being exercised. Mandatory forward loan sale commitments are
accounted for as derivatives and carried at fair value, determined as the amount that would be necessary to
settle the derivative financial instrument at the balance sheet date. Gross derivative assets and liabilities are
recorded as other assets and other liabilities with changes in fair value during the period recorded as
mortgage banking income and included in non-interest income in the statements of income.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill
is recognized as an asset and is to be reviewed for impairment annually and between annual tests when
events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists
when the carrying amount of goodwill exceeds its implied fair value.
The Company has one reportable segment: Community Banking. The community banking segment
primarily encompasses the commercial loan and deposit activities of the Bank, as well as, residential
mortgage and consumer loan products in the area surrounding its stores. Oak Mortgage was acquired by
the Bank on July 28, 2016 and organized as a wholly owned subsidiary of the Bank. Oak Mortgage was
maintained as a separate legal entity through December 31, 2017 in order to preserve certain secondary
market contracts and regulatory licensing requirements.
On January 1, 2018, Oak Mortgage operations were restructured as a division of Republic and all assets,
liabilities, contracts, employees and activity were merged into the Republic. As a result of this restructuring,
the Company re-evaluated its reporting unit structure and determined that as of July 31, 2018 there were no
longer two reporting units but rather a sole reporting unit in Republic Bank. As of July 31, 2019, the
Company elected to perform a Step One Test for goodwill impairment. The fair value of the reporting unit
was higher than the book value and, therefore, no Step Two analysis was required. Goodwill totaled
$5.0 million as of December 31, 2019 and 2018, respectively.
Loans Receivable
The loans receivable portfolio is segmented into commercial and industrial loans, commercial real
estate loans, owner occupied real estate loans, construction and land development loans, consumer and
other loans, and residential mortgages. Consumer loans consist of home equity loans and other consumer
loans.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability
and cash flow to determine the borrower’s ability to repay their obligation as agreed. Commercial and
industrial loans are made primarily based on the identified cash flow of the borrower and secondarily on
the underlying collateral supporting the loan facility. Accordingly, the repayment of a commercial and
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industrial loan depends primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of repayment.
Commercial real estate and owner occupied real estate loans are subject to the underwriting standards
and processes similar to commercial and industrial loans, in addition to those underwriting standards for
real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured
by real estate. Repayment of these loans is generally dependent upon the successful operation of the
property securing the loan or the principal business conducted on the property securing the loan. In addition,
the underwriting considers the amount of the principal advanced relative to the property value. Commercial
real estate and owner occupied real estate loans may be adversely affected by conditions in the real estate
markets or the economy in general. Management monitors and evaluates commercial real estate and owner
occupied real estate loans based on cash flow estimates, collateral and risk-rating criteria. The Company
also utilizes third-party experts to provide environmental and market valuations. Substantial effort is
required to underwrite, monitor and evaluate commercial real estate and owner occupied real estate loans.
Construction and land development loans are underwritten based upon a financial analysis of the
developers and property owners and construction cost estimates, in addition to independent appraisal
valuations. These loans will rely on the value associated with the project upon completion. These cost and
valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the
disbursement of substantial funds over a short period of time with repayment substantially dependent upon
the success of the completed project. Sources of repayment of these loans would be permanent financing
upon completion or sales of developed property. These loans are closely monitored by onsite inspections
and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being
sensitive to general economic conditions, availability of long-term financing, interest rate sensitivity, and
governmental regulation of real property.
Consumer and other loans consist of home equity loans and lines of credit and other loans to individuals
originated through the Company’s retail network, which are typically secured by personal property or
unsecured. Home equity loans and lines of credit often carry additional risk as a result of typically being in
a second position or lower in the event collateral is liquidated. Consumer loans have may also have greater
credit risk because of the difference in the underlying collateral, if any. The application of various federal
and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
Residential mortgage loans are secured by one to four family dwelling units. This group consists of
first mortgages and are originated primarily at loan to value ratios of 80% or less.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or
payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan
losses. Interest on loans is calculated based upon the principal amounts outstanding. The Company defers
and amortizes certain origination and commitment fees, and certain direct loan origination costs over the
contractual life of the related loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of discounts related to loans
purchased based upon the effective interest method. If a loan prepays in full before the contractual maturity
date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest
income.
Loans are generally classified as non-accrual if they are past due as to maturity or payment of principal
or interest for a period of more than 90 days, unless such loans are well-secured and in the process of
collection. Loans that are on a current payment status or past due less than 90 days may also be classified
as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual
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status when all principal and interest amounts contractually due are reasonably assured of repayment within
an acceptable period of time, and there is a sustained period of repayment performance of interest and
principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual
loans, cash received is applied to reduce the principal outstanding.
Allowance for Credit Losses
The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded
lending commitments. The allowance for loan losses represents management’s estimate of losses inherent
in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for
unfunded lending commitments would represent management’s estimate of losses inherent in its unfunded
loan commitments and would be recorded in other liabilities on the consolidated balance sheet, if necessary.
The allowance for credit losses is established through a provision for loan losses charged to operations.
Loans are charged against the allowance when management believes that the collectability of the loan
principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
The allowance for credit losses is an amount that represents management’s estimate of known and
inherent losses related to the loan portfolio and unfunded loan commitments. Because the allowance for
credit losses is dependent, to a great extent, on the general economy and other conditions that may be
beyond Republic’s control, the estimate of the allowance for credit losses could differ materially in the near
term.
The allowance consists of specific, general and unallocated components. The specific component
relates to loans that are categorized as impaired. For such loans that are classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for several qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management’s estimate of probable
losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and general losses in the
portfolio. All identified losses are immediately charged off and therefore no portion of the allowance for
loan losses is restricted to any individual loan or group of loans, and the entire allowance is available to
absorb any and all loan losses.
In estimating the allowance for credit losses, management considers current economic conditions, past
loss experience, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews
and regulatory examinations, borrowers’ perceived financial and managerial strengths, the adequacy of
underlying collateral, if collateral dependent, or present value of future cash flows, and other relevant and
qualitative risk factors. These qualitative risk factors include:
1) Lending policies and procedures, including underwriting standards and collection, charge-off and
recovery practices.
2) National, regional and local economic and business conditions as well as the condition of various
segments.
3) Nature and volume of the portfolio and terms of loans.
4) Experience, ability and depth of lending management and staff.
5) Volume and severity of past due, classified and nonaccrual loans as well as other loan
modifications.
6) Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board
of Directors.
7) Existence and effect of any concentration of credit and changes in the level of such concentrations.
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8) Effect of external factors, such as competition and legal and regulatory requirements.
Each factor is assigned a value to reflect improving, stable or declining conditions based on
management’s best judgment using relevant information available at the time of the evaluation.
Adjustments to the factors are supported through documentation of changes in conditions in a narrative
accompanying the allowance for loan loss calculation.
A loan is considered impaired when, based on current information and events, it is probable that the
Company will be unable to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in determining
impairment, include payment status and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the delay, and the borrower’s prior payment
record. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the
present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s
obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
An allowance for loan losses is established for an impaired loan if its carrying value exceeds its
estimated fair value. The estimated fair values of substantially all of the Company’s impaired loans are
measured based on the estimated fair value of the loan’s collateral.
For commercial, consumer, and residential loans secured by real estate, estimated fair values are
determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a
decision is made regarding whether an updated certified appraisal of the real estate is necessary. This
decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value
ratio based on the original appraisal and the condition of the property. Appraised values are discounted to
arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The
discounts also include estimated costs to sell the property.
For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable,
inventory and equipment, estimated fair values are determined based on the borrower’s financial statements,
inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value
from these sources are generally discounted based on the age of the financial information or the quality of
the assets.
Loans whose terms are modified are classified as troubled debt restructurings if the Company grants
such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.
Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest
rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored
to accrual status if principal and interest payments, under the modified terms, are current for six consecutive
months after modification. Loans classified as troubled debt restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating
categories. The borrower’s overall financial condition, repayment sources, guarantors and value of
collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise,
such as delinquent loan payments, for commercial and consumer loans. Credit quality risk ratings include
regulatory classifications of special mention, substandard, doubtful and loss. Loans classified special
mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential
weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a
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well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that
are inadequately protected by the current sound net worth and paying capacity of the obligor or of the
collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified
substandard with the added characteristic that collection or liquidation in full, on the basis of current
conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are
charged to the allowance for loan losses. Loans not classified as special mention, substandard, doubtful, or
loss are rated pass.
In addition, federal and state regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses and may require the Company to recognize
additions to the allowance based on their judgments about information available to them at the time of their
examination, which may not be currently available to management. Based on management’s comprehensive
analysis of the loan portfolio, management believes the current level of the allowance for loan losses is
adequate.
Transfers of Financial Assets
The Company accounts for the transfers and servicing financial assets in accordance with ASC 860,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. ASC 860,
revises the standards for accounting for the securitizations and other transfers of financial assets and
collateral.
Transfers of financial assets are accounted for as sales, when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not
maintain effective control over the transferred assets through an agreement to repurchase them before their
maturity.
A servicing asset related to SBA loans is initially recorded when these loans are sold and the servicing
rights are retained. The servicing asset is recorded on the balance sheet and included in other assets. An
updated fair value of the servicing asset is obtained from an independent third party on a quarterly basis
and any necessary adjustments are included in loan and servicing fees on the statement of income. The
valuation begins with the projection of future cash flows for each asset based on their unique characteristics,
our market-based assumptions for prepayment speeds and estimated losses and recoveries. The present
value of the future cash flows are then calculated utilizing our market-based discount ratio assumptions. In
all cases, the Company models expected payments for every loan for each quarterly period in order to create
the most detailed cash flow stream possible.
The Company uses various assumptions and estimates in determining the impairment of the SBA
servicing asset. These assumptions include prepayment speeds and discount rates commensurate with the
risks involved and comparable to assumptions used by participants to value and bid serving rights available
for sale in the market.
For more information on the SBA servicing asset including the sensitivity of the current fair value of
the SBA loan servicing rights to adverse changes in key assumptions, see Note 15 – Fair Value
Measurements and Fair Values of Financial Instruments.
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Other Loans Held for Sale
Other loans held for sale consist of the guaranteed portion of SBA loans that the Company intends to
sell after origination and are reflected at the lower of aggregate cost or fair value. When the sale of the loan
occurs, the premium received is combined with the estimated present value of future cash flows on the
related servicing asset and recorded as a Gain on the Sale of SBA loans which is categorized as non-interest
income. Subsequent fees collected for servicing of the sold portion of a loan are combined with fair value
adjustments to the SBA servicing asset and recorded as a net amount in Loan and Servicing Fees, which is
also categorized as non-interest income.
Guarantees
The Company accounts for guarantees in accordance with ASC 815 Guarantor’s Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others. ASC
815 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of
the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company has financial and performance letters of credit. Financial letters of credit require
the Company to make payment if the customer’s financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company to make payments if the customer fails to
perform certain non-financial contractual obligations. The maximum potential undiscounted amount of
future payments of these letters of credit as of December 31, 2019 is $17.2 million and they expire as
follows: $16.3 million in 2020 and $932,000 in 2021. Amounts due under these letters of credit would be
reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the
loans, which varies depending on the customer. There was no liability for guarantees under standby letters
of credit as of December 31, 2019 and December 31, 2018.
Premises and Equipment
Premises and equipment (including land) are stated at cost less accumulated depreciation and
amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the
asset using the straight-line method for financial reporting purposes, and accelerated methods for income
tax purposes. The estimated useful lives are 40 years for buildings and 3 to 13 years for furniture, fixtures
and equipment. Leasehold improvements are amortized over the shorter of their estimated useful lives or
terms of their respective leases, which range from 1 to 30 years. Repairs and maintenance are charged to
current operations as incurred, and renewals and major improvements are capitalized.
Operating Leases
The Company enters into lease agreements to obtain the right to use assets for its business operations,
substantially all of which are real estate. Lease liabilities and ROU assets are recognized when the Company
enters into operating leases and represent its obligations and rights to use these assets over the period of the
leases and may be re-measured for certain modifications, resolution of certain contingencies involving
variable consideration, or its exercise of options (renewal, extension, or termination) under the lease.
Operating lease liabilities include fixed and in-substance fixed payments for the contractual duration
of the lease, adjusted for renewals or terminations which were considered probable of exercise when
measured. During 2019, one lease term for real property was extended, for which the extension was
considered probable at the time of measurement. The lease payments are discounted using a rate determined
when the lease is recognized. As the Company typically does not know the discount rate implicit in the
lease, the Company estimates a discount rate that it believes approximates a collateralized borrowing rate
for the estimated duration of the lease. The discount rate is updated when re-measurement events occur.
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The related operating lease ROU assets may differ from operating lease liabilities due to initial direct costs,
deferred or prepaid lease payments and lease incentives.
The amortization of operating lease ROU assets and the accretion of operating lease liabilities are
reported together as fixed lease expense and are included in net occupancy expense within noninterest
expense. The fixed lease expense is recognized on a straight-line basis over the life of the lease.
The Company has elected to exclude leases with original terms of less than one year from the operating
lease ROU assets and lease liabilities. The Company has no agreements that qualified as a short-term lease.
The related short-term lease expense would be included in net occupancy expense.
Other Real Estate Owned
Other real estate owned consists of assets acquired through, or in lieu of, loan foreclosure. They are
held for sale and are initially recorded at fair value less cost to sell at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of carrying amount or fair value, less the cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in net expenses from other real estate
owned.
Advertising Costs
It is the Company’s policy to expense advertising costs in the period in which they are incurred.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and
deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying
the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The
Company determines deferred income taxes using the liability (or balance sheet) method. Under this
method, the net deferred tax asset or liability is based on the tax effects of the differences between the book
and tax bases of assets and liabilities and enacted changes in tax rates and laws are recognized in the period
in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available,
it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical
merits, that the tax position will be realized or sustained upon examination. The term more likely than not
means a likelihood of more than 50 percent. The terms examined and upon examination also include
resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-
than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit
that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that
has full knowledge of all relevant information. The determination of whether or not a tax position has met
the more-likely-than-not recognition threshold considers the facts, circumstances, and information available
at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes, if any, as a component of the provision
for income taxes.
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Stock Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the
Company granted options, restricted stock or stock appreciation rights to the Company’s employees,
directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was
amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the
2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares
needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to
1.5 million shares, were available for such grants. As of December 31, 2019, the only grants under the 2005
Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the
market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan
vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November
14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity
Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units,
or stock appreciation rights to the Company’s employees, directors, independent contractors, and
consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual
adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors
may determine, are available for such grants. At December 31, 2019, the maximum number of common
shares issuable under the 2014 Plan was 6.4 million shares. Compensation cost for all option awards is
calculated and recognized over the vesting period of the option awards. If the service conditions are not
met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s
accounting policy election is to recognize forfeitures as they occur.
Earnings Per Share
Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic
EPS is computed by dividing net income by the weighted average number of common shares outstanding
for each period presented. Diluted EPS is calculated by dividing net income by the weighted average
number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of
dilutive stock options granted through the Company’s stock option plans for the twelve months ended
December 31, 2019 and 2018. CSEs previously consisted of dilutive stock options granted through the
Company’s stock option plans and convertible securities related to the trust preferred securities issued in
2008 for the twelve months ended December 31, 2017. The convertible securities related to trust preferred
securities issued in 2008 fully converted to common stock in 2018. There was no interest expense in 2018
related to the trust preferred securities issuance. In the diluted EPS computation, the after tax interest
expense on the trust preferred securities issuance would normally be added back to the net income for the
twelve months ended December 31, 2017. However, the effect of CSEs (convertible securities related to
the trust preferred securities only) and the related add back of after tax interest expense was considered
anti-dilutive and therefore was not included in the EPS calculations. The effects of stock options are
excluded from the computation of diluted earnings per share in periods in which the effect would be anti-
dilutive.
