Quarterly Report (10-q)

0000834285 REPUBLIC FIRST BANCORP INC false --12-31 Q1 2021 944,809 836,972 16,091 12,975 - - 0.01 0.01 25.00 25.00 10,000,000 10,000,000 2,000,000 2,000,000 2,000,000 2,000,000 0.01 0.01 100,000,000 100,000,000 59,402,123 59,388,623 58,873,278 58,859,778 503,408 503,408 25,437 25,437 9,508 4,374 0 841 838 409 13,500 8,000 1 2 2 1 4 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5 20 22 0 0 9 0 0 1 1 0 0 3.44 13.99 10.00 31 18 3.48 13.22 10.00 23 12 16 13 1 0 10 20 172 170 333 329 149 152 289 295 0 0 42 20 7 15 8 5 10 38 18 7 13 5 5 10 Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. All amounts are net of tax. Amounts in parentheses indicate reductions to other comprehensive income. Reclassification amounts are reported as gains on sales of investment securities, impairment losses, and amortization of net unrealized losses on the Consolidated Statement of Income. Fair value is generally determined through independent appraisals of the underlying collateral, which include Level 3 inputs that are not identifiable. 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. 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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2021.

☐	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ____ to ____.

Commission File Number: 000-17007

Republic First Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Pennsylvania	23-2486815
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

50 South 16^th Street, Philadelphia, Pennsylvania	19102
(Address of principal executive offices)	(Zip code)

215-735-4422

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock

FRBK

Nasdaq Global Market

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

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

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

Large accelerated filer ☐	Accelerated filer ☒
Non-Accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

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

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

Yes ☐ No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS

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

Common Stock, $0.01 per share	58,873,278
Title of Class	Number of Shares Outstanding as of May 7, 2021

REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS

Part I: Financial Information		Page

Item 1.	Financial Statements
	Consolidated balance sheets as of March 31, 2021 and December 31, 2020 (unaudited)	1
	Consolidated statements of operations for the three months ended March 31, 2021 and 2020 (unaudited)	2
	Consolidated statements of comprehensive income for the three months ended March 31, 2021 and 2020 (unaudited)	3
	Consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 (unaudited)	4
	Consolidated statements of changes in shareholders’ equity for the three months ended March 31, 2021 and 2020 (unaudited)	5

	Notes to consolidated financial statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	60

Item 4.	Controls and Procedures	60

Part II: Other Information

Item 1.	Legal Proceedings	61

Item 1A.	Risk Factors	61

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 3.	Defaults Upon Senior Securities	62

Item 4.	Mine Safety Disclosures	62

Item 5.	Other Information	62

Item 6.	Exhibits	63

Signatures		64

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

March 31, 2021 and December 31, 2020

(Dollars in thousands, except per share data)

	March 31, 2021 unaudited			December 31, 2020
ASSETS
Cash and due from banks	$	45,480		$	29,746
Interest bearing deposits with banks		783,417			745,554
Cash and cash equivalents		828,897			775,300

Investment securities available for sale, at fair value		626,567			528,508
Investment securities held to maturity, at amortized cost (fair value of $944,809 and $836,972, respectively)		948,419			814,936
Equity securities		9,079			9,039
Restricted stock, at cost		3,039			3,039
Mortgage loans held for sale, at fair value		28,069			50,387
Other loans held for sale		552			2,983
Loans receivable (net of allowance for credit losses of $16,091 and $12,975, respectively)		2,689,729			2,632,367
Premises and equipment, net		122,867			123,170
Other real estate owned, net		1,188			1,188
Accrued interest receivable		16,657			16,120
Operating lease right-of-use asset		79,614			72,946
Other assets		41,281			35,752
Total Assets	$	5,395,958		$	5,065,735

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Demand – non-interest bearing	$	1,244,437		$	1,006,876
Demand – interest bearing		1,874,286			1,776,995
Money market and savings		1,058,485			1,043,519
Time deposits		185,891			186,361
Total Deposits		4,363,099			4,013,751
Other borrowings		611,114			633,866
Accrued interest payable		819			926
Other liabilities		15,193			20,232
Operating lease liability		86,084			77,576
Subordinated debt		11,273			11,271
Total Liabilities		5,087,582			4,757,622

Commitments and contingencies (see note 3)		-			-

Shareholders’ Equity
Preferred stock, par value $0.01 per share; liquidation preference $25.00 per share; 10,000,000 shares authorized; share issued 2,000,000 as of March 31, 2021 and December 31, 2020; shares outstanding 2,000,000 as of March 31, 2021 and December 31, 2020		20			20
Common stock, par value $0.01 per share: 100,000,000 shares authorized; shares issued 59,402,123 as of March 31, 2021 and 59,388,623 as of December 31, 2020; shares outstanding 58,873,278 as of March 31, 2021 and 58,859,778 as of December 31, 2020		594			594
Additional paid in capital		322,861			322,321
Accumulated deficit		(1,892	)		(8,085	)
Treasury stock at cost (503,408 shares as of March 31, 2021 and December 31, 2020)		(3,725	)		(3,725	)
Stock held by deferred compensation plan (25,437 shares as of March 31, 2021 and December 31, 2020)		(183	)		(183	)
Accumulated other comprehensive loss		(9,299	)		(2,829	)
Total Shareholders’ Equity		308,376			308,113
Total Liabilities and Shareholders’ Equity	$	5,395,958		$	5,065,735

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income

For the Three Months Ended March 31, 2021 and 2020

(Dollars in thousands, except per share data)

(unaudited)

	Three Months Ended March 31,
	2021		2020
Interest income
Interest and fees on taxable loans	$	29,467	$	19,623
Interest and fees on tax-exempt loans		436		550
Interest and dividends on taxable investment securities		6,393		6,801
Interest and dividends on tax-exempt investment securities		75		20
Interest on federal funds sold and other interest-earning assets		49		289
Total interest income		36,420		27,283
Interest expense
Demand-interest bearing		3,258		3,421
Money market and savings		1,118		1,783
Time deposits		539		1,221
Other borrowings		73		104
Total interest expense		4,988		6,529
Net interest income		31,432		20,754
Provision for loan losses		3,000		950
Net interest income after provision for loan losses		28,432		19,804
Non-interest income
Loan and servicing fees		633		471
Mortgage banking income		4,564		2,458
Gain on sales of SBA loans		761		649
Service fees on deposit accounts		3,960		2,064
Gain on sale of investment securities		-		841
Other non-interest income		357		62
Total non-interest income		10,275		6,545
Non-interest expenses
Salaries and employee benefits		14,721		13,381
Occupancy		3,777		3,422
Depreciation and amortization		2,294		1,875
Legal		217		296
Other real estate owned		98		282
Appraisal and other loan expenses		714		422
Advertising		171		381
Data processing		1,757		1,574
Insurance		335		276
Professional fees		808		634
Debit card processing		986		825
Regulatory assessments and costs		726		630
Taxes, other		322		203
Other operating expenses		2,421		3,071
Total non-interest expense		29,347		27,272
Income (loss) before provision for income taxes		9,360		(923	)
Provision (benefit) for income taxes		2,292		(330	)
Net income (loss)	$	7,068	$	(593	)
Preferred stock dividends		875		-
Net income (loss) available to common shareholders	$	6,193	$	(593	)
Net income (loss) per share
Basic earnings per common share	$	0.11	$	(0.01	)
Diluted earnings per common share	$	0.09	$	(0.01	)

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three Months Ended March 31, 2021 and 2020

(Dollars in thousands)

(unaudited)

	Three Months Ended March 31,
	2021			2020

Net income (loss)	$	7,068		$	(593	)

Other comprehensive (loss) income, net of tax
Unrealized (losses) gains on securities (pre-tax ($9,508), and $4,374 respectively)		(7,098	)		3,264
Reclassification adjustment for securities gains (pre-tax $-, and ($841) respectively		-			(628	)
Net unrealized gains on securities		(7,098	)		2,636
Amortization of net unrealized holding losses during the period (pre-tax $838, and $409 respectively)		628			305

Total other comprehensive (loss) income		(6,470	)		2,941

Total comprehensive income	$	598		$	2,348

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2021 and 2020

(Dollars in thousands)

(unaudited)

	Three Months Ended March 31,
	2021			2020
Cash flows from operating activities
Net income (loss)	$	7,068		$	(593	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		3,000			950
Depreciation and amortization		2,294			1,875
Stock based compensation		497			577
Gain on sale of investment securities		-			(841	)
Fair value adjustment on equity securities		(40	)		-
Amortization of premiums on investment securities		1,828			1,583
Accretion of discounts on retained SBA loans		(229	)		(220	)
Fair value adjustments on SBA servicing assets		187			41
Proceeds from sales of SBA loans originated for sale		7,443			10,745
SBA loans originated for sale		(4,251	)		(8,474	)
Gains on sales of SBA loans originated for sale		(761	)		(649	)
Proceeds from sales of mortgage loans originated for sale		167,758			50,258
Mortgage loans originated for sale		(141,393	)		(55,072	)
Fair value adjustment for mortgage loans originated for sale		1,766			556
Gains on mortgage loans originated for sale		(4,521	)		(1,734	)
Amortization of debt issuance costs		2			2
Non-cash expense related to leases		108			183
Increase in accrued interest receivable and other assets		(2,434	)		(4,865	)
Net (decrease) increase in accrued interest payable and other liabilities		(6,327	)		8,894
Net cash provided by operating activities		31,995			3,216

Cash flows from investing activities
Purchase of investment securities available for sale		(134,750	)		(16,906	)
Purchase of investment securities held to maturity		(202,977	)		-
Proceeds from the sale of securities available for sale		-			26,869
Proceeds from the paydown, maturity, or call of securities available for sale		26,382			34,703
Proceeds from the paydown, maturity or call of securities held to maturity		69,306			32,823
Net increase in loans		(60,133	)		(133,621	)
Net proceeds from sale of other real estate owned		-			586
Premises and equipment expenditures		(1,991	)		(4,812	)
Net cash used in investing activities		(304,163	)		(60,358	)

Cash flows from financing activities
Net proceeds from exercise of stock options		44			24
Net increase (decrease) in demand, money market and savings deposits		349,818			(53,736	)
Decrease in time deposits		(470	)		(948	)
Decrease in other borrowings		(22,752	)		-
Preferred stock dividends paid		(875	)		-
Net cash provided by (used in) financing activities		325,765			(54,660	)

Net increase (decrease) in cash and cash equivalents		53,597			(111,802	)
Cash and cash equivalents, beginning of year		775,300			168,319
Cash and cash equivalents, end of period	$	828,897		$	56,517

Supplemental disclosures
Interest paid	$	4,881		$	6,632
Income taxes paid	$	4,770		$	-

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

For the Three Months Ended March 31, 2021 and 2020

(Dollars in thousands)

(unaudited)

	Preferred Stock		Common Stock		Additional Paid in Capital		Accumulated Deficit			Treasury Stock			Stock Held by Deferred Compensation Plan			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity

Balance January 1, 2021	$	20	$	594	$	322,321	$	(8,085	)	$	(3,725	)	$	(183	)	$	(2,829	)	$	308,113
Net income								7,068												7,068
Preferred stock dividends paid (1)								(875	)											(875	)
Other comprehensive loss, net of tax																	(6,470	)		(6,470	)
Stock based compensation						497														497
Options exercised (13,500 shares)						43														43

Balance March 31, 2021	$	20	$	594	$	322,861	$	(1,892	)	$	(3,725	)	$	(183	)	$	(9,299	)	$	308,376

Balance January 1, 2020	$	-	$	594	$	272,039	$	(12,216	)	$	(3,725	)	$	(183	)	$	(7,341	)	$	249,168
Net loss								(593	)											(593	)
Other comprehensive income, net of tax																	2,941			2,941
Stock based compensation						577														577
Options exercised (8,000 shares)						23														23

Balance March 31, 2020	$	-	$	594	$	272,639	$	(12,809	)	$	(3,725	)	$	(183	)	$	(4,400	)	$	252,116

(1)	Dividends per share of $0.44 were declared and paid on preferred stock for the three months ended March 31, 2021

(See notes to consolidated financial statements)

Republic First Bancorp, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 1: Basis of Presentation

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

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

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

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

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

Note 2: Summary of Significant Accounting Policies

Risks and Uncertainties

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

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

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

In a period of economic contraction, elevated levels of loan losses and lost interest income may occur. The Company continues to accrue interest on loans modified in accordance with the CARES Act. To the extent those borrowers are unable to resume normal contractual payments, the Company could experience additional losses of principal and interest. The extent to which the COVID-19 pandemic has a further impact the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

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

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

Mortgage Banking Activities and Mortgage Loans Held for Sale

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

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

Interest Rate Lock Commitments (“IRLCs”)

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

Use of Estimates

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

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

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

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

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 March 31, 2021, the only grants under the 2005 Plan were option grants. The 2005 Plan provided that the exercise price of each option granted equaled the market price of the Company’s stock on the date of the grant. Options granted pursuant to the 2005 Plan vest within one to four years and have a maximum term of 10 years. The 2005 Plan terminated on November 14, 2015 in accordance with the terms and conditions specified in the Plan agreement.