92
The calculation of EPS for the years ended December 31, 2019, 2018, and 2017 is as follows:
(dollars in thousands, except per share amounts)
2019
2018
2017
Net income (loss) - basic and diluted
$
(3,500)
$
8,627
$
8,905
Weighted average shares outstanding
58,833
58,358
56,933
Net income (loss) per share – basic
$
(0.06)
$
0.15
$
0.16
Weighted average shares outstanding (including dilutive CSEs)
58,833
59,407
58,250
Net income (loss) per share – diluted
$
(0.06)
$
0.15
$
0.15
The following is a summary of securities that could potentially dilute basic earnings per common share
in future periods that were not included in the computation of diluted earnings per common share because
to do so would have been anti-dilutive for the periods presented.
(in thousands)
2019
2018
2017
Anti-dilutive securities
Share based compensation awards
4,979
2,813
Convertible securities
-
-
Total anti-dilutive securities
4,979
2,813
1,689
1,625
3,314
Comprehensive Income
The Company presents as a component of comprehensive income the amounts from transactions and
other events, which currently are excluded from the consolidated statements of income and are recorded
directly to shareholders’ equity. These amounts consist of unrealized holding gains (losses) on available for
sale securities and amortization of unrealized holding losses on available-for-sale securities transferred to
held-to-maturity.
Trust Preferred Securities
The Company has sponsored two outstanding issues of corporation-obligated mandatorily redeemable
capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation,
more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the
Company for financial reporting purposes. The purpose of the issuances of these securities was to increase
capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to
25% of total Tier 1 capital. See Note 8 “Borrowings” for further information regarding the issuances.
Variable Interest Entities
The Company follows the guidance under ASC 810, Consolidation, with regard to variable interest
entities. ASC 810 clarifies the application of consolidation principles for certain legal entities in which
voting rights are not effective in identifying the investor with the controlling financial interest. An entity is
subject to consolidation under ASC 810 if the investors do not have sufficient equity at risk for the entity
93
to finance its activities without additional subordinated financial support, are unable to direct the entity’s
activities, or are not exposed to the entity’s losses or entitled to its residual returns ("variable interest
entities"). Variable interest entities within the scope of ASC 810 will be required to be consolidated by their
primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its expected returns, or both.
The Company does not consolidate its subsidiary trusts. ASC 810 precludes consideration of the call
option embedded in the preferred securities when determining if the Company has the right to a majority
of the trusts’ expected residual returns. The non-consolidation results in the investment in the common
securities of the trusts to be included in other assets with a corresponding increase in outstanding debt of
$341,000. In addition, the income received on the Company’s investment in the common securities of the
trusts is included in other income.
Treasury Stock
Common stock purchased for treasury is recorded at cost.
Recent Accounting Pronouncements
ASU 2016-02
In February 2016, the FASB issued ASU No. 2016-02, Leases. From the Company’s perspective, the
new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a
lease liability on the balance sheet for all leases with terms longer than 12 months. Leases are classified as
either finance or operating, with classification affecting the pattern of expense recognition in the income
statement for lessees. From the landlord perspective, the new standard requires a lessor to classify leases as
either sales-type, finance or operating. A lease is treated as a sale if it transfers all of the risks and rewards,
as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the
transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or
control, an operating lease results. The new standard was effective for fiscal years beginning after December
15, 2018, including interim periods within those fiscal years.
In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which
provided lessees the option to apply the new leasing standard to all open leases as of the adoption date.
Prior to this ASU issuance, a modified retrospective transition approach was required.
In December 2018, the FASB issued ASU 2018-20 "Leases (Topic 842): Narrow-Scope Improvements
for Lessors," which provided lessors a policy election to not evaluate whether certain sales taxes and other
similar taxes are lessor costs or lessee costs. Additionally, the update requires certain lessors to exclude
from variable payments lessor costs paid by lessees directly to third parties.
The Company adopted this ASU on January 1, 2019. The Company recognized an ROU asset of
$34.2 million and total operating lease liability obligations of $35.1 million at January 1, 2019. Capital
ratios remained in compliance with the regulatory definition of well capitalized. There were no material
changes to the recognition of operating lease expense in the consolidated statements of income. The
Company adopted certain practical expedients available under the new guidance, which did not require it
to (1) reassess whether any expired or existing contracts contain leases, (2) reassess the lease classification
for any expired or existing leases, (3) reassess initial direct costs for any existing leases, and (4) evaluate
whether certain sales taxes and other similar taxes are lessor costs. The Company elected the use-of-
hindsight practical expedient. Additionally, the Company elected to apply the new lease guidance at the
adoption date, rather than at the beginning of the earliest period presented.
94
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all
expected credit losses for financial assets held at the reporting date based on historical experience, current
conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will
now use forward-looking information to better inform their credit loss estimates. Many of the loss
estimation techniques applied today will still be permitted, although the inputs to those techniques will
change to reflect the full amount of expected credit losses. Additionally, the ASU amends the accounting
for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.
The Company is currently evaluating the impact of this ASU, continuing its implementation efforts and
reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Calculations of
expected losses under the new guidance were run parallel to the calculations under existing guidance to
assess and evaluate the potential impact to the Company’s financial statements. The new model includes
different assumptions used in calculating credit losses, such as estimating losses over the estimated life of
a financial asset and considers expected future changes in macroeconomic conditions. The adoption of this
ASU may result in an increase to the Company's allowance for loan losses which will depend upon the
nature and characteristics of the Company's loan portfolio at the adoption date, as well as the
macroeconomic conditions and forecasts at that date. The Company expects an initial increase to the
allowance for credit losses, in the range of 0% to 11% of the December 31, 2019 allowance for credit losses,
or an incremental increase to the allowance for credit losses in the range of $0 up to approximately
$1.0 million. When finalized, this one-time increase as a result of the adoption of ASU 2016-13 will be
recorded, net of tax, as an adjustment to retained earnings effective January 1, 2020. This estimate is subject
to change based on continuing refinement and validation of the model and methodologies. For the
Company, this update became effective January 1, 2020.
ASU 2017-08
In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt
Securities, which amends the amortization period for certain purchased callable debt securities held at a
premium, shortening such period to the earliest call date. The ASU was effective for public business entities
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all
other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods
within fiscal years beginning after December 15, 2020. Earlier application is permitted for all entities,
including adoption in an interim period. If an entity early adopts the ASU in an interim period, any
adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The
adoption of ASU 2017-08 did not have a material impact on the consolidated financial statements.
ASU 2018-07
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). The
ASU simplifies the accounting for share based payments granted to non-employees for goods and services.
The ASU applies to all share based payment transactions in which a grantor acquires goods or services from
non-employees to be used or consumed in a grantor’s own operations by issuing share based payment
awards. With the amended guidance from ASU 2018-07, non-employees share based payments are
measured with an estimate of the fair value of the equity of the business is obligated to issue at the grant
date (the date that the business and the stock award recipient agree to the terms of the award). Compensation
would be recognized in the same period and in the same manner as if the entity had paid cash for goods and
services instead of stock. The ASU is effective for fiscal years, and interim periods within those fiscal years,
95
beginning after December 15, 2018, with early adoption permitted. The Company adopted this ASU on
January 1, 2019. The adoption of this ASU did not have a significant impact on the Company’s financial
condition, results of operations, and consolidated financial statements.
3. Investment Securities
A summary of the amortized cost and market value of securities available for sale and securities held
to maturity at December 31, 2019 and 2018 is as follows:
(dollars in thousands)
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Municipal securities
Corporate bonds
Total securities available for sale
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Total securities held to maturity
(dollars in thousands)
Collateralized mortgage obligations
Agency mortgage-backed securities
Municipal securities
Corporate bonds
Asset-backed securities
Total securities available for sale
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Total securities held to maturity
Amortized
Cost
$
$
$
$
38,743
329,492
98,953
4,064
69,499
540,751
94,913
416,177
133,752
644,842
Amortized
Cost
$
$
$
$
197,812
39,105
20,807
62,583
6,433
326,740
107,390
500,690
153,483
761,563
At December 31, 2019
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
$
1
2,368
82
18
79
2,548
482
7,603
1,782
9,867
$
$
$
$
(439)
(422)
(98)
-
(3,298)
(4,257)
(294)
(793)
(513)
(1,600)
At December 31, 2018
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$
$
$
$
567
5
64
87
-
723
-
570
-
570
$
$
$
$
(2,120)
(611)
(232)
(3,396)
(90)
(6,449)
(3,772)
(5,793)
(5,245)
(14,810)
Fair
Value
38,305
331,438
98,937
4,082
66,280
539,042
95,101
422,987
135,021
653,109
Fair
Value
196,259
38,499
20,639
59,274
6,343
321,014
103,618
495,467
148,238
747,323
$
$
$
$
$
$
$
$
The following table presents investment securities by stated maturity at December 31, 2019.
Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that
differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these
securities are classified separately with no specific maturity date.
Available for Sale
Held to Maturity
(dollars in thousands)
Due in 1 year or less
After 1 year to 5 years
After 5 years to 10 years
After 10 years
Collateralized mortgage obligations
Agency mortgage-backed securities
Total
Amortized
Cost
3,790
39,653
65,863
3,000
329,492
98,953
540,751
$
$
Fair
Value
3,795
39,435
62,617
2,820
331,438
98,937
539,042
$
$
96
Amortized
Cost
-
20,048
74,865
-
416,177
133,752
644,842
$
$
Fair
Value
-
20,073
75,028
-
422,987
135,021
653,109
$
$
Expected maturities will differ from contractual maturities because borrowers have the right to call or
prepay obligations with or without prepayment penalties.
The Company’s investment securities portfolio consists primarily of debt securities issued by U.S.
government agencies, U.S. government-sponsored agencies, state governments, local municipalities and
certain corporate entities. There were no private label mortgage-backed securities (“MBS”) or collateralized
mortgage obligations (“CMO”) held in the investment securities portfolio as of December 31, 2019 and
December 31, 2018. There were also no MBS or CMO securities that were rated “Alt-A” or “sub-prime”
as of those dates.
The fair value of investment securities is impacted by interest rates, credit spreads, market volatility
and liquidity conditions. Net unrealized gains and losses in the available for sale portfolio are included in
shareholders’ equity as a component of accumulated other comprehensive income or loss, net of tax.
Securities classified as held to maturity are carried at amortized cost. An unrealized loss exists when the
current fair value of an individual security is less than the amortized cost basis.
The Company regularly evaluates investment securities that are in an unrealized loss position in order
to determine if the decline in fair value is other than temporary. Factors considered in the evaluation include
the current economic climate, the length of time and the extent to which the fair value has been below cost,
the current interest rate environment and the rating of each security. An OTTI loss must be recognized for
a debt security in an unrealized loss position if the Company intends to sell the security or it is more likely
than not that it will be required to sell the security prior to recovery of the amortized cost basis. The amount
of OTTI loss recognized is equal to the difference between the fair value and the amortized cost basis of
the security that is attributed to credit deterioration. Accounting standards require the evaluation of the
expected cash flows to be received to determine if a credit loss has occurred. In the event of a credit loss,
that amount must be recognized against income in the current period. The portion of the unrealized loss
related to other factors, such as liquidity conditions in the market or the current interest rate environment,
is recorded in accumulated other comprehensive income (loss) for investment securities classified available
for sale. There were no impairment charges (credit losses) recorded during the years ended December 31,
2019, 2018, and 2017.
At December 31, 2019 and 2018, investment securities in the amount of approximately $847.1 million
and $710.7 million, respectively, were pledged as collateral for public deposits and certain other deposits
as required by law.
The following table presents a roll-forward of the balance of credit-related impairment losses on
securities held at December 31, 2019, 2018, and 2017 for which a portion of OTTI was recognized in other
comprehensive income:
(dollars in thousands)
Beginning Balance, January 1st
Reductions for securities sold during the period
Ending Balance, December 31st
2019
2018
2017
$
$
-
-
-
$
$
274
(274)
-
$
$
937
(663)
274
97
The following tables show the fair value and gross unrealized losses associated with the investment
portfolio, aggregated by investment category and length of time that individual securities have been in a
continuous unrealized loss position as of December 31, 2019 and 2018:
Less than 12 months
At December 31, 2019
12 months or more
Total
(dollars in thousands)
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Municipal securities
Corporate bonds
Total Available for Sale
Fair
Value
28,136
63,384
2,924
-
2,820
97,264
$
$
Unrealized
Losses
$
$
439
328
13
-
180
960
$
$
Fair
Value
-
6,164
6,411
-
51,882
64,457
Unrealized
Losses
Fair
Value
$
$
-
94
85
-
3,118
3,297
$
28,136 $
69,548
9,335
-
54,702
$ 161,721 $
Losses
439
422
98
-
3,298
4,257
Unrealized
Less than 12 months
At December 31, 2019
12 months or more
Total
(dollars in thousands)
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Total Held to Maturity
$
$
Fair
Value
33,092
24,211
14,044
71,347
Unrealized
Losses
Fair
Value
Unrealized
Fair
Value
Unrealized
Losses
$
$
220
18
33
271
$
3,703
64,324
52,132
$ 120,159
$
$
36,795 $
$
88,535
66,176
$ 191,506 $
294
793
513
1,600
Losses
74
775
480
1,329
Less than 12 months
At December 31, 2018
12 months or more
Total
(dollars in thousands)
Collateralized mortgage obligations
Agency mortgage-backed securities
Municipal securities
Corporate bonds
Asset backed securities
Total Available for Sale
Fair
Value
58,883
1,134
1,549
-
6,343
67,909
$
$
Unrealized
Unrealized
Unrealized
Losses
Fair
Value
$
$
270
10
7
-
90
377
$
83,377
16,768
12,154
53,189
-
$ 165,488
$
$
Losses
1,850
601
225
3,396
-
6,072
Fair
Value
$ 142,260 $
17,902
13,703
53,189
6,343
$ 233,397 $
Losses
2,120
611
232
3,396
90
6,449
Less than 12 months
At December 31, 2018
12 months or more
Total
(dollars in thousands)
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Total Held to Maturity
$
$
Fair
Value
5,351
44,574
-
49,925
Unrealized
Losses
Fair
Value
Losses
Fair
Value
Unrealized
Unrealized
$
$
26
475
-
501
$
98,267
173,467
119,243
$ 390,977
$
3,746
5,318
5,245
$ 14,309
$ 103,618 $
218,041
119,243
$ 440,902 $
Losses
3,772
5,793
5,245
14,810
Unrealized losses on securities in the investment portfolio amounted to $5.9 million with a total fair
value of $353.2 million as of December 31, 2019 compared to unrealized losses of $21.3 million with a
total fair value of $674.3 million as of December 31, 2018. The Company believes the unrealized losses
presented in the tables above are temporary in nature and primarily related to market interest rates or limited
trading activity in particular type of security rather than the underlying credit quality of the issuers. The
Company does not believe that these losses are other than temporary and does not currently intend to sell
or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of
the amortized cost bases.
The Company held nine U.S. Government agency securities, thirty-two collateralized mortgage
obligations and seventeen agency mortgage-backed securities that were in an unrealized loss position at
December 31, 2019. Principal and interest payments of the underlying collateral for each of these securities
98
carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes
the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates
and are considered temporary as of December 31, 2019.
All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for
impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In
addition, the Company periodically conducts its own independent review on each issuer to ensure the
financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and
New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the
issuing municipality. At December 31, 2019, the investment portfolio had no municipal securities that were
in an unrealized loss position.
At December 31, 2019, the investment portfolio included seven corporate bonds that were in an
unrealized loss position. Management believes the unrealized losses on these securities were also driven by
changes in market interest rates and not a result of credit deterioration. The seven corporate bonds are with
four of the largest U.S. financial institutions. Each financial institution is well capitalized.
At December 31, 2018, the investment portfolio included one asset-backed security that was in an
unrealized loss position. The asset-backed security held in the investment securities portfolio was a Sallie
Mae bond, collateralized by student loans which are guaranteed by the U.S. Department of Education. This
security was sold during the first quarter of 2019.
Proceeds associated with the sale of securities available for sale in 2019 were $54.7 million. Gross
gains of $1.2 million and gross losses of $67,000 were realized on these sales. The tax provision applicable
to the net gains of $1.1 million for the year ended December 31, 2019 amounted to $280,000.