On April 29, 2014 the Company’s shareholders approved the 2014 Republic First Bancorp, Inc. Equity Incentive Plan (the “2014 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2014 Plan, 2.6 million shares of common stock, plus an annual adjustment to be no less than 10% of the outstanding shares or such lower number as the Board of Directors may determine, are available for such grants. Compensation cost for all option awards is calculated and recognized over the vesting period of the option awards. If the service conditions are not met, the Company reverses previously recorded compensation expense upon forfeiture. The Company’s accounting policy election is to recognize forfeitures as they occur. At March 31, 2021, the maximum number of common shares issuable under the 2014 Plan was 6.4 million shares. During the three months ended March 31, 2021, 520 thousand stock units were granted under the 2014 Plan with a fair value of $1.7 million.

On April 27, 2021 the Company’s shareholders approved the 2021 Equity Incentive Plan of Republic First Bancorp, Inc. (the “2021 Plan”), under which the Company may grant options, restricted stock, stock units, or stock appreciation rights to the Company’s employees, directors, independent contractors, and consultants. Under the terms of the 2021 Plan, the maximum number of shares which may be issued or awarded is 7.5 million shares of common stock. As of March 31, 2021, no shares have been granted under the 2021 Plan.

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

During the three months ended March 31, 2021 and 2020, 632,635 options and 907,790 options vested, respectively. Expense is recognized ratably over the period required to vest. At March 31, 2021, the intrinsic value of the 5,672,875 options outstanding was $1.6 million, while the intrinsic value of the 3,851,635 exercisable (vested) options was $793 thousand. At March 31, 2020, the intrinsic value of the 6,067,450 options outstanding was $52,000, while the intrinsic value of the 3,456,750 exercisable (vested) options was $52,000. During the three months ended March 31, 2021, 13,500 options were exercised with cash received of $43,503 and 208,230 options were forfeited with a weighted average grant date fair value of $433,395. During the three months ended March 31, 2020, 8,000 options were exercised with cash received of $23,780 and 107,625 options were forfeited with a weighted average grant date fair value of $216,331.

Information regarding stock option compensation for the three months ended March 31, 2021 and 2020 is set forth below:

	2021		2020
Stock based compensation expense recognized	$	436,000	$	577,000
Number of unvested stock options		1,826,040		2,610,700
Fair value of unvested stock options	$	3,000,864	$	4,912,774
Amount remaining to be recognized as expense	$	2,703,509	$	4,055,481

The remaining unrecognized expense amount of $2,703,509 will be recognized ratably as expense through February 2024.

The Company granted stock units under the 2014 Plan during the three month period ended March 31, 2021. The compensation expense for the stock units is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures.

The following table details the Stock Units for the three months ended March 31, 2021:

	Number of Units			Weighted Average Grant Date Fair Value
Beginning balance		0		$	-
Granted		520,350			3.34
Vested		0			3.34
Forfeited		(4,800	)		3.34
Ending balance		515,550		$	3.34

Information regarding stock unit compensation for the three months ended March 31, 2021 and 2020 is set forth below:

	2021		2020
Stock based compensation expense recognized	$	61,000		-
Number of unvested stock units		515,550		-
Fair value of unvested stock units	$	1,721,937		-
Amount remaining to be recognized as expense	$	1,660,937		-

The remaining unrecognized expense amount of $1,660,937 will be recognized ratably as expense through February 2025.

Earnings per Share

Earnings per share (“EPS”) consists of two separate components: basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents (“CSEs”). CSEs consist of dilutive stock options granted through the Company’s stock option plans for the three months ended March 31, 2021 and March 31, 2020.

The calculation of EPS for the three months ended March 31, 2021 and 2020 is as follows (in thousands, except per share amounts):

	Three Months Ended March 31,
	2021		2020

Net income (loss) available to common shareholders	$	6,193	$	(593	)

Weighted average shares outstanding		58,860		58,848

Net income (loss) per share – basic	$	0.11	$	(0.01	)

Weighted average shares outstanding (including dilutive CSEs)		75,817		58,848

Net income (loss) per share – diluted	$	0.09	$	(0.01	)

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.

	Three Months Ended March 31,
(in thousands)	2021		2020

Anti-dilutive securities

Share based compensation awards		5,902		6,067

Convertible preferred stock		-		-

Total anti-dilutive securities		5,902		6,067

Recent Accounting Pronouncements

ASU 2016-13

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

ASU 2020-04

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

ASU 2021-01

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

Note 3: Commitments and Contingencies

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

Note 4: Segment Reporting

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

Note 5: Investment Securities

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

	At March 31, 2021
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government agencies	$	30,789	$	868	$	(1,327	)	$	30,330
Collateralized mortgage obligations		222,655		2,886		(5,191	)		220,350
Agency mortgage-backed securities		246,823		500		(4,935	)		242,388
Municipal securities		8,188		166		-			8,354
Corporate bonds		126,300		150		(1,305	)		125,145
Investment securities available for sale	$	634,755	$	4,570	$	(12,758	)	$	626,567

Held to maturity
U.S. Government agencies	$	78,484	$	2,381	$	-		$	80,865
Collateralized mortgage obligations		417,227		9,571		(10,506	)		416,292
Agency mortgage-backed securities		452,708		3,199		(8,255	)		447,652
Investment securities held to maturity	$	948,419	$	15,151	$	(18,761	)	$	944,809

Equity securities (1)								$	9,079

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

	At December 31, 2020
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government agencies	$	32,312	$	-	$	(426	)	$	31,886
Collateralized mortgage obligations		218,232		3,584		(270	)		221,546
Agency mortgage-backed securities		149,325		1,204		(1	)		150,528
Municipal securities		8,201		24		-			8,225
Corporate bonds		119,118		595		(3,390	)		116,323
Investment securities available for sale	$	527,188	$	5,407	$	(4,087	)	$	528,508

Held to maturity
U.S. Government agencies	$	82,093	$	4,185	$	-		$	86,278
Collateralized mortgage obligations		363,363		12,687		(231	)		375,819
Agency mortgage-backed securities		369,480		5,640		(245	)		374,875
Investment securities held to maturity	$	814,936	$	22,512	$	(476	)	$	836,972

Equity securities (1)								$	9,039

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

The following table presents investment securities by stated maturity at March 31, 2021. Collateralized mortgage obligations and agency mortgage-backed securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay with or without prepayment penalties and, therefore, these securities are classified separately with no specific maturity date.

	Available for Sale				Held to Maturity
(dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in 1 year or less	$	12,620	$	12,558	$	407	$	410
After 1 year to 5 years		82,985		83,192		70,743		72,874
After 5 years to 10 years		52,748		52,403		7,334		7,581
After 10 years		16,924		15,676		-		-
Collateralized mortgage obligations		222,655		220,350		417,227		416,292
Agency mortgage-backed securities		246,823		242,388		452,708		447,652
Total investment securities	$	634,755	$	626,567	$	948,419	$	944,809

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

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

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

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 March 31, 2021 and December 31, 2020:

	At March 31, 2021
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

U.S. Government agencies	$	13,056	$	868	$	30,330	$	459	$	43,386	$	1,327
Collateralized mortgage obligations		107,343		5,191		-		-		107,343		5,191
Agency mortgage-backed securities		216,260		4,935		-		-		216,260		4,935
Municipal securities		-		-		-		-		-		-
Corporate bonds		13,254		322		42,017		983		55,271		1,305
Investment Securities Available for Sale	$	349,913	$	11,316	$	72,347	$	1,442	$	422,260	$	12,758

	At March 31, 2021
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

U.S. Government agencies	$	-	$	-	$	-	$	-	$	-	$	-
Collateralized mortgage obligations		186,170		10,506		-		-		186,170		10,506
Agency mortgage-backed securities		289,378		8,255		-		-		289,378		8,255
Investment Securities Held to Maturity	$	475,548	$	18,761	$	-	$	-	$	475,548	$	18,761

	At December 31, 2020
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

U.S. Government agencies	$	-	$	-	$	31,886	$	426	$	31,886	$	426
Collateralized mortgage obligations		99,497		270		-		-		99,497		270
Agency mortgage-backed securities		20,934		1		-		-		20,934		1
Municipal securities		-		-		-		-		-		-
Corporate bonds		4,559		39		54,649		3,351		59,208		3,390
Investment Securities Available for Sale	$	124,990	$	310	$	86,535	$	3,777	$	211,525	$	4,087

	At December 31, 2020
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

U.S. Government agencies	$	-	$	-	$	-	$	-	$	-	$	-
Collateralized mortgage obligations		62,603		231		-		-		62,603		231
Agency mortgage-backed securities		54,537		245		-		-		54,537		245
Investment Securities Held to Maturity	$	117,140	$	476	$	-	$	-	$	117,140	$	476

Unrealized losses on securities in the investment portfolio amounted to $31.5 million with a total fair value of $897.8 million as of March 31, 2021 compared to unrealized losses of $4.6 million with a total fair value of $328.7 million as of December 31, 2020. The Company believes the unrealized losses presented in the tables above are temporary in nature and primarily related to market interest rates or limited trading activity in particular type of security rather than the underlying credit quality of the issuers. The Company does not believe that these losses are other than temporary and does not currently intend to sell or believe it will be required to sell securities in an unrealized loss position prior to maturity or recovery of the amortized cost bases.

The Company held five U.S. Government agency securities, twenty collateralized mortgage obligations and twenty-two agency mortgage-backed securities that were in an unrealized loss position at March 31, 2021. Principal and interest payments of the underlying collateral for each of these securities are backed by U.S. Government sponsored agencies and carry minimal credit risk. Management found no evidence of OTTI on any of these securities and believes the unrealized losses are due to fluctuations in fair values resulting from changes in market interest rates and are considered temporary as of March 31, 2021.

All municipal securities held in the investment portfolio are reviewed on least a quarterly basis for impairment. Each bond carries an investment grade rating by either Moody’s or Standard & Poor’s. In addition, the Company periodically conducts its own independent review on each issuer to ensure the financial stability of the municipal entity. The largest geographic concentration was in Pennsylvania and New Jersey and consisted of either general obligation or revenue bonds backed by the taxing power of the issuing municipality. At March 31, 2021, the investment portfolio included no municipal securities that were in an unrealized loss position.

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

There were no proceeds from the sale of securities during the three months ended March 31, 2021. Proceeds associated with the sale of securities available for sale during the three months ended March 31, 2020 were $26.9 million. Gross gains of $841,000 were realized on these sales. The tax provision applicable to the net gains of $841,000 for the three months ended March 31, 2020 amounted to $213,000.

Note 6: Loans Receivable and Allowance for Loan Losses

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

(dollars in thousands)	March 31, 2021			December 31, 2020

Commercial real estate	$	708,547		$	705,748
Construction and land development		153,062			142,821
Commercial and industrial		211,192			200,188
Owner occupied real estate		477,316			475,206
Consumer and other		97,850			102,368
Residential mortgage		425,106			395,174
Paycheck protection program		649,696			636,637
Total loans receivable		2,722,769			2,658,142
Deferred costs (fees)		(16,949	)		(12,800	)
Allowance for loan losses		(16,091	)		(12,975	)
Net loans receivable	$	2,689,729		$	2,632,367

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

The following tables provide the activity in and ending balances of the allowance for loan losses by loan portfolio class at and for the three months ended March 31, 2021 and 2020:

(dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate			Consumer and Other			Residential Mortgage		Paycheck Protection Program		Unallocated		Total

*Three months ended March 31, 2021*
*Allowance for loan losses:*

Beginning balance:	$	4,394	$	948	$	1,367	$	2,374		$	723		$	3,025	$	-	$	144	$	12,975
Charge-offs		-		-		-		-			(34	)		-		-		-		(34	)
Recoveries		-		-		104		43			3			-		-		-		150
Provisions		1,246		133		265		12			53			931		-		360		3,000
Ending balance	$	5,640	$	1,081	$	1,736	$	2,429		$	745		$	3,956	$	-	$	504	$	16,091

*Three months ended March 31, 2020*
*Allowance for loan losses:*

Beginning Balance:	$	3,043	$	688	$	931	$	2,292		$	590		$	1,705	$	-	$	17	$	9,266
Charge-offs		-		-		-		-			(22	)		-		-		-		(22	)
Recoveries		-		-		17		-			6			-		-		-		23
Provisions (credits)		359		146		494		(433	)		60			207		-		117		950
Ending balance	$	3,402	$	834	$	1,442	$	1,859		$	634		$	1,912	$	-	$	134	$	10,217

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 March 31, 2021 and December 31, 2020:

(dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Paycheck Protection Program		Unallocated		Total

March 31, 2021

Allowance for loan losses:
Individually evaluated for impairment	$	1,015	$	-	$	301	$	236	$	-	$	-	$	-	$	-	$	1,552
Collectively evaluated for impairment		4,625		1,081		1,435		2,193		745		3,956		-		504		14,539
Total allowance for loan losses	$	5,640	$	1,081	$	1,736	$	2,429	$	745	$	3,956	$	-	$	504	$	16,091