Proceeds associated with the sale of securities available for sale in 2018 were $6.4 million. Gross losses
of $67,000 were realized on these sales. The tax benefit applicable to the net losses for the year ended
December 31, 2018 amounted to $18,000. Included in the 2018 sales activity was the sale of one CDO
security. Proceeds from the sale of the CDO security totaled $660,000. A gross loss of $66,000 was realized
on this sale. The tax benefit applicable to the net loss for the twelve months ended December 31, 2018
amounted to $17,000. Management had previously stated that it did not intend to sell the CDO security
prior to its maturity or the recovery of its cost basis, nor would it be forced to sell this security prior to
maturity or recovery of the cost basis. This statement was made over a period of several years where there
was limited trading activity in the pooled trust preferred CDO market resulting in fair market value
estimates well below the book values. During 2018, management received several inquiries regarding the
availability of the remaining CDO security and noted an increased level of trading in this type of security.
As a result of the increased activity and the level of bids received, management elected to sell the remaining
CDO security resulting in a net loss of $66,000 during 2018.
Proceeds of sales of securities available for sale in 2017 were $31.2 million. Gross gains of $652,000
and gross losses of $798,000 were realized on these sales. The tax benefit applicable to the net losses for
the year ended December 31, 2017 amounted to $52,000. Included in the 2017 sales activity were the sales
of two CDO securities. Proceeds from the sale of the CDO securities totaled $1.5 million. Gross losses of
$798,000 were realized on these sales. The tax benefit applicable to the net losses for the twelve months
ended December 31, 2017 amounted to $287,000. As a result of the increased activity and the level of bids
received, management elected to sell two CDOs resulting in a net loss of $798,000 during 2017 which was
offset by gains on sales of agency mortgage-backed securities, collateralized mortgage obligations and
corporate bonds.
99
In December 2018, twenty-three CMOs and two MBSs with a fair value of $230.1 million that were
previously classified as available-for-sale were transferred to the held-to-maturity category. The securities
were transferred at fair value. Unrealized losses of $9.4 million associated with the transferred securities
will remain in other comprehensive income and be amortized as an adjustment to yield over the remaining
life of the securities. At December 31, 2019, the total approximated unrealized loss of $8.1 million
remaining to be amortized includes ten securities previously transferred in July 2014.
4. Loans Receivable
The following table sets forth the Company’s gross loans by major categories as of December 31, 2019
and 2018:
(dollars in thousands)
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total loans receivable
Deferred costs (fees)
Allowance for loan losses
Net loans receivable
$
$
December 31,
2019
December 31,
2018
613,631 $
121,395
223,906
424,400
101,320
263,444
1,748,096
99
(9,266)
1,738,929 $
515,738
121,042
200,423
367,895
91,152
140,364
1,436,614
(16)
(8,615)
1,427,983
The Company disaggregates its loan portfolio into groups of loans with similar risk characteristics for
purposes of estimating the allowance for loan losses. The Company’s loan groups include commercial real
estate, construction and land development, commercial and industrial, owner occupied real estate,
consumer, and residential mortgages. The loan groups are also considered classes for purposes of
monitoring and assessing credit quality based on certain risk characteristics.
Included in loans are loans due from directors and other related parties of $13.6 million at December 31,
2019, $13.0 million at December 31, 2018, and $8.9 million at December 31, 2017. The Board of Directors
approves loans to individual directors to conform to our underwriting policies. The following presents the
activity in amount due from directors and other related parties for the years ended December 31, 2019,
2018, and 2017.
(dollars in thousands)
Balance at beginning of year
Additions
Repayments
Balance at end of year
December 31,
2019
December 31,
2018
December 31,
2017
$
$
13,029
2,064
(1,500)
13,593
$
$
8,920
4,812
(703)
13,029
$
$
7,862
1,896
(838)
8,920
100
5. Allowances for Loan Losses
The following tables provide the activity in and ending balances of the allowance for loan losses by
loan portfolio class at and for the years ended December 31, 2019, 2018, and 2017:
(dollars in thousands)
Year ended December, 2019
Allowance for loan losses:
Beginning balance:
Charge-offs
Recoveries
Provisions
Ending balance
Year ended December, 2018
Allowance for loan losses:
Beginning Balance:
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Year ended December, 2017
Allowance for loan losses:
Beginning Balance:
Charge-offs
Recoveries
Provisions (credits)
Ending balance
Commercial
Real Estate
Construction
and Land
Development
Commercial
and
Industrial
Owner
Occupied
Real Estate
Consumer
and Other
Residential
Mortgage
Unallocated
Total
$
$
$
$
$
$
2,462 $
-
-
581
3,043 $
777 $
-
-
(89)
688 $
1,754 $
(1,356)
217
316
931 $
2,033 $
-
2
257
2,292 $
577
(126)
9
130
590
3,774 $
(1,603)
50
241
2,462 $
725 $
-
-
52
777 $
1,317 $
(151)
81
507
1,754 $
1,737 $
(465)
20
741
2,033 $
573
(219)
3
220
577
3,254 $
-
54
466
3,774 $
557 $
-
-
168
725 $
2,884 $
(1,366)
64
(265)
1,317 $
1,382 $
(157)
-
512
1,737 $
588
(53)
2
36
573
$
$
$
$
$
$
894 $
-
-
811
1,705 $
118 $
-
-
(101)
17 $
8,615
(1,482)
228
1,905
9,266
392 $
-
-
502
894 $
81 $
-
-
37
118 $
8,599
(2,438)
154
2,300
8,615
58 $
-
-
334
392 $
432 $
-
-
(351)
81 $
9,155
(1,576)
120
900
8,599
101
The following tables provide a summary of the allowance for loan losses and balance of loans receivable
by loan class and by impairment method as of December 31, 2019 and 2018:
Commercial
Real Estate
Construction
and Land
Development
Commercial
and
Industrial
Owner
Occupied
Real Estate
Consumer
and
Other
Residential
Mortgage
Unallocated
Total
(dollars in thousands)
December 31, 2019
Allowance for loan losses:
Individually evaluated for
impairment
$
265 $
- $
23 $
268 $
- $
- $
- $
556
Collectively evaluated for
impairment
Total allowance for loan
2,778
688
908
2,024
590
1,705
17
8,710
losses
$
3,043 $
688 $
931 $
2,292 $
590 $
1,705 $
17 $
9,266
Loans receivable:
Loans evaluated
individually
Loans evaluated collectively
Total loans receivable
$
10,331 $
603,300
$ 613,631 $
- $
3,087 $
3,634 $
1,062 $
768 $
121,395
121,395 $ 223,906 $ 424,400 $ 101,320 $ 263,444 $
420,766
220,819
262,676
100,258
18,882
- $
1,729,214
-
4
- $ 1,748,096
Commercial
Real Estate
Construction
and Land
Development
Commercial
and
Industrial
Owner
Occupied
Real Estate
Consumer
and
Other
Residential
Mortgage
Unallocated
Total
(dollars in thousands)
December 31, 2018
Allowance for loan losses:
Individually evaluated for
impairment
$
295 $
- $
867 $
217 $
94 $
- $
- $
1,473
Collectively evaluated for
impairment
Total allowance for loan
2,167
777
887
1,816
483
894
118
7,142
losses
$
2,462 $
777 $
1,754 $
2,033 $
577 $
894 $
118 $
8,615
Loans receivable:
Loans evaluated
individually
Loans evaluated collectively
Total loans receivable
$
10,947 $
504,791
$ 515,738 $
- $
3,662 $
2,560 $
861 $
- $
121,042
121,042 $ 200,423 $ 367,895 $ 91,152 $ 140,364 $
365,335
196,761
140,364
90,291
18,030
- $
1,418,584
-
- $ 1,436,614
102
A loan is considered impaired, when based on current information and events, it is probable that the
Company will be unable to collect all amounts due from the borrower in accordance with the contractual
terms of the loan. Impaired loans include nonperforming loans, but also include internally classified
accruing loans. The following table summarizes information with regard to impaired loans by loan portfolio
class as of December 31, 2019 and 2018:
December 31, 2019
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2018
Unpaid
Principal
Balance
Related
Allowance
-
-
-
-
-
-
-
265
-
23
268
-
-
556
265
-
23
268
-
-
556
$
6,332 $
6,337 $
-
1,655
1,905
710
-
$ 10,602 $
-
5,418
2,013
1,082
-
14,850 $
-
-
-
-
-
-
-
$
4,615 $
5,498 $
295
-
2,007
655
151
-
7,428 $
-
2,195
704
158
-
8,555 $
-
867
217
94
-
1,473
$
$
10,947 $
11,835 $
295
-
3,662
2,560
861
-
18,030 $
-
7,613
2,717
1,240
-
23,405 $
$
-
867
217
94
-
1,473
(dollars in thousands)
With no related allowance
recorded:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
$
6,186 $
6,192 $
-
2,719
2,127
1,062
768
12,862 $
-
2,989
2,275
1,375
768
13,599 $
Total
$
With an allowance recorded:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
Total:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
$
4,145 $
4,667 $
-
368
1,507
-
-
6,020 $
-
383
1,521
-
-
6,571 $
$
$
10,331 $
10,859 $
-
3,087
3,634
1,062
768
18,882 $
-
3,372
3,796
1,375
768
20,170 $
$
103
The following table presents additional information regarding the Company’s impaired loans for the
years ended December 31, 2019, 2018, and 2017:
2019
Years Ended December 31,
2018
2017
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
(dollars in thousands)
With no related allowance recorded:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
With an allowance recorded:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
$
$
6,463 $
289
$
10,429 $
288
$ 9,579 $
-
2,144
1,908
909
461
11,885 $
$
-
5
38
20
2
354
-
3,341
2,275
658
-
$
16,703 $
-
52
58
21
-
419
-
2,270
1,894
801
26
14,570 $
$
$
4,281 $
1
$
3,076 $
-
$ 6,490 $
-
838
1,071
30
-
6,220 $
-
-
31
-
-
32
$
-
1,862
969
191
-
6,098 $
-
6
25
1
-
32
-
2,517
1,390
420
-
$
10,817 $
Total:
Commercial real estate
Construction and land
development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
$
10,744 $
290
$
13,505 $
288
$
16,069 $
-
2,982
2,979
939
461
18,105 $
$
-
5
69
20
2
386
-
5,203
3,244
849
-
$
22,801 $
-
58
83
22
-
451
-
4,787
3,284
1,221
26
$ 25,387 $
366
-
37
58
21
1
483
14
-
68
32
10
-
124
380
-
105
90
31
1
607
The total average recorded investment on the Company’s impaired loans for the years ended
December 31, 2019, 2018, and 2017 were $18.1 million, $22.8 million, and $25.4 million, respectively,
and the related interest income recognized for those dates was $386,000, $451,000, and $607,000,
respectively.
104
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the
loans receivable as determined by the length of time a recorded payment is past due. The following table
presents the classes of the loan portfolio summarized by the past due status as of December 31, 2019 and
2018:
(dollars in thousands)
At December 31, 2019
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
(dollars in thousands)
At December 31, 2018
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
30-59
Days
Past Due
60-89
Days
Past Due
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Loans
Receivable
> 90 Days
and Accruing
$
$
- $
-
-
-
112
-
313 $
-
50
1,219
241
-
4,159 $ 4,472
-
3,137
4,556
1,415
768
112 $ 1,823 $ 12,413 $ 14,348
-
3,087
3,337
1,062
768
613,631
$ 609,159 $
121,395
121,395
223,906
220,769
424,400
419,844
101,320
99,905
263,444
262,676
$ 1,733,748 $ 1,748,096
$
$
-
-
-
-
-
-
-
30-59
Days Past
Due
60-89
Days
Past Due
Greater
than 90
Days
Total
Past Due
Current
Total
Loans
Receivable
Loans
Receivable
> 90 Days
and Accruing
$
339 $
-
280
-
214
302
515,738
121,042
200,423
367,895
91,152
140,364
$ 1,135 $ 1,574 $ 10,341 $ 13,050 $ 1,423,564 $ 1,436,614
921 $ 4,631 $ 5,891 $
-
3,661
1,188
861
-
509,847 $
121,042
196,482
366,054
90,077
140,062
-
3,941
1,841
1,075
302
-
-
653
-
-
$
$
-
-
-
-
-
-
-
The following table presents the classes of the loan portfolio summarized by the aggregate pass rating
and the classified ratings of special mention, substandard and doubtful within our internal risk rating system
as of December 31, 2019 and 2018:
(dollars in thousands)
At December 31, 2019:
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
(dollars in thousands)
At December 31, 2018:
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
Pass
Special
Mention
Substandard
Doubtful
Total
$
$
$
$
609,382
121,395
220,819
418,997
100,258
262,555
1,733,406
$
$
90
-
-
1,770
-
121
1,981
$
$
4,159
-
3,087
3,633
1,062
768
12,709
$
$
Pass
Special
Mention
Substandard
Doubtful
510,186
121,042
196,751
364,032
90,291
140,240
1,422,542
$
$
921
-
10
1,303
-
124
2,358
$
$
4,631
-
3,382
2,560
861
-
11,434
$
$
-
-
-
-
-
-
-
-
-
280
-
-
-
280
$
$
$
$
613,631
121,395
223,906
424,400
101,320
263,444
1,748,096
Total
515,738
121,042
200,423
367,895
91,152
140,364
1,436,614
105
The following table shows non-accrual loans by class as of December 31, 2019 and 2018:
(dollars in thousands)
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
December 31,
2019
December 31,
2018
$
$
4,159
-
3,087
3,337
1,062
768
12,413
$
$
4,631
-
3,661
1,188
861
-
10,341
If these loans were performing under their original contractual rate, interest income on such loans would
have increased approximately $548,000, $498,000, and $590,000, for 2019, 2018, and 2017, respectively.
Troubled Debt Restructurings
A modification to the contractual terms of a loan which results in a concession to a borrower that is
experiencing financial difficulty is classified as a troubled debt restructuring (“TDR”). The concessions
made in a TDR are those that would not otherwise be considered for a borrower or collateral with similar
risk characteristics. A TDR is typically the result of efforts to minimize potential losses that may be incurred
during loan workouts, foreclosure, or repossession of collateral at a time when collateral values are
declining. Concessions include a reduction in interest rate below current market rates, a material extension
of time to the loan term or amortization period, partial forgiveness of the outstanding principal balance,
acceptance of interest only payments for a period of time, or a combination of any of these conditions.
The following table summarizes information with regard to outstanding troubled debt restructurings at
December 31, 2019 and 2018:
(dollars in thousands)
December 31, 2019
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
December 31, 2018
Commercial real estate
Construction and land development
Commercial and industrial
Owner occupied real estate
Consumer and other
Residential mortgage
Total
Number of
Loans
Accrual
Status
Non-
Accrual
Status
Total TDRs
1
-
-
-
-
-
1
1
-
3
1
-
-
5
$
$
$
$
6,173
-
-
-
-
-
6,173
6,316
-
-
-
-
-
6,316
$
$
$
$
-
-
-
-
-
-
-
-
-
1,224
242
-
-
1,466
$
$
$
$
6,173
-
-
-
-
-
6,173
6,316
-
1,224
242
-
-
7,782
106
All TDRs are considered impaired and are therefore individually evaluated for impairment in the
calculation of the allowance for loan losses. Some TDRs may not ultimately result in the full collection of
principal and interest as restructured and could lead to potential incremental losses. These potential
incremental losses would be factored into our estimate of the allowance for loan losses. The level of any
subsequent defaults will likely be affected by future economic conditions.
There were no loan modifications made during the twelve months ended December 31, 2019 and 2018
that met the criteria of a TDR.
After a loan is determined to be a TDR, we continue to track its performance under the most recent
restructured terms. There were no TDRs that subsequently defaulted during the year ended December 31,
2019. There were three TDRs that subsequently defaulted during the year ended December 31, 2018.
There was one residential mortgage in the process of foreclosure as of December 31, 2019. There were
no residential mortgages in the process of foreclosure at December 31, 2018. There was no other real estate
owned relating to residential real estate at December 31, 2019 and 2018.
6. Other Real Estate Owned
Other real estate owned consists of properties acquired as a result of foreclosures or deeds in-lieu-of
foreclosure. Costs relating to the development or improvement of assets are capitalized, and costs relating
to holding the property are charged to expense. As of December 31, 2019 the balance of OREO is comprised
of five properties.
The following table presents a reconciliation of other real estate owned for the years ended December
31, 2019, 2018, and 2017:
(dollars in thousands)
Beginning Balance, January 1st
Additions
Valuation adjustments
Dispositions
Ending Balance
7. Premises and Equipment
December 31,
2019
December 31,
2018
December 31,
2017
$
$
6,223
1,225
(646)
(5,072)
1,730
$
$
6,966
315
(563)
(495)
6,223
$
$
10,174
291
(3,000)
(499)
6,966
A summary of premises and equipment is as follows:
(dollars in thousands)
Land
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Construction in progress
Less accumulated depreciation
Net premises and equipment
December 31,
2019
December 31,
2018
$
$
18,991
58,917
29,898
29,067
13,728
150,601
(33,645)
116,956
$
$
15,957
49,204
20,396
21,430
8,041
115,028
(27,367)
87,661
107
Depreciation expense on premises and equipment amounted to approximately $6.5 million,
$5.4 million, and $4.6 million in 2019, 2018, and 2017, respectively. The construction in progress balance
of $13.7 million mainly represents costs incurred for the selection and development of future store locations.
Of this balance, $5.7 million represents land purchased and land deposits for five future store locations.
Contractual construction commitments related to future store locations were $5.3 million as of December
31, 2019.
8. Borrowings
Republic has a line of credit with the Federal Home Loan Bank (“FHLB”) of Pittsburgh with a
maximum borrowing capacity of $860.5 million as of December 31, 2019. As of December 31, 2019 and
2018, there were no fixed term borrowings against this line of credit. There were no overnight borrowings
outstanding as of December 31, 2019. As of December 31, 2018, we had overnight borrowings of
$91.4 million at a rate of 2.65% against this line of credit. As of December 31, 2019 and 2018, FHLB had
issued letters of credit, on Republic’s behalf, totaling $150.0 million and $100.0 million, respectively,
against its available credit line, primarily to be used as collateral for public funds deposit balances. There
were no fixed term advances outstanding at any month-end during 2019 and 2018. At December 31, 2019,
$1.2 billion of loans collateralized the overnight advance and the letter of credit. The maximum amount of
overnight borrowings outstanding at any month-end was $69.0 million in 2019 and $206.9 million in 2018.
Republic also has a line of credit in the amount of $10.0 million available for the purchase of federal
funds through the Atlantic Community Bankers Bank (“ACBB”). At December 31, 2019 and 2018,
Republic had no amount outstanding against the line at ACBB. There were no overnight advances on this
line at any month end in 2019 and 2018.
Republic also established a line of credit with Zions Bank in the amount of $15.0 million to assist in
managing our liquidity position during the year ended December 31, 2018. At December 31, 2019 and
2018, Republic had no amount outstanding against the line at Zions Bank. There were no overnight balances
on this line at any month end in 2019 and 2018.
Subordinated debt and corporation-obligated-mandatorily redeemable capital securities of
subsidiary trust holding solely junior obligations of the corporation:
The Company has sponsored two outstanding issues of corporation-obligated mandatorily redeemable
capital securities of a subsidiary trust holding solely junior subordinated debentures of the corporation,
more commonly known as trust preferred securities. The subsidiary trusts are not consolidated with the
Company for financial reporting purposes. The purpose of the issuances of these securities was to increase
capital. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in an amount up to
25% of total Tier 1 capital.
In December 2006, Republic Capital Trust II (“Trust II”) issued $6.0 million of trust preferred securities
to investors and $0.2 million of common securities to the Company. Trust II purchased $6.2 million of
junior subordinated debentures of the Company due 2037, and the Company used the proceeds to call the
securities of Republic Capital Trust I (“Trust I”). The debentures supporting Trust II have a variable
interest rate, adjustable quarterly, at 1.73% over the 3-month Libor. The Company may call the securities
on any interest payment date after five years without a prepayment penalty.
108
On June 28, 2007, the Company caused Republic Capital Trust III (“Trust III”), through a pooled
offering, to issue $5.0 million of trust preferred securities to investors and $0.2 million common securities
to the Company. Trust III purchased $5.2 million of junior subordinated debentures of the Company due
2037, which have a variable interest rate, adjustable quarterly, at 1.55% over the 3 month Libor. The
Company has the ability to call the securities on any interest payment date without a prepayment penalty.
On June 10, 2008, the Company caused Republic First Bancorp Capital Trust IV (“Trust IV”) to issue
$10.8 million of convertible trust preferred securities as part of the Company’s strategic capital plan. The
securities were purchased by various investors, including Vernon W. Hill, II, founder and chairman (retired)
of Commerce Bancorp and, since December 5, 2016, chairman of the Company. This investor group also
included a family trust of Harry D. Madonna, president and chief executive officer of Republic First
Bancorp, Inc, and Theodore J. Flocco, Jr., who, since the investment, has been elected to the Company’s
Board of Directors and serves as the Chairman of the Audit Committee. Trust IV also issued $0.3 million
of common securities to the Company. Trust IV purchased $11.1 million of junior subordinated debentures
due 2038, which paid interest at an annual rate of 8.0% and were callable after the fifth year under certain
terms and conditions. The trust preferred securities of Trust IV were convertible into approximately
1.7 million shares of common stock of the Company, based on a conversion price of $6.50 per share of
Company common stock. One independent director converted $240,000 of trust preferred securities into
37,000 shares of common stock in 2017. On January 31, 2018, the Company notified the existing holders
of Trust IV of its intent to fully redeem these securities in accordance with the Optional Redemption terms
included in the Indenture Agreement. The securities were redeemed on March 31, 2018 at a price equal to
the outstanding principal amount. The holders had the option to convert these securities into shares of the
Company’s common stock at any time until the end of the last business day preceding the redemption date.
During the first quarter of 2018, $10.1 million of trust preferred securities were converted into 1.6 million
shares of common stock. After redemption of the remaining securities on March 31 2018, Trust IV was
dissolved.
Deferred issuance costs included in subordinated debt were $76,000 and $82,000 at December 31, 2019
and December 31, 2018, respectively. Amortization of deferred issuance costs were $6,000, $6,000, and
$29,000 for the years ended December 31, 2019, 2018, and 2017, respectively. Deferred issuance costs in
the amount of $467,000 were recorded against additional paid in capital during the first quarter of 2018 as
a result of the conversion of trust preferred securities into common stock in accordance with ASC 470-20.
9. Deposits
The following is a breakdown, by contractual maturities of the Company’s certificates of deposit for
the years 2020 through 2024.
(dollars in thousands)
2020
2021
2022
2023
2024
Thereafter
Total
Certificates of Deposit $ 170,562 $ 50,079
$ 1,130 $ 1,071 $
737
$ -
$ 223,579
Certificates of deposit of $250,000 or more totaled $146.8 million and $104.6 million at December 31,
2019 and 2018, respectively.
Deposits of related parties totaled $103.0 million and $102.7 million at December 31, 2019 and 2018,
respectively. Brokered deposits totaled $1.0 million and $18.6 million at December 31, 2019 and 2018
respectively. Overdrafts totaled $540,000 and $277,000 at December 31, 2019 and 2018, respectively.
109
10. Income Taxes
The provision (benefit) for income taxes for the years ended December 31, 2019, 2018, and 2017
consists of the following:
(dollars in thousands)
Current
Federal
State
Deferred
Federal
State
Total provision (benefit) for income taxes
2019
2018
2017
$
$
$
394
-
$
-
51
2,137
-
(1,524)
(220)
(1,350)
$
2,006
(479)
1,578
$
(5,056)
-
(2,919)
The following table reconciles the difference between the actual tax provision and the amount per the
statutory federal income tax rate of 21.0% for the year ended December 31, 2019, 21.0% for the year ended
December 31, 2018 and 35.0% for the year ended December 31, 2017.
(dollars in thousands)
Tax provision computed at federal statutory rate
State income tax, net of federal benefit
Tax exempt interest
Deferred tax only items
Effect of change in tax rate
Deferred tax asset valuation allowance adjustment
Other
Total provision (benefit) for income taxes
2019
2018
$
$
(1,018)
(260)
(425)
-
-
-
353
(1,350)
$
$
2,143
(340)
(430)
199
-
-
6
1,578
$
$
2017
2,095
-
(573)
-
7,661
(12,214)
112
(2,919)
The significant components of the Company’s net deferred tax asset as of December 31, 2019 and 2018
are as follows:
(dollars in thousands)
Deferred tax assets
Allowance for loan losses
Deferred compensation
Unrealized losses on securities available for sale
Foreclosed real estate write-downs
Interest income on non-accrual loans
Net operating loss carryforward
Other
Total deferred tax assets
Deferred tax liabilities
Deferred loan costs
Premises and equipment
Other
Total deferred tax liabilities
Net deferred tax asset
2019
2018
$
$
2,351
620
2,495
996
541
5,123
2,263
14,389
1,138
612
-
1,750
12,639
$
2,185
591
3,935
2,351
615
3,541
1,472
14,690
1,103
634
619
2,356
$ 12,334
110
The Company’s net deferred tax asset increased to $12.6 million at December 31, 2019 compared to
$12.3 million at December 31, 2018. The Company began recognizing an increased provision for federal
and state income taxes during the first quarter of 2018 after reversing our deferred tax asset valuation
allowance during the fourth quarter of 2017. The company initially recorded a deferred tax asset valuation
allowance in 2011 and continued to carry this allowance after determining that some portion of the deferred
tax asset balance may not be realized within its life cycle based on the weight of available evidence.
Adjustments to the valuation allowance resulted in the recognition of a minimal provision for income taxes
in each period until its reversal in 2017. The effective tax rates for the years ended December 31, 2019 and
2018 were (28%) and 15%, respectively.
The $12.6 million net deferred tax asset as of December 31, 2019 is comprised of $5.1 million currently
recognizable through net operating loss carryforwards (“NOLs”) and $7.5 million attributable to several
items associated with temporary timing differences which will reverse at some point in the future to provide
a net reduction in tax liabilities. The Company’s largest future reversal relates to its unrealized losses on
securities available for sale, which totaled $2.5 million as of December 31, 2019.
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.
The Company has a federal NOL in the amount of $17.2 million which will begin to expire after
December 31, 2031 if not utilized prior to that date. In order to realize our deferred tax assets, we must
generate sufficient taxable income in future years prior to expiration. The $6.9 million NOL generated in
2019 will not expire.
In assessing the need for a valuation allowance, the Company carefully weighed both positive and
negative evidence currently available. Judgment is required when considering the relative impact of such
evidence. The weight given to the potential effect of positive and negative evidence must be commensurate
with the extent to which it can be objectively verified.
The Company is in a 3-year cumulative profit position factoring in pre-tax GAAP income and
permanent book/tax differences. Growth in interest-earning assets is expected to continue and is supported
by the capital raise completed at the end of 2016. The ratio of non-performing assets to total assets along
with other credit quality metrics continue to improve. A number of cost control measures have been
implemented to offset the challenges faced in growing revenue as a result of compression in the net interest
margin. The Company has added 10 store locations in the past 3 years and since the inception of the growth
and expansion strategy in 2014 almost every new store location has met or exceeded expectations. The
success of the expansion into New York, combined with the stabilization of interest rates and continued
loan growth are expected to improve profitability going forward.
Conversely, the Company generated a loss in the current year when factoring in pre-tax GAAP income
and permanent book/tax differences. The Bank’s net interest margin declined during 2019 as a result of the
challenging interest rate environment which appears to be consistent across the financial services industry.
Non-accrual loans increased by $2.1 million during 2019 although the ratio of non-performing loans to total
111
loans decreased slightly. Rising interest rates and a downturn in the economy could significantly decrease
the volume of mortgage loan originations.
Based on the guidance provided in FASB Accounting Standards Codification Topic 740 (ASC 740),
the Company believed that the positive evidence considered at December 31, 2019 outweighed the negative
evidence and that it was more likely than not that all of the Company’s deferred tax assets would be realized
within their life cycle. Therefore, a valuation allowance was not required at December 31, 2019.
The net deferred tax asset balance was $12.6 million as of December 31, 2019, $12.3 million as of
December 31, 2018, and $12.7 million as of December 31, 2017. The deferred tax asset will continue to be
analyzed on a quarterly basis for changes affecting realizability.
The Company accounts for uncertain tax positions if it is more likely than not, based on the technical
merits, that the tax position will be realized or sustained upon examination. The Company has not identified
any uncertain tax position as of December 31, 2019. No interest or penalties have been recorded for the
years ended December 31, 2019, 2018, and 2017. The Internal Revenue Service has completed its audits of
the Company’s federal tax returns for all tax years through December 31, 2015. The Pennsylvania
Department of Revenue is not currently conducting any income tax audits. The Company’s federal income
tax returns filed subsequent to 2016 remain subject to examination by the Internal Revenue Service.
11. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a
financial instrument to perform in accordance with the terms of the contract. The maximum exposure to
credit loss under commitments to extend credit and standby letters of credit is represented by the contractual
amount of these instruments. The Company uses the same underwriting standards and policies in making
credit commitments as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are commitments to extend
credit of approximately $329.9 million and $286.4 million and standby letters of credit of approximately
$17.2 million and $13.9 million at December 31, 2019 and 2018, respectively. Commitments often expire
without being drawn upon. Of the $329.9 million of commitments to extend credit at December 31, 2019,
substantially all were variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and many require the payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The
amount of collateral obtained upon extension of credit is based on management’s credit evaluation of the
customer. Collateral held varies but may include real estate, marketable securities, pledged deposits,
equipment and accounts receivable.
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
112
based on management’s credit evaluation of the customer. Collateral held varies but may include real estate,
marketable securities, pledged deposits, equipment and accounts receivable. Management believes that the
proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum
potential amount of future payments required under the corresponding guarantees. The current amount of
liability as of December 31, 2019 and 2018 for guarantees under standby letters of credit issued is not
material.
12. Commitments and Contingencies
The Company and Republic are from time to time a party (plaintiff or defendant) to lawsuits that are in
the normal course of business. While any litigation involves an element of uncertainty, management is of
the opinion that the liability of the Company and Republic, if any, resulting from such actions will not have
a material effect on the financial condition or results of operations of the Company and Republic.
13. Regulatory Capital
Dividend payments by Republic to the Company are subject to the Pennsylvania Banking Code of 1965
(the “Banking Code”) and the Federal Deposit Insurance Act (the “FDIA”). Under the Banking Code, no
dividends may be paid except from “accumulated net earnings” (generally, undivided profits). Under the
FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance
assessment due to the FDIC. Under current banking laws, Republic would be limited to $48.2 million of
dividends plus an additional amount equal to its net profit for 2020, up to the date of any such dividend
declaration. However, dividends would be further limited in order to maintain capital ratios.
State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels
of capital by Republic. Federal banking agencies impose four minimum capital requirements on the
Company’s risk-based capital ratios based on total capital, Tier 1 capital, CET 1 capital, and a leverage
capital ratio. The risk-based capital ratios measure the adequacy of a bank’s capital against the riskiness of
its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for “prompt
corrective action” or other regulatory enforcement action. In assessing a bank’s capital adequacy, regulators
also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality
and level or earnings; concentrations of credit; quality of loans and investments; risks of any nontraditional
activities; effectiveness of bank policies; and management’s overall ability to monitor and control risks.