Loans receivable:
Loans evaluated individually	$	8,834	$	-	$	2,961	$	4,251	$	1,280	$	1,273	$	-	$	-	$	18,599
Loans evaluated collectively		699,713		153,062		208,231		473,065		96,570		423,833		649,696		-		2,704,170
Total loans receivable	$	708,547	$	153,062	$	211,192	$	477,316	$	97,850	$	425,106	$	649,696	$	-	$	2,722,769

(dollars in thousands)	Commercial Real Estate		Construction and Land Development		Commercial and Industrial		Owner Occupied Real Estate		Consumer and Other		Residential Mortgage		Paycheck Protection Program		Unallocated		Total

December 31, 2020

Allowance for loan losses:
Individually evaluated for impairment	$	418	$	-	$	51	$	122	$	-	$	-	$	-	$	-	$	591
Collectively evaluated for impairment		3,976		948		1,316		2,252		723		3,025		-		144		12,384
Total allowance for loan losses	$	4,394	$	948	$	1,367	$	2,374	$	723	$	3,025	$	-	$	144	$	12,975

Loans receivable:
Loans evaluated individually	$	9,048	$	-	$	2,963	$	3,955	$	1,302	$	701	$	-	$	-	$	17,969
Loans evaluated collectively		696,700		142,821		197,225		471,251		101,066		394,473		636,637		-		2,640,173
Total loans receivable	$	705,748	$	142,821	$	200,188	$	475,206	$	102,368	$	395,174	$	636,637	$	-	$	2,658,142

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 March 31, 2021 and December 31, 2020:

	March 31, 2021						December 31, 2020
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial real estate	$	4,819	$	4,827	$	-	$	5,033	$	5,040	$	-
Construction and land development		-		-		-		-		-		-
Commercial and industrial		2,297		2,299		-		2,608		2,794		-
Owner occupied real estate		3,182		3,331		-		3,198		3,407		-
Consumer and other		1,280		1,553		-		1,302		1,556		-
Residential mortgage		1,273		1,365		-		701		768		-
Paycheck protection program		-		-		-		-		-		-
Total	$	12,851	$	13,375	$	-	$	12,842	$	13,565	$	-

With an allowance recorded:
Commercial real estate	$	4,015	$	4,536	$	1,015	$	4,015	$	4,536	$	418
Construction and land development		-		-		-		-		-		-
Commercial and industrial		664		865		301		355		371		51
Owner occupied real estate		1,069		1,086		236		757		775		122
Consumer and other		-		-		-		-		-		-
Residential mortgage		-		-		-		-		-		-
Paycheck protection program		-		-		-		-		-		-
Total	$	5,748	$	6,487	$	1,552	$	5,127	$	5,682	$	591

Total:
Commercial real estate	$	8,834	$	9,363	$	1,015	$	9,048	$	9,576	$	418
Construction and land development		-		-		-		-		-		-
Commercial and industrial		2,961		3,164		301		2,963		3,165		51
Owner occupied real estate		4,251		4,417		236		3,955		4,182		122
Consumer and other		1,280		1,553		-		1,302		1,556		-
Residential mortgage		1,273		1,365		-		701		768		-
Paycheck protection program		-		-		-		-		-		-
Total	$	18,599	$	19,862	$	1,552	$	17,969	$	19,247	$	591

The following table presents additional information regarding the Company’s impaired loans for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
	2021				2020
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial real estate	$	6,005	$	70	$	6,372	$	70
Construction and land development		-		-		-		-
Commercial and industrial		2,300		-		2,727		1
Owner occupied real estate		2,827		22		2,680		2
Consumer and other		1,195		9		1,205		2
Residential mortgage		833		6		768		-
Paycheck protection program		-		-		-		-
Total	$	13,160	$	107	$	13,752	$	75

With an allowance recorded:
Commercial real estate	$	4,015	$	-	$	4,145	$	-
Construction and land development		-		-		-		-
Commercial and industrial		670		-		426		-
Owner occupied real estate		1,073		-		1,809		6
Consumer and other		-		-		-		-
Residential mortgage		-		-		60		-
Paycheck protection program		-		-		-		-
Total	$	5,758	$	-	$	6,440	$	6

Total:
Commercial real estate	$	10,020	$	70	$	10,517	$	70
Construction and land development		-		-		-		-
Commercial and industrial		2,970		-		3,153		1
Owner occupied real estate		3,900		22		4,489		8
Consumer and other		1,195		9		1,205		2
Residential mortgage		833		6		828		-
Paycheck protection program		-		-		-		-
Total	$	18,918	$	107	$	20,192	$	81

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 March 31, 2021 and December 31, 2020:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
At March 31, 2021
Commercial real estate	$	954	$	48	$	4,314	$	5,316	$	703,231	$	708,547	$	-
Construction and land development		-		-		-		-		153,062		153,062		-
Commercial and industrial		83		-		2,962		3,045		208,147		211,192		-
Owner occupied real estate		-		-		3,361		3,361		473,955		477,316		-
Consumer and other		-		-		1,280		1,280		96,570		97,850		-
Residential mortgage		-		-		1,273		1,273		423,833		425,106		-
Paycheck protection program		-		-		-		-		649,696		649,696		-
Total	$	1,037	$	48	$	13,190	$	14,275	$	2,708,494	$	2,722,769	$	-

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivable		Loans Receivable > 90 Days and Accruing
At December 31, 2020
Commercial real estate	$	-	$	97	$	4,421	$	4,518	$	701,230	$	705,748	$	-
Construction and land development		-		-		-		-		142,821		142,821		-
Commercial and industrial		1,648		-		2,963		4,611		195,577		200,188		-
Owner occupied real estate		581		813		2,859		4,253		470,953		475,206		-
Consumer and other		92		28		1,302		1,422		100,946		102,368		-
Residential mortgage		-		-		1,313		1,313		393,861		395,174		612
Paycheck protection program		-		-		-		-		636,637		636,637		-
Total	$	2,321	$	938	$	12,858	$	16,117	$	2,642,025	$	2,658,142	$	612

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

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
At March 31, 2021:
Commercial real estate	$	704,134	$	76	$	4,337	$	-	$	708,547
Construction and land development		153,062		-		-		-		153,062
Commercial and industrial		208,230		-		2,962		-		211,192
Owner occupied real estate		472,824		242		4,250		-		477,316
Consumer and other		96,570		-		1,280		-		97,850
Residential mortgage		423,833		-		1,273		-		425,106
Paycheck protection program		649,696		-		-		-		649,696
Total	$	2,708,349	$	318	$	14,102	$	-	$	2,722,769