113
The following table presents the Company’s and Republic’s capital regulatory ratios calculated based
on Basel III guidelines at December 31, 2019 and 2018:
(dollars in thousands)
At December 31, 2019:
Total risk based capital
Republic
Company
Tier one risk based
capital
Republic
Company
CET 1 risk based
Republic
Company
Tier one leveraged
capital
Republic
Company
At December 31, 2018:
Total risk based capital
Republic
Company
Tier one risk based
capital
Republic
Company
CET 1 risk based
Republic
Company
Tier one leveraged
capital
Republic
Company
Actual
Amount Ratio
Minimum Capital
Adequacy
Amount
Ratio
Minimum Capital
Adequacy with
Capital Buffer
Amount
Ratio
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
$ 252,307 11.94 %
261,759 12.37 %
$ 169,016 8.00 %
169,251 8.00 %
$ 221,833 10.50 %
222,141 10.50 %
$ 211,270 10.00 %
- %
-
243,041 11.50 %
252,493 11.93 %
126,762 6.00 %
126,938 6.00 %
179,579
179,829
8.50 %
8.50 %
169,016
-
8.00 %
- %
243,041 11.50 %
241,493 11.41 %
95,071 4.50 %
95,203 4.50 %
147,889
148,094
7.00 %
7.00 %
137,325
-
6.50 %
- %
245,158 7.54 %
249,168 7.83 %
128,935 4.00 %
129,058 4.00 %
128,935
129,058
4.00 %
4.00 %
161,169
-
5.00 %
- %
$ 231,610 13.26 %
262,964 15.03 %
$ 139,722 8.00 %
140,009 8.00 %
$ 172,489 9.875 %
172,824 9.875 %
$ 174,652 10.00 %
- %
-
222,995 12.77 %
254,349 14.53 %
104,791 6.00 %
105,007 6.00 %
137,539 7.875 %
137,821 7.875 %
139,722
-
8.00 %
- %
222,995 12.77 %
243,349 13.90 %
78,594 4.50 %
78,755 4.50 %
111,341 6.375 %
111,570 6.375 %
113,524
-
6.50 %
- %
222,995 8.21 %
254,349 9.35 %
108,685 4.00 %
108,800 4.00 %
108,685
108,800
4.00 %
4.00 %
135,857
-
5.00 %
- %
Management believes that Republic met, as of December 31, 2019, all capital adequacy requirements
to which it is subject. As of December 31, 2019 and 2018, the FDIC categorized Republic as well capitalized
under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance
Act. There are no calculations or events since that notification that management believes have changed
Republic’s category.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1,
Tier 1, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet
credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative risk.
Under applicable capital rules, Republic is required to maintain a minimum common equity Tier 1 capital
ratio requirement of 4.5%, a minimum Tier 1 capital ratio requirement of 6%, a minimum total capital
requirement of 8% and a minimum leverage ratio requirement of 4%. Under the rules, in order to avoid
limitations on capital distributions (including dividend payments and certain discretionary bonus payments
to executive officers), a banking organization must hold a capital conservation buffer comprised of common
equity Tier 1 capital above its minimum risk-based capital requirements in an amount greater than 2.5% of
total risk-weighted assets. The capital conservation buffer, which is composed of common equity Tier 1
capital, began on January 1, 2016 at the 0.625% level and was phased in over a three year period (increasing
by that amount on each January 1, until it reached 2.5% on January 1, 2019). Implementation of the
114
deductions and other adjustments to common equity Tier 1 capital began on January 1, 2015 and were
phased-in over a three-year period.
The following table shows the required capital ratios with the conversation buffer over the phase-in
period.
Basel III Community Banks
Minimum Capital Ratio Requirements
2016
2017
2018
2019
Common equity tier 1 capital (CET1)
Tier 1 capital (to risk weighted assets)
Total capital (to risk-weighted assets)
5.125%
6.625%
8.625%
5.750%
7.250%
9.250%
6.375%
7.875%
9.875%
7.000%
8.500%
10.500%
The Company believes that, as of December 31, 2019, all capital adequacy requirements are met under
the Basel III Capital Rules on a fully phased-in basis.
14. Benefit Plans
Defined Contribution Plan
The Company has a defined contribution plan pursuant to the provision of 401(k) of the Internal
Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan
provides for elective employee contributions with a matching contribution from the Company limited to
4% of total salary. The total expense charged to Republic, and included in salaries and employee benefits
relating to the plan, was $1.2 million in 2019, $1.1 million in 2018, and $927,000 in 2017.
Directors’ and Officers’ Plans
The Company has agreements that provide for an annuity payment upon the retirement or death of
certain directors and officers, ranging from $15,000 to $25,000 per year for ten years. The agreements were
modified for most participants in 2001, to establish a minimum age of 65 to qualify for the payments. All
participants are fully vested. The accrued benefits under the plan amounted to $1.1 million at both
December 31, 2019 and December 31, 2018, which is included in other liabilities. The expense for the years
ended December 31, 2019, 2018, and 2017, totaled $16,000, $18,000, and $24,000, respectively, which is
included in salaries and employee benefits. The Company funded the plan through the purchase of certain
life insurance contracts. The aggregate cash surrender value of these contracts (owned by the Company)
was $2.6 million at December 31, 2019 and $2.5 million at December 31, 2018 and is included in other
assets.
The Company maintains a deferred compensation plan for the benefit of certain officers and
directors. The plan permitted certain participants to make elective contributions to their accounts, subject
to applicable provisions of the Internal Revenue Code. In addition, the Company made discretionary
contributions to participant accounts. Company contributions were subject to vesting, and generally vested
three years after the end of the plan year to which the contribution applied, subject to acceleration of vesting
upon certain changes in control (as defined in the plan) and to forfeiture upon termination for cause (as
defined in the plan). No future contributions are permitted. Participant accounts are adjusted to reflect
distributions, and income, gains, losses, and expenses as if the accounts had been invested in permitted
investments selected by the participants, including Company common stock. The plan provides for
distributions upon retirement and, subject to applicable limitations under the Internal Revenue Code, limited
hardship withdrawals. As of December 31, 2019 and 2018, $1.3 million and $1.2 million in benefits,
115
respectively, had vested and the accrued benefits are included in other liabilities. Expense recognized for
the deferred compensation plan for 2019 and 2017 was $2,000 and $28,000, respectively, and is included
in salaries and employee benefits. A reduction in expense of $15,000 was recognized for the deferred
compensation plan during 2018. Although the plan is an unfunded plan, and does not require the Company
to segregate any assets, the Company has purchased shares of Company common stock in anticipation of
its obligation to pay benefits under the plan. Such shares are classified in the financial statements as stock
held by deferred compensation plan. No purchases were made in 2019, 2018, and 2017. As of December
31, 2019, approximately 25,437 shares of Company common stock were classified as stock held by deferred
compensation plan.
15. Fair Value Measurements and Fair Values of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company’s financial instruments;
however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all
financial instruments, the fair value estimates herein are not necessarily indicative of the amounts the
Company could have realized in a sales transaction on the dates indicated. The estimated fair value
amounts have been measured as of their respective year-ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting dates may be different than the
amounts reported at each year-end.
The Company follows the guidance issued under ASC 820, Fair Value Measurement, which defines
fair value, establishes a framework for measuring fair value under GAAP, and identifies required
disclosures on fair value measurements.
ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs
(Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or
indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e. supported with little or no market activity).
An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement.
116
For financial assets measured at fair value on a recurring basis, the fair value measurements by level
within the fair value hierarchy used at December 31, 2019 and December 31, 2018 were as follows:
(Level 1)
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 2)
Significant
Other
Observable
Inputs
(Level 3)
Significant
Unobservable
Inputs
$
$
$
$
$
$
$
$
$
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
$
$
38,305
331,438
98,937
4,082
63,460
536,222
10,345
-
362
4
2
-
133
83
196,259
38,499
20,639
56,205
6,343
317,945
20,887
-
410
5
10
-
138
230
-
-
-
-
2,820
2,820
-
4,447
-
-
-
-
-
-
-
-
-
3,069
-
3,069
-
4,785
-
-
-
-
-
-
(dollars in thousands)
December 31, 2019
Assets:
U.S. Government agencies
Collateralized mortgage obligations
Agency mortgage-backed securities
Municipal securities
Corporate bonds
Securities Available for Sale
Mortgage Loans Held for Sale
SBA Servicing Assets
Interest Rate Lock Commitments
Best Efforts Forward Loan Sales Commitments
Mandatory Forward Loan Sales Commitments
Liabilities:
Interest Rate Lock Commitments
Best Efforts Forward Loan Sales Commitments
Mandatory Forward Loan Sales Commitments
December 31, 2018
Assets:
Collateralized mortgage obligations
Agency mortgage-backed securities
Municipal securities
Corporate bonds
Asset-backed securities
Securities Available for Sale
Mortgage Loans Held for Sale
SBA Servicing Assets
Interest Rate Lock Commitments
Best Efforts Forward Loan Sales Commitments
Mandatory Forward Loan Sales Commitments
Liabilities:
Interest Rate Lock Commitments
Best Efforts Forward Loan Sales Commitments
Mandatory Forward Loan Sales Commitments
$
$
$
$
$
$
Total
38,305
331,438
98,937
4,082
66,280
539,042
10,345
4,447
362
4
2
-
133
83
196,259
38,499
20,639
59,274
6,343
321,014
20,887
4,785
410
5
10
-
138
230
117
The following table presents an analysis of the activity in the SBA servicing assets for the years ended
December 31, 2019, 2018, and 2017:
(dollars in thousands)
Beginning balance, January 1st
Additions
Fair value adjustments
Ending balance, December 31st
2019
2018
2017
$
$
4,785 $
1,026
(1,364)
4,447 $
5,243
1,000
(1,458)
4,785
$
$
5,352
1,078
(1,187)
5,243
Fair value adjustments are recorded as loan and servicing fees on the statement of operations. Servicing
fee income, not including fair value adjustments, totaled $1.9 million, $2.0 million, and $1.8 million for the
years ended December 31, 2019, 2018, and 2017, respectively. Total loans in the amount of $201.7 million
at December 31, 2019 and $204.4 million at December 31, 2018 were serviced for others.
The following table presents a reconciliation of the securities available for sale measured at fair value
on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2019,
2018, and 2017:
Year Ended
December 31, 2019
Trust
Preferred
Securities
-
$
Corporate
Bonds
$
3,069
Year Ended
December 31, 2018
Trust
Preferred
Securities
$
489
Corporate
Bonds
$ 3,086
Year Ended
December 31, 2017
Trust
Preferred
Securities
1,820
$
Corporate
Bonds
$
2,971
-
-
-
(249 )
-
237
-
-
-
-
(660 )
(66 )
-
(17 )
-
-
-
-
1,006
-
(1,539 )
(798 )
-
115
-
-
-
Level 3 Investments Only
(dollars in thousands)
Balance, January 1,
Security transferred to
Level 3 measurement
Unrealized (losses) gains
Paydowns
Proceeds from sales
Realized losses
Impairment charges on
Level 3
-
-
-
-
-
Balance, December 31,
$
-
2,820
$
$
-
-
-
$ 3,069
$
-
489
-
3,086
$
For assets measured at fair value on a nonrecurring basis, the fair value measurements by level within
the fair value hierarchy used at December 31, 2019 and 2018, respectively, were as follows:
(dollars in thousands)
December 31, 2019:
Impaired loans
Other real estate owned
December 31, 2018:
Impaired loans
Other real estate owned
(Level 1)
Quoted Prices
in Active
Markets for
Identical Assets
(Level 2)
Significant
Other
Observable
Inputs
$
$
-
-
-
-
$
$
-
-
-
-
Total
5,730
899
5,955
1,114
$
$
(Level 3)
Significant
Unobservable
Inputs
$
$
5,730
899
5,955
1,114
118
The table below presents additional quantitative information about Level 3 assets measured at fair value
(dollars in thousands):
Asset Description
Fair Value
December 31, 2019
Corporate bonds
$
2,820
SBA servicing assets
$
4,447
Impaired loans
$
5,730
Other real estate owned
$
899
December 31, 2018
Corporate bonds
$
3,069
SBA servicing assets
$
4,785
Quantitative Information about Level 3 Fair Value Measurements
Valuation
Technique
Discounted
Cash Flows
Discounted
Cash Flows
Appraised Value of
Collateral (1)
Appraised Value of
Collateral (1)
Discounted
Cash Flows
Discounted
Cash Flows
Unobservable Input
Range (Weighted
Average)
Discount Rate
Conditional
Prepayment Rate
Discount Rate
(6.66%)
(13.53%)
(10.75%)
Liquidation expenses (2)
9% - 20% (12%) (3)
Liquidation expenses (2)
6% - 16% (8%) (3)
Discount Rate
Conditional
Prepayment Rate
Discount Rate
(8.24%)
(10.31%)
(11.50%)
Impaired loans
Other real estate owned
$
5,955
$
1,114
Appraised Value of
Collateral (1)
Appraised Value of
Collateral (1)
Liquidation expenses (2)
11% - 24% (13%) (3)
Liquidation expenses (2)
(7%) (3)
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not
identifiable.
(2) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
(3) The range and weighted average of qualitative factors such as economic conditions and estimated liquidation expenses are presented as a
percent of the appraised value.
The significant unobservable inputs for impaired loans and other real estate owned are the appraised
value or an agreed upon sales price. These values are adjusted for estimated costs to sell which are
incremental direct costs to transact a sale such as broker commissions, legal fees, closing costs and title
transfer fees. The costs must be considered essential to the sale and would not have been incurred if the
decision to sell had not been made. The costs to sell are based on costs associated with the Company’s
actual sales of other real estate owned which are assessed annually.
Fair Value Assumptions
The following information should not be interpreted as an estimate of the fair value of the entire
Company since a fair value calculation is only provided for a limited portion of the Company’s assets and
liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company’s disclosures and those of other companies may not be
meaningful. The following methods and assumptions were used to estimate the fair values of the
Company’s financial instruments at December 31, 2019 and December 31, 2018:
119
Investment Securities
The fair value of securities available for sale (carried at fair value) and held to maturity (carried at
amortized cost) are determined by obtaining quoted market prices on nationally recognized securities
exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted market prices for the specific
securities but rather by relying on the securities’ relationship to other benchmark quoted prices. For certain
securities, which are not traded in active markets or are subject to transfer restrictions, valuations are
adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on
available market evidence (Level 3). In the absence of such evidence, management’s best estimate is
used. Management’s best estimate consists of both internal and external support on certain Level 3
investments. Internal cash flow models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from broker/dealers (where available)
were used to support fair values of certain Level 3 investments.
The types of instruments valued based on matrix pricing in active markets include all of the Company’s
U.S. government and agency securities, corporate bonds, asset backed securities, and municipal obligations
held in the investment securities portfolio. Such instruments are generally classified within Level 2 of the
fair value hierarchy. As required by ASC 820-10, the Company does not adjust the matrix pricing for such
instruments.
Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, and
may be adjusted to reflect illiquidity and/or non-transferability, with such adjustment generally based on
available market evidence. In the absence of such evidence, management’s best estimate is used.
Subsequent to inception, management only changes Level 3 inputs and assumptions when corroborated by
evidence such as transactions in similar instruments, completed or pending third-party transactions in the
underlying investment or comparable entities, subsequent rounds of financing, recapitalizations and other
transactions across the capital structure, offerings in the equity or debt markets, and changes in financial
ratios or cash flows. Republic has one Level 3 investment classified as available for sale which is a single
corporate bond.
The corporate bond included in Level 3 was transferred from Level 2 in 2010 and is not actively traded.
Impairment would depend on the repayment ability of the underlying issuer, which is assessed through a
detailed quarterly review of the issuer’s financial statements. The issuer is a “well capitalized” financial
institution as defined by federal banking regulations and has demonstrated the ability to raise additional
capital, when necessary, through the public capital markets. The fair value of this corporate bond is
estimated by obtaining a price of a comparable floating rate debt instrument through Bloomberg.
Mortgage Loans Held for Sale (Carried at Fair Value)
The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be
sold in the principal market at the measurement date and are classified within Level 2 of the fair value
hierarchy. Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in
order to more accurately reflect their economic value. Interest income on loans held for sale, totaled
$500,000 and $1.2 million for the twelve months ended December 31, 2019 and December 31, 2018,
respectively, are included in interest and fees in the statements of operations.
120
The following table reflects the difference between the carrying amount of mortgage loans held for
sale, measured at fair value and the aggregate unpaid principal amount that Republic is contractually
entitled to receive at maturity as of December 31, 2019 and December 31, 2018 (dollars in thousands):
Carrying
Amount
10,345
20,887
$
$
Aggregate Unpaid
Principal Balance
Excess Carrying
Amount Over
Aggregate Unpaid
Principal Balance
$
$
9,983
20,071
$
$
362
816
December 31, 2019
December 31, 2018
Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the
statement of operations in mortgage banking income. Republic did not have any mortgage loans held for
sale recorded at fair value that were 90 or more days past due and on non-accrual at December 31, 2019
and December 31, 2018.
Interest Rate Lock Commitments (“IRLC”)
The Company determines the value of IRLCs by comparing the market price to the price locked in with
the customer, adding fees or points to be collected at closing, subtracting commissions to be paid at closing,
and subtracting estimated remaining loan origination costs to the bank based on the processing status of the
loan. The Company also considers pull-through as it determines the fair value of IRLCs. Factors that affect
pull-through rates include the origination channel, current mortgage interest rates in the market versus the
interest rate incorporated in the IRLC, the purpose of the mortgage (purchase versus financing), the stage
of completion of the underlying application and underwriting process, and the time remaining until the
IRLC expires. IRLCs are classified within Level 2 of the valuation hierarchy.
Best Efforts Forward Loan Sales Commitments
Best efforts forward loan sales commitments are classified within Level 2 of the valuation hierarchy.
Best efforts forward loan sales commitments fix the forward sales price that will be realized upon the sale
of mortgage loans into the secondary market. Best efforts forward loan sales commitments are entered into
for loans at the time the borrower commitment is made. These best efforts forward loan sales commitments
are valued using the committed price to the counterparty against the current market price of the interest rate
lock commitment or mortgage loan held for sale.
Mandatory Forward Loan Sales Commitments
Fair values for mandatory forward loan sales commitments are based on fair values of the underlying
mortgage loans and the probability of such commitments being exercised. Due to the observable inputs
used by Republic, best efforts mandatory loan sales commitments are classified within Level 2 of the
valuation hierarchy.
Impaired Loans (Carried at Lower of Cost or Fair Value)
Impaired loans are those that the Company has measured impairment based on the fair value of the
loan’s collateral. Fair value is generally determined based upon independent third party appraisals of the
properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level
3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The
fair value consists of the loan balances less any valuation allowance. The valuation allowance amount is
calculated as the difference between the recorded investment in a loan and the present value of expected
121
future cash flows or it is calculated based on discounted collateral values if the loans are collateral
dependent.
Other Real Estate Owned (Carried at Lower of Cost or Fair Value)
These assets are carried at the lower of cost or fair value. Fair value is determined through valuations
periodically performed by third-party appraisers, and the real estate is carried at the lower of its carrying
amount or fair value less estimated costs to sell. Any declines in the fair value of the real estate properties
below the initial cost basis are recorded through a valuation expense. At December 31, 2019 and December
31, 2018, these assets are carried at current fair value and classified within Level 3 of the fair value
hierarchy.
SBA Servicing Asset (Carried at Fair Value)
The SBA servicing asset is initially recorded when loans are sold and the servicing rights are retained
and recorded on the balance sheet. An updated fair value is obtained from an independent third party on a
quarterly basis and adjustments are presented as loan and servicing fees on the statement of income. The
valuation begins with the projection of future cash flows for each asset based on their unique characteristics,
the Company’s market-based assumptions for prepayment speeds and estimated losses and recoveries. The
present value of the future cash flows are then calculated utilizing the Company’s market-based discount
ratio assumptions. In all cases, the Company models expected payments for every loan for each quarterly
period in order to create the most detailed cash flow stream possible.
The Company uses assumptions and estimates in determining the impairment of the SBA servicing
asset. These assumptions include prepayment speeds and discount rates commensurate with the risks
involved and comparable to assumptions used by participants to value and bid serving rights available for
sale in the market. At December 31, 2019 and December 31, 2018, the sensitivity of the current fair value
of the SBA loan servicing rights to immediate 10% and 20% adverse changes in key assumptions are
included in the accompanying table.
(dollars in thousands)
SBA Servicing Asset
December 31, 2019
December 31, 2018
Fair Value of SBA Servicing Asset
$
4,447
$
4,785
Composition of SBA Loans Serviced for Others
Fixed-rate SBA loans
Adjustable-rate SBA loans
Total
2 %
98 %
100 %
2 %
98 %
100 %
Weighted Average Remaining Term
20.7 years
20.4 years
Prepayment Speed
Effect on fair value of a 10% increase
Effect on fair value of a 20% increase
Weighted Average Discount Rate
Effect on fair value of a 10% increase
Effect on fair value of a 20% increase
13.53 %
(175 )
(338 )
10.75 %
(154 )
(298 )
$
$
10.31 %
(170 )
(330 )
11.50 %
(186 )
(359 )
$
$
122
The sensitivity calculations above are hypothetical and should not be considered to be predictive of
future performance. As indicated, changes in value based on adverse changes in assumptions generally
cannot be extrapolated because the relationship of the change in assumption to the change in value may not
be linear. Also in this table, the effect of an adverse variation in a particular assumption on the value of the
SBA servicing rights is calculated without changing any other assumption. While in reality, changes in one
factor may magnify or counteract the effect of the change.
Off-Balance Sheet Financial Instruments (Disclosed at notional amounts)
Fair values for the Company’s off-balance sheet financial instruments (lending commitments and letters
of credit) are based on fees currently charged in the market to enter into similar agreements, taking into
account, the remaining terms of the agreements and the counterparties’ credit standing.
The estimated fair values of the Company’s financial instruments at December 31, 2019 were as
follows:
(dollars in thousands)
Balance Sheet Data
Financial assets:
Cash and cash equivalents
Investment securities available for sale
Investment securities held to maturity
Restricted stock
Loans held for sale
Loans receivable, net
SBA servicing assets
Accrued interest receivable
Interest rate lock commitments
Best efforts forward loan sales
Mandatory forward loan sales
commitments
commitments
Financial liabilities:
Fair Value Measurements at December 31, 2019
Carrying
Amount
Fair
Value
$
168,319
539,042
644,842
2,746
13,349
1,738,929
4,447
9,934
362
4
2
$
168,319
539,042
653,109
2,746
13,349
1,731,876
4,447
9,934
362
4
2
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
168,319 $
- $
-
-
-
-
-
-
-
-
-
-
536,222
653,109
2,746
10,345
-
-
9,934
362
4
2
-
2,820
-
-
3,004
1,731,876
4,447
-
-
-
-
Deposits
Demand, savings and money market
Time
Subordinated debt
Accrued interest payable
Interest rate lock commitments
Best efforts forward loan sales
Mandatory forward loan sales
commitments
commitments
Off-Balance Sheet Data
Commitments to extend credit
Standby letters-of-credit
$
$ 2,775,584
223,579
11,265
1,630
-
133
83
$ 2,775,584
224,095
8,540
1,630
-
133
83
-
-
-
-
- $
-
-
-
-
-
-
-
-
2,775,584 $
224,095
-
1,630
-
133
83
-
-
-
-
8,540
-
-
-
-
-
-
123
The estimated fair values of the Company’s financial instruments at December 31, 2018 were as
follows:
Fair Value Measurements at December 31, 2018
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
72,473 $
-
-
-
-
-
-
-
-
-
-
- $
317,945
747,323
5,754
20,887
-
-
9,025
410
5
10
-
3,069
-
-
5,404
1,410,945
4,785
-
-
-
-
Carrying
Amount
Fair
Value
$
72,473
321,014
761,563
5,754
26,291
1,427,983
4,785
9,025
410
5
10
$
72,473
321,014
747,323
5,754
26,291
1,410,945
4,785
9,025
410
5
10
$
$ 2,238,610
154,257
11,259
558
-
138
230
$ 2,238,610
152,989
8,279
558
-
138
230
-
-
-
-
- $
-
-
-
-
-
-
-
-
2,238,610 $
152,989
-
558
-
138
230
-
-
-
-
8,279
-
-
-
-
-
-
(dollars in thousands)
Balance Sheet Data
Financial assets:
Cash and cash equivalents
Investment securities available for sale
Investment securities held to maturity
Restricted stock
Loans held for sale
Loans receivable, net
SBA servicing assets
Accrued interest receivable
Interest rate lock commitments
Best efforts forward loan sales
Mandatory forward loan sales
commitments
commitments
Financial liabilities:
Deposits
Demand, savings and money market
Time
Subordinated debt
Accrued interest payable
Interest rate lock commitments
Best efforts forward loan sales
Mandatory forward loan sales
commitments
commitments
Off-Balance Sheet Data
Commitments to extend credit
Standby letters-of-credit
16. Stock Based Compensation
The Company has a Stock Option and Restricted Stock Plan (“the 2005 Plan”), under which the
Company granted options, restricted stock or stock appreciation rights to the Company’s employees,
directors, and certain consultants. The 2005 Plan became effective on November 14, 1995, and was
amended and approved at the Company’s 2005 annual meeting of shareholders. Under the terms of the
2005 Plan, 1.5 million shares of common stock, plus an annual increase equal to the number of shares
needed to restore the maximum number of shares that could be available for grant under the 2005 Plan to
1.5 million shares, were available for such grants. As of December 31, 2019, the only grants under the 2005
Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the
market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan
vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November
14, 2015 in accordance with the terms and conditions specified in the Plan agreement.
On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity
Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units,
or stock appreciation rights to the Company’s employees, directors, independent contractors, and
consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual
adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors
may determine, are available for such grants. At December 31, 2019, the maximum number of common
124
shares issuable under the 2014 Plan was 6.4 million shares. During the twelve months ended December 31,
2019, 1.4 million options were granted under the 2014 Plan with a fair value of $2,799,976. During 2019,
options to purchase the Company’s common stock were granted to certain employees and directors. The
exercise price for the options granted was equal to the closing price of the Company’s common stock on
the date of grant. The options issued are subject to a one to four year vesting period and expire after ten
years.
The Company utilized the Black-Scholes option pricing model to calculate the estimated fair value of
each stock option granted on the date of the grant. A summary of the assumptions used in the Black-Scholes
option pricing model for 2019, 2018, and 2017 is as follows:
Dividend yield(1)
Expected volatility
Risk-free interest rate(4)
Expected life(5)
Assumed forfeiture rate(6)
2019
0.0%
28.81%(2)
1.42% to 2.78%
6.25 years
4.0%
2018
0.0%
28.22%(2)
2.35% to 2.96%
6.25 years
4.0%
2017
0.0%
44.00% to 50.09%(3)
1.89% to 2.30%
5.5 to 7.0 years
6.0%
(1) A dividend yield of 0.0% is utilized because cash dividends have never been paid.
(2) The expected volatility was based on the historical volatility of the Company’s common stock price as adjusted for certain historical periods
of extraordinary volatility in order to estimate expected volatility.
(3) Expected volatility is based on Bloomberg’s five and one-half to seven year volatility calculation for “FRBK” stock.
(4) The risk-free interest rate is based on the five to seven year Treasury bond.
(5) The expected life reflects a 1 to 4 year vesting period, the maximum ten year term and review of historical behavior.
(6) Forfeiture rate is determined through forfeited and expired options as a percentage of options granted over the current three year period.
During 2019, 842,898 options vested as compared to 753,864 options in 2018 and 529,624 options in
2017. Expense is recognized ratably over the period required to vest. At December 31, 2019, the intrinsic
value of the 4,979,475 options outstanding was $1.3 million, while the intrinsic value of the 2,611,960
exercisable (vested) options was $1.3 million. During 2019, 185,125 options were forfeited with a weighted
average grant date fair value of $475,000.
Information regarding stock based compensation for the years ended December 31, 2019, 2018, and
2017 is set forth below:
Stock based compensation expense recognized
Number of unvested stock options
Fair value of unvested stock options
Amount remaining to be recognized as expense
2019
$ 2,632,000
2,367,515
$ 6,108,271
$ 3,574,740
2018
$ 2,116,000
1,962,163
$ 5,550,820
$ 3,406,394
2017
$ 1,842,000
1,659,102
$ 4,587,565
$ 2,508,314
The remaining amount of $3.6 million will be recognized ratably as expense through October 2023.
125
A summary of stock option activity under the Plan as of December 31, 2019, 2018, and 2017 is as
follows:
2019
For the Years Ended December 31,
2018
2017
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Weighted
Average
Exercise
Price
Shares
Shares
Shares
Outstanding, beginning of year
Granted
Exercised
Forfeited
Outstanding, end of year
1,356,500
(53,550)
(185,125)
3,861,650 $ 5.96
6.35
4.88
6.76
4,979,475 $ 6.05
3,005,825 $ 4.98
8.34
1,106,800
3.83
(174,850)
6.80
(76,125)
3,861,650 $ 5.96
2,332,900 $ 3.70
8.03
916,000
3.26
(197,975)
7.95
(45,100)
3,005,825 $ 4.98
Options exercisable at year-end
2,611,960 $ 5.28
1,899,487 $ 4.53
1,346,723 $ 3.55
Weighted average fair value of
options granted during the year
$ 2.15
$ 2.85
$ 3.75
A summary of stock option exercises and related proceeds during the years end December 31,
2019, 2018, and 2017 is as follows:
For the Years Ended December 31,
2018
2019
2017
Number of options exercised
Cash received
Intrinsic value
Tax benefit
53,550
$
261,143
$ 72,187
5,159
$
174,850
$
670,413
$ 814,855
$ 12,288
197,975
$
646,263
$ 991,957
$ 81,589
The following table summarizes information about options outstanding at December 31, 2019:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
Number
Outstanding
$1.55 to $3.53
$3.55 to $3.95
$3.99 to $7.85
$8.00 to $9.45
516,200
650,475
1,928,125
1,884,675
4,979,475
Weighted-
Average
Remaining
Contractual Life
2.5
4.5
5.7
8.2
Weighted-
Average
Exercise Price
Shares
Weighted-
Average
Exercise Price
$ 2.51
3.62
5.69
8.22
$ 6.05
516,200
648,475
423,874
1,023,411
2,611,960
$ 2.51
3.62
4.17
8.19
$ 5.28
A roll-forward of non-vested options during the year ended December 31, 2019 is as follows:
Nonvested, beginning of year
Granted
Vested
Forfeited
Nonvested, end of year
Number of
Shares
1,962,163
1,356,500
(842,898)
(108,250)
2,367,515
Weighted-
Average Grant
Date Fair Value
$ 2.83
2.15
2.83
2.83
$ 2.58
126
17. Segment Reporting
The Company has one reportable segment: community banking. The community banking segment
primarily encompasses the commercial loan and deposit activities of Republic, as well as, residential
mortgage and consumer loan products in the area surrounding its stores. Mortgage loans in Delaware and
Florida are primarily made to local customers that have second homes (vacation) in Delaware and Florida.
We do not have loan production offices in those states.
18. Transactions with Affiliates and Related Parties
The Company made payments to related parties in the amount of $1.4 million, $685,000, and $653,000
during 2019, 2018, and 2017, respectively. The disbursements made during 2019, 2018, and 2017 include
$1.1 million, $400,000, and $361,000, respectively, in fees for marketing, graphic design, architectural and
project management services paid to InterArch, a company owned by the spouse of Vernon W. Hill, II. Mr.
Hill is the Chairman of the Company, and beneficially owns 8.2% of the common shares currently
outstanding. The Company paid $158,000, $165,000 and $172,000 during 2019, 2018, and 2017 to
Glassboro Properties, LLC related to a land lease agreement for its Glassboro store. Mr. Hill has an
ownership interest in Glassboro Properties LLC, a commercial real estate firm.
The Company paid $120,000 during 2019, 2018 and 2017 to Brian Communications for public relations
services in addition to reimbursements for out-of-pocket expenses and other reimbursable costs. Brian
Tierney, a member of the Board of Directors, is the CEO of Brian Communications, a strategic
communications agency.
127
19. Parent Company Financial Information
The following financial statements for Republic First Bancorp, Inc. (Parent Company) should be read
in conjunction with the consolidated financial statements and the other notes related to the consolidated
financial statements.