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
At December 31, 2020:
Commercial real estate	$	701,151	$	80	$	4,517	$	-	$	705,748
Construction and land development		142,821		-		-		-		142,821
Commercial and industrial		197,225		-		2,963		-		200,188
Owner occupied real estate		470,732		519		3,955		-		475,206
Consumer and other		101,066		-		1,302		-		102,368
Residential mortgage		394,473		-		701		-		395,174
Paycheck protection program		636,637		-		-		-		636,637
Total	$	2,644,105	$	599	$	13,438	$	-	$	2,658,142

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

(dollars in thousands)	March 31, 2021		December 31, 2020

Commercial real estate	$	4,314	$	4,421
Construction and land development		-		-
Commercial and industrial		2,962		2,963
Owner occupied real estate		3,361		2,859
Consumer and other		1,280		1,302
Residential mortgage		1,273		701
Paycheck protection program		-		-
Total	$	13,190	$	12,246

If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $189,000 and $224,000 for the three months ended March 31, 2021 and 2020, respectively.

Troubled Debt Restructurings

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

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law which amended certain sections of the CARES Act. This amendment extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declares a termination of the national emergency related to the COVID-19 pandemic. As of March 31, 2021, deferrals declined to three customer relationships with outstanding balances of $3 million, or less than 1% of total loans outstanding. At December 31, 2020, twenty-one customers with outstanding balances of $16 million, or less than 1% of total loans outstanding were deferring loan payments. As of March 31, 2021, there were no deferral requests that were for deferment of principal balances only compared to approximately $4 million at December 31, 2020. The remaining deferrals include requests to defer both principal and interest payments. As of March 31, 2021, the three deferrals were second deferrals with outstanding balances of $3 million. At December 31, 2020, deferrals were comprised of the following categories: 90 day deferrals amounted to eight customers with outstanding balances of $3 million and second deferrals amounted to thirteen customers with outstanding balances of $13 million.

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

(dollars in thousands)	Number of Loans		Accrual Status		Non- Accrual Status		Total TDRs
March 31, 2021
Commercial real estate		1	$	4,497	$	-	$	4,497
Construction and land development		-		-		-		-
Commercial and industrial		-		-		-		-
Owner occupied real estate		-		-		-		-
Consumer and other		-		-		-		-
Residential mortgage		-		-		-		-
Paycheck protection program		-		-		-		-
Total		1	$	4,497	$	-	$	4,497

December 31, 2020
Commercial real estate		1	$	4,530	$	-	$	4,530
Construction and land development		-		-		-		-
Commercial and industrial		-		-		-		-
Owner occupied real estate		-		-		-		-
Consumer and other		-		-		-		-
Residential mortgage		-		-		-		-
Paycheck protection program		-		-		-		-
Total		1	$	4,530	$	-	$	4,530

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

There were no loan modifications made during the three months ended March 31, 2021 and 2020 that met the criteria of a TDR.

After a loan is determined to be a TDR, the Company continues to track its performance under the most recent restructured terms. There were no TDRs that subsequently defaulted during the three months ended March 31, 2021 and the year ended December 31, 2020.

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

Note 7: Other Borrowings

The following is a summary of short-term borrowings by type.

	March 31, 2021					December 31, 2020
(dollars in thousands)	Balance at End of Period		Weighted Average Interest Rate at End of Period			Balance at End of Period		Weighted Average Interest Rate at End of Period
Other borrowings
Paycheck Protection Program
Liquidity Facility borrowings	$	611,114		0.35	%	$	633,866		0.35	%

As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowings to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. At March 31, 2021, the Company pledged $611 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $611 million of funds at a rate of 0.35%. The Company pledged $634 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $634 million of funds at a rate of 0.35% at December 31, 2020.

Note 8: Fair Value of Financial Instruments

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

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

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

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

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

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

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

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

(dollars in thousands)	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs

March 31, 2021
Assets:

U.S. Government agencies	$	30,330	$	-	$	30,330	$	-
Collateralized mortgage obligations		220,350		-		220,350		-
Agency mortgage-backed securities		242,388		-		242,388		-
Municipal securities		8,354		-		8,354		-
Corporate bonds		125,145		-		122,525		2,620
Investment securities available for sale	$	626,567	$	-	$	623,947	$	2,620
Equity securities		9,079		9,079		-		-

Mortgage Loans Held for Sale	$	28,069	$	-	$	28,069	$	-
SBA Servicing Assets		4,617		-		-		4,617
Interest Rate Lock Commitments		846		-		846		-
Best Efforts Forward Loan Sales Commitments		239		-		239		-
Mandatory Forward Loan Sales Commitments		386		-		386		-

Liabilities:

Interest Rate Lock Commitments		14		-		14		-
Best Efforts Forward Loan Sales Commitments		178		-		178		-
Mandatory Forward Loan Sales Commitments		39		-		39		-

December 31, 2020
Assets:

U.S. Government agencies	$	31,886	$	-	$	31,886	$	-
Collateralized mortgage obligations		221,546		-		221,546		-
Agency mortgage-backed securities		150,528		-		150,528		-
Municipal securities		8,225		-		8,225		-
Corporate bonds		116,323		-		113,692		2,631
Investment securities available for sale	$	528,508	$	-	$	525,877	$	2,631
Equity securities		9,039		9,039		-		-

Mortgage Loans Held for Sale	$	50,387	$	-	$	50,387	$	-
SBA Servicing Assets		4,626		-		-		4,626
Interest Rate Lock Commitments		1,580		-		1,580		-
Best Efforts Forward Loan Sales Commitments		2		-		2		-
Mandatory Forward Loan Sales Commitments		-		-		-		-

Liabilities:

Interest Rate Lock Commitments		-		-		-		-
Best Efforts Forward Loan Sales Commitments		612		-		612		-
Mandatory Forward Loan Sales Commitments		800		-		800		-

The following table presents an analysis of the activity in the SBA servicing assets for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
(dollars in thousands)	2021			2020

Beginning balance, January 1^st	$	4,626		$	4,447
Additions		178			238
Fair value adjustments		(187	)		(41	)
Ending balance, March 31^st	$	4,617		$	4,644

Fair value adjustments are recorded as loan and servicing fees on the statement of income. Servicing fee income, not including fair value adjustments, totaled $482,000 and $430,000 for the three months ended March 31, 2021 and 2020, respectively. Total loans in the amount of $212.8 million at March 31, 2021 and $208.7 million at December 31, 2020 were serviced for others.

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

	2021			2020
Level 3 Investments Only	*Corporate*			*Corporate*
(dollars in thousands)	*Bonds*			*Bonds*

Balance, January 1^st	$	2,631		$	2,819
Unrealized losses		(11	)		(170	)
Paydowns		-			-
Proceeds from sales		-			-
Realized gains		-			-
Impairment charges on Level 3		-			-
Balance, March 31^st	$	2,620		$	2,649

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

(dollars in thousands)	Total		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
March 31, 2021
Impaired loans	$	4,461	$	-	$	-	$	4,461
Other real estate owned		-		-		-		-

December 31, 2020
Impaired loans	$	5,678	$	-	$	-	$	5,678
Other real estate owned		364		-		-		364

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

	Quantitative Information about Level 3 Fair Value Measurements
Asset Description	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
March 31, 2021

Corporate bonds	$	2,620	Discounted Cash Flows	Discount Rate		(3.44%)

SBA servicing assets	$	4,617	Discounted Cash Flows	Conditional Prepayment Rate		(13.99%)

				Discount Rate		(10.00%)

Impaired loans	$	4,461	Appraised Value of Collateral (1)	Liquidation expenses (2)		0%	-	31%	(18%)	(3)

Other real estate owned	$	-	Appraised Value of Collateral (1)	Liquidation expenses (2)		-

December 31, 2020
Corporate bonds	$	2,631	Discounted Cash Flows	Discount Rate		(3.48%)

SBA servicing assets	$	4,626	Discounted Cash Flows	Conditional Prepayment Rate		(13.22%)

				Discount Rate		(10.00%)

Impaired loans	$	5,678	Appraised Value of Collateral (1)	Liquidation expenses (2)		0%	-	23%	(12%)	(3)

Other real estate owned	$	364	Appraised Value of Collateral (1)	Liquidation expenses (2)		7%	-	16%	(13%)	(3)

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

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

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

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

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 March 31, 2021 and December 31, 2020.

Investment Securities

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

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

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

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

Mortgage Loans Held for Sale (Carried at Fair Value)

The fair value of mortgage loans held for sale is determined by obtaining prices at which they could be sold in the principal market at the measurement date and are classified within Level 2 of the fair value hierarchy. Republic elected to adopt the fair value option for its mortgage loans held for sale portfolio in order to more accurately reflect their economic value. Interest income on loans held for sale, which totaled $281,000 for three months ended March 31, 2021 and $83,000 for the three months ended March 31, 2020, are included in interest and fees in the statements of operations.

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 March 31, 2021 and December 31, 2020 (dollars in thousands):

	Carrying Amount		Aggregate Unpaid Principal Balance		Excess Carrying Amount Over Aggregate Unpaid Principal Balance
March 31, 2021	$	28,069	$	27,558	$	511

December 31, 2020	$	50,387	$	48,109	$	2,278

Changes in the excess carrying amount over aggregate unpaid principal balance are recorded in the statement of operations in mortgage banking income. At March 31, 2021, Republic had one mortgage loan held for sale recorded at fair value that was 90 or more days past due and on non-accrual. 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, 2020.

Interest Rate Lock Commitments (“IRLC”)

The Company determines the value of IRLC’s 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 IRLC’S Factors that affect pull-through rates include the origination channel, current mortgage interest rates in the market versus the interest rate incorporated in the IRLC, the purpose of the mortgage (purchase versus financing), the stage of completion of the underlying application and underwriting process, and the time remaining until the IRLC expires. IRLCs are classified within Level 2 of the valuation hierarchy.

Best Efforts Forward Loan Sales Commitments

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

Mandatory Forward Loan Sales Commitments

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

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

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

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 March 31, 2021 and December 31, 2020, these assets are carried at current fair value and classified within Level 3 of the fair value hierarchy.

SBA Servicing Asset (Carried at Fair Value)

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

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

(dollars in thousands)	March 31, 2021		December 31, 2020

SBA Servicing Asset

Fair Value of SBA Servicing Asset	$	4,617	$	4,626

Composition of SBA Loans Serviced for Others
Fixed-rate SBA loans		2%		2%
Adjustable-rate SBA loans		98%		98%
Total		100%		100%

Weighted Average Remaining Term (in years)		20.0		20.0

Prepayment Speed		13.99%		13.22%
Effect on fair value of a 10% increase	$	(172)	$	(170)
Effect on fair value of a 20% increase		(333)		(329)

Weighted Average Discount Rate		10.00%		10.00%
Effect on fair value of a 10% increase	$	(149)	$	(152)
Effect on fair value of a 20% increase		(289)		(295)

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

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 March 31, 2021 were as follows.

	Fair Value Measurements at March 31, 2021
(dollars in thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Balance Sheet Data
Financial assets:
Cash and cash equivalents	$	828,897	$	828,897	$	828,897	$	-	$	-
Investment securities available for sale		626,567		626,567		-		623,947		2,620
Investment securities held to maturity		948,419		944,809		-		944,809		-
Equity securities		9,079		9,079		9,079		-		-
Restricted stock		3,039		3,039		-		3,039		-
Loans held for sale		28,621		28,621		-		28,069		552
Loans receivable, net		2,689,729		2,698,544		-		-		2,698,544
SBA servicing assets		4,617		4,617		-		-		4,617
Accrued interest receivable		16,657		16,657		-		16,657		-
Interest rate lock commitments		846		846		-		846		-
Best efforts forward loan sales commitments		239		239		-		239		-
Mandatory forward loan sales commitments		386		386		-		386		-

Financial liabilities:
Deposits
Demand, savings and money market	$	4,177,208	$	4,177,208	$	-	$	4,177,208	$	-
Time		185,891		186,505		-		186,505		-
Subordinated debt		11,273		8,487		-		-		8,487
Accrued interest payable		819		819		-		819		-
Interest rate lock commitments		14		14		-		14		-
Best efforts forward loan sales commitments		178		178		-		178		-
Mandatory forward loan sales commitments		39		39		-		39		-

Off-Balance Sheet Data
Commitments to extend credit		-		-		-		-		-
Standby letters-of-credit		-		-		-		-		-