Balance Sheet
December 31, 2019 and 2018
(Dollars in thousands)
ASSETS
Cash
Corporation-obligated mandatorily redeemable capital securities of
subsidiary trust holding junior obligations of the corporation
Investment in subsidiaries
Other assets
Total Assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accrued expenses
Corporation-obligated mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation
Total Liabilities
Shareholders’ Equity
Total Shareholders’ Equity
December 31,
2019
December 31,
2018
$
6,327
$
27,722
$
$
341
245,158
8,640
260,466
341
220,864
7,572
256,499
$
33
$
51
11,265
11,298
11,259
11,310
249,168
245,189
Total Liabilities and Shareholders’ Equity
$
260,466
$
256,499
128
Statements of Operations, Comprehensive Income, and Changes in Shareholders’ Equity
For the years ended December 31, 2019, 2018, and 2017
(Dollars in thousands)
2019
2018
2017
Interest income
Total income
$
$
14
14
$
13
13
Trust preferred interest expense
Other expenses
Total expenses
Net loss before taxes
Benefit for income taxes
Loss before undistributed income of
subsidiaries
Equity in undistributed income of
subsidiaries
Net income (loss)
Net income (loss)
Total other comprehensive income (loss)
Total comprehensive income
Shareholders’ equity, beginning of year
Stock based compensation
Exercise of stock options
Conversion of subordinated debt to common
shares
Net income (loss)
Total other comprehensive income (loss)
Shareholders’ equity, end of year
476
3,662
4,138
(4,124)
(917)
(3,207)
(293)
(3,500)
(3,500)
4,586
1,086
245,189
2,632
261
-
(3,500)
4,586
249,168
$
$
$
$
$
441
4,972
5,413
(5,400)
(1,640)
(3,760)
12,387
8,627
8,627
(2,778)
5,849
226,460
2,116
670
10,094
8,627
(2,778)
245,189
$
$
$
$
$
$
$
$
$
$
37
37
1,225
1,424
2,649
(2,612)
(914)
(1,698)
10,603
8,905
8,905
(215)
8,690
215,053
1,842
646
229
8,905
(215)
226,460
129
Statements of Cash Flows
For the years ended December 31, 2019, 2018, and 2017
(Dollars in thousands)
Cash flows from operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Share based compensation
Amortization of debt issuance costs
Increase in other assets
Net increase (decrease) in other liabilities
Equity in undistributed income of subsidiaries
Net cash used in operating activities
Cash flows from investing activities:
Investment in subsidiary
Net cash used in investing activities
Cash flows from financing activities:
Exercise of stock options
Net cash provided by financing activities
2019
2018
2017
$
(3,500)
$
8,627
$
8,905
2,632
6
(1,069)
(18)
293
(1,656)
2,116
6
(1,639)
20
(12,387)
(3,257)
1,842
29
(1,342)
(179)
(10,603)
(1,348)
(20,000)
(20,000)
(30,000)
(30,000)
261
261
670
670
-
-
646
646
Decrease in cash
Cash, beginning of period
Cash, end of period
(21,395)
27,722
6,327
$
(32,587)
60,309
$ 27,722
(702)
61,011
$
60,309
130
20. Quarterly Financial Data (unaudited)
The following represents summarized unaudited quarterly financial data of the Company for each of
the quarters ended during 2019 and 2018.
Summary of Selected Quarterly Consolidated Financial Data
(dollars in thousands, except per share data)
December 31st
September 30th
June 30th
March 31st
For the Quarter Ended
$
$
$
$
$
$
$
$
25,519
6,379
19,140
300
4,945
23,267
92
426
0.01
0.01
20,899
2,783
18,116
400
4,535
20,102
372
1,777
0.03
0.03
$
$
$
$
$
2019
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) per share:
Basic
Diluted
2018
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Provision (benefit) for income taxes
Net income (loss)
Net income (loss) per share (1):
26,892
6,978
19,914
1,155
5,213
27,488
(1,031)
(2,485)
$
$
26,208
6,826
19,382
450
6,554
27,824
(516)
(1,822)
$
$
26,245
6,874
19,371
-
7,026
25,911
105
381
(0.04)
(0.04)
$
$
(0.03)
(0.03)
$
$
0.01
0.01
$
$
25,293
5,313
19,980
600
4,888
22,057
54
23,558
4,412
19,146
500
5,131
20,833
622
$
2,157
$
2,322
$
22,324
3,662
18,662
800
5,768
20,729
530
2,371
Basic
Diluted
$
$
0.04
0.04
$
$
0.04
0.04
$
$
0.04
0.04
(1) Quarterly net income per share does not add to full year net income per share due to rounding.
131
21. Changes in Accumulated Other Comprehensive Income (Loss) By Component (1)
The following table presents the changes in accumulated other comprehensive loss by component, net
of taxes, for the years ended December 31, 2019, 2018, and 2017.
(dollars in thousands)
Balance January 1, 2019
Unrealized gain on securities
Amounts reclassified from accumulated other
comprehensive income to net income (2)
Net current-period other comprehensive
income
Total change in accumulated other
comprehensive income
Balance December 31, 2019
Balance January 1, 2018
Reclassification due to the adoption of
ASU 2018-02
Unrealized gain on securities
Net unrealized holding losses on securities
transferred from available-for-sale to held-
to-maturity
Amounts reclassified from accumulated other
comprehensive income to net income (2)
Net current-period other comprehensive
income (loss)
Total change in accumulated other
comprehensive income (loss)
Balance December 31, 2018
Balance January 1, 2017
Unrealized loss on securities
Amounts reclassified from accumulated other
comprehensive income to net income (2)
Net current-period other comprehensive
income (loss)
Total change in accumulated other
comprehensive income (loss)
Balance December 31, 2017
Unrealized Gains
(Losses) on
Available-For-Sale
Securities
Unrealized Holding
Losses on Securities
Transferred From
Available-For-Sale
To Held-To-
Maturity
Total
$
(4,736)
4,284
$
(7,191)
-
$
(11,927)
4,284
(823)
3,461
1,125
1,125
3,461
(1,275)
$
1,125
(6,066)
$
302
4,586
4,586
(7,341)
(7,150)
$
(359)
$
(7,509)
(1,562)
3,927
-
49
3,976
2,414
(4,736)
(6,831)
(413)
94
(319)
$
$
(78)
-
(6,855)
101
(6,754)
(6,832)
(7,191)
(463)
-
104
104
$
$
(319)
(7,150)
$
104
(359)
$
(1,640)
3,927
(6,855)
150
(2,778)
(4,418)
(11,927)
(7,294)
(413)
198
(215)
(215)
(7,509)
$
$
$
$
$
(1) All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income.
(2) Reclassification amounts are reported as gains/losses on sales of investment securities, impairment losses, and amortization
of net unrealized losses on the Consolidated Statement of Income.
22. Goodwill
The Company completed an annual impairment test for goodwill as of July 31, 2019 and 2018. Future
impairment testing will be conducted as of July 31 on an annual basis, unless a triggering event occurs in
the interim that would suggest impairment, in which case it would be tested as of the date of the triggering
event. During the year ended December 31, 2019 and 2018, there was no goodwill impairment recorded.
There can be no assurance that future impairment assessments or tests will not result in a charge to earnings.
132
On July 28, 2016, Republic acquired all of the issued and outstanding limited liability company interests
of Oak Mortgage Company, LLC (“Oak Mortgage”) and, as a result, Oak Mortgage became a wholly owned
subsidiary of Republic on that date. The Company’s goodwill related to the acquisition of Oak Mortgage
in July 2016 is detailed below:
(dollars in thousands)
Balance
December 31,
2018
Additions/
Adjustments
Amortization
Balance
December 31,
2019
Amortization Period
(in years)
Goodwill
$
5,011
$
-
$
-
$
5,011
Indefinite
(dollars in thousands)
Balance
December 31,
2017
Additions/
Adjustments
Amortization
Balance
December 31,
2018
Amortization Period
(in years)
Goodwill
$
5,011
$
-
$
-
$
5,011
Indefinite
23. Derivatives and Risk Management Activities
Republic did not have any derivative instruments designated as hedging instruments, or subject to
master netting and collateral agreements for the twelve months ended December 31, 2019 and 2018. The
following table summarizes the amounts recorded in Republic’s statement of financial condition for
derivatives not designated as hedging instruments as of December 31, 2019 and December 31, 2018 (in
thousands):
December 31, 2019
Asset derivatives:
Balance Sheet
Presentation
Fair
Value
Notional
Amount
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Other Assets
Other Assets
Other Assets
Liability derivatives:
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Other Liabilities
Other Liabilities
Other Liabilities
$
$
362
4
2
-
133
83
$
$
14,586
875
288
-
13,711
9,614
December 31, 2018
Asset derivatives:
Balance Sheet
Presentation
Fair
Value
Notional
Amount
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Other Assets
Other Assets
Other Assets
Liability derivatives:
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Other Liabilities
Other Liabilities
Other Liabilities
$
$
410
5
10
-
138
230
$
$
16,966
1,639
865
-
15,327
18,980
133
The following table summarizes the amounts recorded in Republic’s statement of income for derivative
instruments not designated as hedging instruments for the twelve months ended December 31, 2019, 2018,
and 2017 (in thousands):
Twelve Months Ended December 31, 2019
Asset derivatives:
Income Statement
Presentation
Gain/(Loss)
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Mortgage banking income
Mortgage banking income
Mortgage banking income
Liability derivatives:
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Mortgage banking income
Mortgage banking income
Mortgage banking income
$
$
(48)
(1)
(8)
-
5
147
Twelve Months Ended December 31, 2018
Asset derivatives:
Income Statement
Presentation
Gain/(Loss)
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Mortgage banking income
Mortgage banking income
Mortgage banking income
Liability derivatives:
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Mortgage banking income
Mortgage banking income
Mortgage banking income
$
$
47
-
(9)
1
(45)
(35)
Twelve Months Ended December 31, 2017
Asset derivatives:
Income Statement
Presentation
Gain/(Loss)
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Mortgage banking income
Mortgage banking income
Mortgage banking income
Liability derivatives:
IRLC’s
Best efforts forward loan sales commitments
Mandatory forward loan sales commitments
Mortgage banking income
Mortgage banking income
Mortgage banking income
$
$
(76)
(98)
(210)
54
32
(157)
The fair value of Republic’s IRLCs, best efforts forward loan sales commitments, and mandatory
forward loan sales commitments are based upon the estimated value of the underlying mortgage loan
(determined consistent with “Loans Held for Sale”), adjusted for (1) estimated costs to complete and
originate the loan, and (2) the estimated percentage of IRLCs that will result in a closed mortgage loan. The
valuation of the IRLCs issued by Republic includes the value of the servicing released premium. Republic
sells loans servicing released, and the servicing released premium is included in the market price.
134
24. Revenue Recognition
On January 1, 2018, the Company adopted ASU 2014-09 “Revenue from Contracts with Customers”
(Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 2 Summary of Significant
Accounting Policies, the implementation of the new standard did not have a material impact on the
measurement of recognition of revenue. Management determined that a cumulative effect adjustment to
opening retained earnings was not deemed necessary. Results for reporting periods beginning January 1,
2018 are presented under Topic 606, while prior period amounts were not adjusted and continue to be
reported in accordance with our historic accounting under Topic 605.
Topic 606 does not apply to revenue associated with financial instruments, including revenue from
loans and investments. In addition, certain non-interest income streams such as gains on sales of residential
mortgage and SBA loans, income associated with servicing assets, and loan fees, including residential
mortgage originations to be sold and prepayment and late fees charged across all loan categories are also
not in scope of the new guidance. Topic 606 is applicable to non-interest revenue streams such as service
charges on deposit accounts. However, the recognition of these revenue streams did not change significantly
upon adoption of Topic 606. Non-interest revenue streams in-scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed
business and public checking accounts), ATM fees, NSF fees, and other deposit related fees.
The Company’s performance obligation for account analysis fees and monthly services fees is generally
satisfied, and the related revenue recognized, over the period in which the service is provided, which is
typically one month. Revenue is recognized at month end after the completion of the service period and
payment for these service charges on deposit accounts is primarily received through a direct charge to
customers’ accounts.
ATM fees, NSF fees, and other deposit related fees are largely transactional based, and therefore, the
Company’s performance obligation is satisfied, and the related revenue recognized, at a point in time.
Payment for these service charges are received immediately through a direct charge to customers’ accounts.
For the Company, there are no other material revenue streams within the scope of Topic 606.
The following tables present non-interest income, segregated by revenue streams in-scope and out-of-
scope of Topic 606, for the twelve months ended December 31, 2019, 2018, and 2017.
(dollars in thousands)
Non-interest income
In-scope of Topic 606
Twelve Months Ended
December 31,
2018
2019
2017
Service charges on deposit accounts
Other non-interest income
Non-interest income (in-scope of Topic 606)
Non-interest income (out-of-scope of Topic 606)
Total non-interest income
$
7,541
214
7,755
15,983
$ 23,738
$ 5,476
174
5,650
14,672
$ 20,322
$
3,904
177
4,081
16,016
$ 20,097
135
Contract Balances
A contract assets balance occurs when an entity performs a service for a customer before the customer
pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract
asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the
entity has already received payment (or payment is due) from the customer. The Company’s non-interest
revenue streams are largely based on transaction activity, or standard month-end revenue accruals.
Consideration is often received immediately or shortly after the Company satisfies its performance
obligation and revenue is recognized. The Company does not typically enter into long-term contracts with
customers, and therefore, does not experience significant contract balances. As of December 31, 2019,
2018, and 2017, the Company did not have any significant contract balances.
Contract Acquisition Costs
In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently
amortize as an expense, certain incremental costs of obtaining a contract with a customer if these costs are
expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs
to obtain a contract with a customer that it would not have incurred if the contract had not been obtained
(for example, sales commission). The company utilizes the practical expedient which allows entities to
immediately expense contract acquisition costs when the assets that would have resulted from capitalizing
these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did
not capitalize any contract acquisition cost.
25. Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards
Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase
transparency and comparability among organizations by recognizing lease assets and lease liabilities on the
balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and
disclosing key information about leasing arrangements. The new standard was adopted by the Company on
January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees
to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented
or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the
beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. Adoption
of ASU 2016-02 resulted in the recognition of total operating lease liability obligations totaling $35.1
million and the recognition of operating lease right-of-use assets totaling $34.2 million at the date of
adoption. The initial balance sheet gross up upon adoption was related to operating leases on land and
buildings for twenty-three lease agreements. The Company has no finance leases or material subleases for
which it is the lessor of property. The Company has elected to apply the package of practical expedients
allowed by the new standard under which the Company need not reassess whether any expired or existing
contracts are leases or contain leases, the Company need not reassess the lease classification for any expired
or existing lease, and the Company need not reassess initial direct costs for any existing leases.
At January 1, 2019, the Company had thirty-four operating leases for real property, which includes
operating leases for fifteen branch locations, eight offices that are used for general office space, and eleven
operating leases for equipment. All of the real property operating leases include one or more options to
extend the lease term. Five of the operating leases for branch locations are land leases where the Company
is responsible for the construction of the building on the property.
At December 31, 2019, the Company had thirty-seven operating lease agreements, which include
operating leases for seventeen branch locations, seven offices that are used for general office space, and
136
thirteen operating leases for equipment. Two of the real property operating leases did not include one or
more options to extend the lease term. Five of the operating leases for branch locations are land leases
where the Company is responsible for the construction of the building on the property. The thirty-seven
operating leases have maturity dates ranging from January 2020 to December 2058 most of which include
options for multiple five and ten year extensions which the Company is reasonably certain to exercise. No
operating leases include variable lease payments that are based on an index or rate, such as the CPI. The
weighted average remaining operating lease term for these leases is 19.75 years as of December 31, 2019.
The discount rate used in determining the operating lease liability obligation for each individual lease
was the assumed incremental borrowing rate for the Company that corresponded with the remaining lease
term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for
leases subsequently entered in to. The weighted average operating lease discount rate was 3.58% as of
December 31, 2019.
The following table presents operating lease costs net of sublease income for the twelve months ended
December 31, 2019.
(dollars in thousands)
Operating lease cost
Sublease income
Total lease cost
Twelve Months
Ended
December 31, 2019
$
$
6,817
(302)
6,515
Rent expense was approximately $4.4 million and $4.0 million for the years ended December 31, 2018
and 2017, respectively.
The following table presents a maturity analysis of total operating lease liability obligations and
reconciliation of the undiscounted cash flows to total operating lease liability obligations at December 31,
2019.
(dollars in thousands)
Operating lease payments due:
Within one year
One to three years
Three to five years
More than five years
Total undiscounted cash flows
Discount on cash flows
$
Total operating lease liability obligations
$
December 31, 2019
7,221
11,385
10,028
70,721
99,355
(30,499)
68,856
137
The following table presents cash and non-cash activities for the twelve months ended December 31,
2019.
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases
Non-cash investing and financing activities
Additions to Operating leases – right of use asset
New operating lease liability obligation
Twelve Months
Ended
December 31, 2019
$
$
5,387
72,648
138
Tel: 215-564-1900
Fax: 215-564-3940
www.bdo.com
Ten Penn Center
1801 Market Street, Suite 1700
Philadelphia, PA 19103
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Republic First Bancorp, Inc.
Philadelphia, Pennsylvania
Opinion on Internal Control over Financial Reporting
We have audited Republic First Bancorp, Inc.’s (the “Company’s”) internal control over financial
reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company and
subsidiaries as of December 31, 2019 and 2018, the related consolidated statements of operations,
comprehensive income, changes in shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2019, and the related notes and our report dated
March 16, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, Management’s Report on Internal Controls. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting
based on our audit. We are a public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the
international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
139
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
Philadelphia, Pennsylvania
March 16, 2020
140
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A: Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable assurance
that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms and accumulated and communicated to the Company’s management,
including the Company’s principal executive officer and principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the principal executive officer and the principal
financial officer, conducted an evaluation, as of the end of the period covered by this report, of the
effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Exchange
Act Rule 13a-15(e). Based on this evaluation, the principal executive officer and the principal financial
officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure
controls and procedures, as defined in Rule 13a-15(e), were effective at the reasonable assurance level.
Changes in Internal Controls
The principal executive officer and principal financial officer also conducted an evaluation of the
Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes
in Internal Control occurred during the quarter ended December 31, 2019 that have materially affected or
which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been
no such change during the quarter ended December 31, 2019.
Management’s Report on Internal Controls
Management of Republic First Bancorp, Inc. (the “Company”) is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act.
The Company’s management, under the supervision and with the participation of the principal
executive officer and principal financial officer, conducted an evaluation of the effectiveness of internal
control over financial reporting, as of December 31, 2019, based on the framework in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the framework in Internal Control – Integrated Framework
2013, management of the Company has concluded the Company maintained effective internal control over
financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of
December 31, 2019.
Limitations on the Effectiveness of Controls
Control systems, no matter how well designed and operated, can provide only reasonable, not an
absolute, level of assurance that the objectives of the control system are met. The design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of
141
controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, have been detected. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions. Projections
of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls
may become inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
BDO, an independent registered public accounting firm, has audited the Company’s consolidated
financial statements as of and for the years ended December 31, 2019 and 2018, and the effectiveness of
the Company’s internal control over financial reporting as of December 31, 2019, as stated in their reports,
which are included herein.
Item 9B: Other Information
None
Item 10: Directors, Executive Officers and Corporate Governance
PART III
Except as set forth below, the information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in
connection with the Company’s 2020 annual meeting of shareholders, including, but not necessarily limited
to, the sections entitled “Board of Directors and Committees” and “Executive Officers and Compensation.”
The Company has adopted a code of ethics that applies to the Company’s principal executive officer,
principal financial officer, principal accounting officer or controller, or persons performing similar
functions. The text of the Company’s code of ethics is available on the Company’s website at
www.myrepublicbank.com. We intend to disclose any changes in or revision to our code of ethics on our
website, if applicable.
Item 11: Executive Compensation
The information required by this Item is incorporated by reference from the definitive proxy materials
of the Company to be filed with the Securities and Exchange Commission in connection with the
Company’s 2020 annual meeting of shareholders, including, but not necessarily limited to, the section
entitled “Executive Officers and Compensation.”
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Except as set forth below, the information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and Exchange Commission in
connection with the Company’s 2020 annual meeting of shareholders, including, but not necessarily limited
to, the section entitled “Security Ownership of Certain Beneficial Owners and Management.”
142
The following table sets forth information as of December 31, 2019, with respect to the shares of
common stock that may be issued under the Company’s existing equity compensation plans.
Plan Category
Equity compensation plans approved by
security holders
Equity compensation plans not approved
by security holders
Number of Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
Number of Shares Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securities
Reflected in First Column)
4,979,475
$ 6.05
2,083,235 (1) (2)
-
-
-
Total
4,979,475
$ 6.05
2,083,235 (1) (2)
(1) Pursuant to the terms of the Stock Option and Restricted Stock Plan, as amended and restated in 2005, no additional equity awards were
issuable after November 14, 2015.
(2) The 2014 Republic First Bancorp, Inc. Equity Incentive Plan provides for 2,600,000 shares of common stock plus an annual adjustment to be
no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, to be available for such grants.
Item 13: Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference from the definitive proxy materials
of the Company to be filed with the Securities and Exchange Commission in connection with the
Company’s 2020 annual meeting of shareholders, including, but not necessarily limited to, the sections
entitled “Certain Relationships and Related Transactions” and “Board of Directors and Committees.”
Item 14: Principal Accountant Fees and Services
The information required by this Item is incorporated by reference from the definitive proxy materials
of the Company to be filed with the Securities and Exchange Commission in connection with the
Company’s 2020 annual meeting of shareholders, including, but not necessarily limited to, the section
entitled “Information Regarding Independent Registered Public Accounting Firm”.
143
Item 15: Exhibits, Financial Statement Schedules
PART IV
(a) (1) The following financial statements and related documents of Republic First Bancorp, Inc. are filed
as part of this Annual Report on Form 10-K in Part II – Item 8 “Financial Statements and Supplementary
Data”:
a. Consolidated Balance Sheets as of December 31, 2019 and 2018;
b. Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017;
c. Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019,
2018, and 2017;
d. Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017;
e. Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,
2019, 2018, and 2017; and
f. Notes to Consolidated Financial Statements.
(a) (2) None
(a) (3) The exhibits filed or furnished, as applicable, as part of this report are listed under Exhibits at
subsection (b) of this Item 15.
(b) Exhibits
The following Exhibits are filed as part of this report.
Exhibit
Number
3.1
3.2
4.1
Description
Amended and Restated Articles of Incorporation of
Republic First Bancorp, Inc.
Location
Incorporated by reference to Form 10-K
filed March 10, 2017
Amended and Restated By-Laws of Republic First
Bancorp, Inc.
Incorporated by reference to Form S-1
filed April 23, 2010 (333-166286)
The Company will furnish to the SEC upon request
copies of the following documents relating to the
Company’s Floating Rate Junior Subordinated
Debt Securities due 2037: (i) Indenture dated as of
December 27, 2006, between the Company and
Wilmington Trust Company, as
trustee; (ii)
Amended and Restated Declaration of Trust of
Republic Capital Trust II, dated as of December 27,
2006; and (iii) Guarantee Agreement dated as of
December 27, 2006, between the Company and
Wilmington Trust Company, as trustee, for the
benefit of the holders of the capital securities of
Republic Capital Trust II
144
Location
Exhibit
Number
4.2
4.3
Description
The Company will furnish to the SEC upon request
copies of the following documents relating to the
Company’s Floating Rate Junior Subordinated
Debt Securities due 2037: (i) Indenture dated as of
the Company and
June 28, 2007, between
Wilmington Trust Company,
trustee;
(ii) Amended and Restated Declaration of Trust of
Republic Capital Trust III, dated as of June 28,
2007; and (iii) Guarantee Agreement dated as of
June 28, 2007, between
the Company and
Wilmington Trust Company, as trustee, for the
benefit of the holders of the capital securities of
Republic Capital Trust III
as
The Company will furnish to the SEC upon request
copies of the following documents relating to the
Company’s Fixed Rate Junior Subordinated
Convertible Debt Securities due 2038: (i) Indenture
dated as of June 10, 2008, between the Company
and Wilmington Trust Company, as trustee;
(ii) Amended and Restated Declaration of Trust of
Republic First Bancorp Capital Trust IV, dated as
of June 10, 2008; and (iii) Guarantee Agreement
dated as of June 10, 2008, between the Company
and Wilmington Trust Company, as trustee, for the
benefit of the holders of the capital securities of
Republic First Bancorp Capital Trust IV
4.4
Description of Capital Securities
Filed Herewith
10.1
Form of Employment Agreement, dated July 1,
2015, by and among, certain named Executive
Officers, Republic First Bancorp, Inc. and Republic
First Bank*
Incorporated by reference to Form 8-K
filed July 14, 2015
10.2
Amended and Restated Stock Option Plan and
Restricted Stock Plan*
Incorporated by reference to Form 10-K
filed March 10, 2008
10.3
Deferred Compensation Plan*
10.4
Amended and Restated Supplemental Retirement
Plan Agreements between Republic First Bank
and Certain Directors*
Incorporated by reference to Form 10-K
filed March 16, 2010
Incorporated by reference to Form 10-Q
filed November 7, 2008
145
Exhibit
Number
10.5
10.6
10.7
10.8
10.9
Description
Purchase Agreement among Republic First
Bancorp, Inc., Republic First Bancorp Capital Trust
IV, and Purchasers of the Trust IV Capital
Securities
Location
Incorporated by reference to Form 10-Q
filed November 7, 2008
Registration Rights Agreement among Republic
First Bancorp, Inc. and the Holders of the Trust IV
Capital Securities
Incorporated by reference to Form10-Q
filed November 7, 2008
Agreement, dated March 9, 2017, between
Republic First Bancorp, Inc. and Vernon W. Hill II
Incorporated by reference to Form 10-K
filed March 10, 2017
Employment Agreement, dated May 10, 2013, by
and among Harry D. Madonna, Republic First
Bancorp, Inc., and Republic First Bank*
First Amendment to Employment Agreement, dated
March 18, 2015, by and among Harry D. Madonna,
Republic First Bancorp, Inc. and Republic First
Bank*
Incorporated by reference to Form 10-Q
filed May 10, 2013
Incorporated by reference to Form 8-K
filed March 20, 2015
10.10
Form of Option Award*
Incorporated by reference to Form S-1
filed April 23, 2010 (333-166286)
10.11
Republic First Bancorp, Inc. 2014 Equity Incentive
Plan*
Incorporated by
the
definitive proxy statement on Schedule
14A filed March 26, 2014
reference
to
10.12
10.13
Form of Incentive Stock Option Award – 2014
Equity Incentive Plan*
Incorporated by reference to Form 10-K
filed March 13, 2015
Form of Nonqualified Stock Option Award – 2014
Equity Incentive Plan*
Incorporated by reference to Form 10-K
filed March 13, 2015
10.14
Form of Investment Agreement
10.15
Limited Liability Company Purchase Agreement
dated July 26, 2016 by and among, Republic First
Bank d/b/a Republic Bank and Owners of Oak
Mortgage Company, LLC
Incorporated by reference to Form 8-K
filed April 22, 2014
Incorporated by reference to form 8-K
filed August 1, 2016
21.1
Subsidiaries of the Company
23.1
Consent of BDO USA, LLP
31.1
13a-14(a)/15d-14(a) Certification
of
Rule
Chairman and Chief Executive Officer of Republic
First Bancorp, Inc.
Filed Herewith
Filed Herewith
Filed Herewith
146
Exhibit
Number
31.2
Description
Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer of Republic First Bancorp, Inc.
Location
Filed Herewith
32.1
Section 1350 Certification of Harry D. Madonna
Furnished Herewith
32.2
Section 1350 Certification of Frank A. Cavallaro
Furnished Herewith
101
The following materials from the Company’s
Annual Report on Form 10-K for the fiscal year
ended December 31, 2019, formatted in XBRL
(eXtensible Business Reporting Language); (i)
Consolidated Balance Sheets as of December 31,
2019 and December 31, 2018, (ii) Consolidated
Statements of Operations for the years ended
December 31, 2019, 2018, and 2017, (iii)
Consolidated Statements of Comprehensive
Income (Loss) for the years ended December 31,
2019, 2018, and 2017, (iv) Consolidated Statements
of Cash Flows for the years ended December 31,
2019, 2018, and 2017, (v) Consolidated Statements
of Changes in Shareholders’ Equity for the years
ended December 31, 2019, 2018, and 2017, and (vi)
Notes to Consolidated Financial Statements.
* Constitutes a management compensation agreement or arrangement.
(c) All financial statement schedules are omitted because the required information is not present or not
present in amounts sufficient to require submission of the schedule or because the information
required is included in the respective financial statements or notes thereto contained herein.
147
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 16, 2020
By:
Date: March 16, 2020
By:
REPUBLIC FIRST BANCORP, INC.
/s/ Harry D. Madonna
Harry D. Madonna
President and Chief Executive Officer
(principal executive officer)
/s/ Frank A. Cavallaro
Frank A. Cavallaro
Executive Vice President and Chief Financial Officer
(principal financial and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: March 16, 2020
Date: March 16, 2020
Date: March 16, 2020
Date: March 16, 2020
Date: March 16, 2020
Date: March 16, 2020
Date: March 16, 2020
Date: March 16, 2020
By:
/s/ Vernon W. Hill, II
Vernon W. Hill, II, Chairman of the Board
By:
/s/ Andrew B. Cohen
Andrew B. Cohen, Director
By:
/s/ Theodore J. Flocco, Jr.
Theodore J. Flocco, Jr., Director
By:
/s/ Lisa R. Jacobs
Lisa R. Jacobs, Director
By:
/s/ Harry D. Madonna
Harry D. Madonna, Director
By:
/s/ Barry L. Spevak
Barry L. Spevak, Director
By:
/s/ Brian P. Tierney
Brian P. Tierney, Director
By:
/s/ Harris Wildstein, Esq.
Harris Wildstein, Esq., Director
148
SUBSIDIARIES OF THE COMPANY
Exhibit 21.1
Subsidiary Name
Jurisdiction of Organization
Subsidiaries of Republic First Bancorp, Inc.
Republic First Bank (dba Republic Bank)
Pennsylvania
Republic Capital Trust II
Republic Capital Trust III
Delaware
Delaware
Tel: 215-564-1900
Fax: 215-564-3940
www.bdo.com
Ten Penn Center
1801 Market Street, Suite 1700
Philadelphia, PA 19103
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
Republic First Bancorp, Inc
Philadelphia, Pennsylvania
We hereby consent to the incorporation by reference in the Registration Statements on Form S3
(No. 333-196024 and No. 333-228279) and Form S-8 (No. 333-200868) of Republic First Bancorp,
Inc. and subsidiaries of our reports dated March 16, 2020, relating to the consolidated financial
statements, and the effectiveness of Republic First Bancorp, Inc.’s internal control over financial
reporting, which appear in this Form 10-K.
Philadelphia, Pennsylvania
March 16, 2020
BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the
international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
REPUBLIC FIRST BANCORP, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Harry D. Madonna, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2019 of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a–15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 16, 2020
/s/ Harry D. Madonna
President and Chief Executive Officer
REPUBLIC FIRST BANCORP, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Frank A. Cavallaro, certify that:
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2019 of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a–15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant's internal control over financial reporting.
Date: March 16, 2020
/s/ Frank A. Cavallaro
Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with
the Securities and Exchange Commission by Republic First Bancorp, Inc. (the "Company") on the date hereof (the
"Report"), I, Harry D. Madonna, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
Date: March 16, 2020
/s/ Harry D. Madonna
President and Chief Executive Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with
the Securities and Exchange Commission by Republic First Bancorp, Inc. (the "Company") on the date hereof (the
"Report"), I, Frank A. Cavallaro, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
result of operations of the Company.
Date: March 16, 2020
/s/ Frank A. Cavallaro
Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of
Chapter 63 of Title 18 of the United States Code) and is not being filed as part of the Report or as a separate disclosure document.
CORPORATE INFORMATION
Headquarters
Republic First Bancorp, Inc.
Two Liberty Place
50 S. 16th Street, Suite 2400
Philadelphia, PA 19102
888.875.2265
Annual Shareholders’ Meeting
Wednesday, April 29, 2019 at 5pm
The Union League of Philadelphia
140 South Broad Street
Philadelphia, PA 19102
Certified Public Accountants
BDO USA, LLP
1801 Market Street
Ten Penn Center, Suite 1700
Philadelphia, PA 19103
Transfer Agent/Registrar
Computershare
P.O. Box 43078
Providence, RI 02940-3078
800.368.5948
Stock Exchange Listing
National NASDAQ Symbol: FRBK
Shareholder Information
For a copy of the Report filed on Form 10K
with the Securities and Exchange Commission
and for all other shareholder related information,
please contact Investor Relations or visit our
website at: myrepublicbank.com