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

	Fair Value Measurements at December 31, 2020
(dollars in thousands)	Carrying Amount		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Balance Sheet Data
Financial assets:
Cash and cash equivalents	$	775,300	$	775,300	$	775,300	$	-	$	-
Investment securities available for sale		528,508		528,508		-		525,877		2,631
Investment securities held to maturity		814,936		836,972		-		836,972		-
Equity securities		9,039		9,039		9,039		-		-
Restricted stock		3,039		3,039		-		3,039		-
Loans held for sale		53,370		53,370		-		50,387		2,983
Loans receivable, net		2,632,367		2,618,104		-		-		2,618,104
SBA servicing assets		4,626		4,626		-		-		4,626
Accrued interest receivable		16,120		16,120		-		16,120		-
Interest rate lock commitments		1,580		1,580		-		1,580		-
Best efforts forward loan sales commitments		2		2		-		2		-
Mandatory forward loan sales commitments		-		-		-		-		-

Financial liabilities:
Deposits
Demand, savings and money market	$	3,827,390	$	3,827,390	$	-	$	3,827,390	$	-
Time		186,361		187,292		-		187,292		-
Subordinated debt		11,271		8,026		-		-		8,026
Accrued interest payable		926		926		-		926		-
Interest rate lock commitments		-		-		-		-		-
Best efforts forward loan sales commitments		612		612		-		612		-
Mandatory forward loan sales commitments		800		800		-		800		-

Off-Balance Sheet Data
Commitments to extend credit		-		-		-		-		-
Standby letters-of-credit		-		-		-		-		-

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

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

	Unrealized Gains (Losses) on Available- For-Sale Securities			Unrealized Holding Losses on Securities Transferred From Available-For-Sale To Held-To-Maturity			Total
(dollars in thousands)
Balance January 1, 2021	$	985		$	(3,814	)	$	(2,829	)
Unrealized gain on securities		(7,098	)		-			(7,098	)
Amounts reclassified from accumulated other comprehensive income to net income (2)		-			628			628
Net current-period other comprehensive income		(7,098	)		628			(6,470	)
Total change in accumulated other comprehensive income		(7,098	)		628			(6,470	)
Balance March 31, 2021	$	(6,113	)	$	(3,186	)	$	(9,299	)

Balance January 1, 2020	$	(1,275	)	$	(6,066	)	$	(7,341	)
Unrealized gain on securities		3,264			-			3,264
Amounts reclassified from accumulated other comprehensive income to net income (2)		(628	)		305			(323	)
Net current-period other comprehensive income		2,636			305			2,941
Total change in accumulated other comprehensive income		2,636			305			2,941
Balance March 31, 2020	$	1,361		$	(5,761	)	$	(4,400	)

Balance January 1, 2020	$	(1,275	)	$	(6,066	)	$	(7,341	)
Unrealized gain on securities		4,320			-			4,320
Amounts reclassified from accumulated other comprehensive income to net income (2)		(2,060	)		2,252			192
Net current-period other comprehensive income		2,260			2,252			4,512
Total change in accumulated other comprehensive income		2,260			2,252			4,512
Balance December 31, 2020	$	985		$	(3,814	)	$	(2,829	)

(1)

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

(2)

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

Note 10 – Shareholders’ Equity

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

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

Note 11: Goodwill and Other Intangibles

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

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

	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Balance, January 1^st	$	-	$	5,011
Additions/Adjustments		-		-
Amortization		-		-
Balance, March 31^st	$	-	$	5,011

Amortization Period (in years)		N/A	Indefinite

Note 12: Derivatives and Risk Management Activities

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

March 31, 2021	Balance Sheet Presentation	Fair Value		Notional Amount

Asset derivatives:

IRLC’s	Other Assets	$	846	$	40,028
Best efforts forward loan sales commitments	Other Assets		239		23,450
Mandatory forward loan sales commitments	Other Assets		386		24,326

Liability derivatives:

IRLC’s	Other Liabilities	$	14	$	4,417
Best efforts forward loan sales commitments	Other Liabilities		178		20,995
Mandatory forward loan sales commitments	Other Liabilities		39		3,097

December 31, 2020	Balance Sheet Presentation	Fair Value		Notional Amount

Asset derivatives:

IRLC’s	Other Assets	$	1,580	$	48,223
Best efforts forward loan sales commitments	Other Assets		2		2,069
Mandatory forward loan sales commitments	Other Assets		-		-

Liability derivatives:

IRLC’s	Other Liabilities	$	-	$	-
Best efforts forward loan sales commitments	Other Liabilities		612		46,154
Mandatory forward loan sales commitments	Other Liabilities		800		48,373

The following table summarizes the amounts recorded in Republic’s statement of income for derivative instruments not designated as hedging instruments for the three months ended March 31, 2020 and 2019 (in thousands):

Three Months Ended March 31, 2021	Income Statement Presentation	Gain/(Loss)

Asset derivatives:

IRLCs	Mortgage banking income	$	(734	)
Best efforts forward loan sales commitments	Mortgage banking income		237
Mandatory forward loan sales commitments	Mortgage banking income		386

Liability derivatives:

IRLCs	Mortgage banking income	$	(14	)
Best efforts forward loan sales commitments	Mortgage banking income		434
Mandatory forward loan sales commitments	Mortgage banking income		761

Three Months Ended March 31, 2020	Income Statement Presentation	Gain/(Loss)

Asset derivatives:

IRLCs	Mortgage banking income	$	166
Best efforts forward loan sales commitments	Mortgage banking income		1,053
Mandatory forward loan sales commitments	Mortgage banking income		269

Liability derivatives:

IRLCs	Mortgage banking income	$	(718	)
Best efforts forward loan sales commitments	Mortgage banking income		75
Mandatory forward loan sales commitments	Mortgage banking income		54

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.

Note 13: Revenue from Contracts with Customers

The following table presents non-interest income, segregated by revenue streams that are in-scope and out-of-scope of ASC 606, “Revenue from Contracts with Customers”, for the three months ended March 31, 2021 and 2020.

	Three Months Ended March 31,
(dollars in thousands)	2021		2020
Non-interest income
In-scope of Topic 606
Service charges on deposit accounts	$	3,960	$	2,064
Other non-interest income		317		62
Non-interest income (in-scope of Topic 606)		4,277		2,126
Non-interest income (out-of-scope of Topic 606)		5,998		4,419
Total non-interest income	$	10,275	$	6,545

Note 14: Leases

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

At March 31, 2021, the Company had forty-two operating lease agreements, which include operating leases for twenty branch locations, seven offices that are used for general office space, and fifteen operating leases for equipment. Two of the real property operating leases did not include one or more options to extend the lease term. Eight of the operating leases for branch locations are land leases where the Company is responsible for the construction of the building on the property. The forty-two operating leases have maturity dates ranging from August 2021 to August 2059 most of which include options for multiple five and ten year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 19.2 years as of March 31, 2021. The weighted average operating lease discount rate was 3.34% at March 31, 2021.

At March 31, 2020, the Company had thirty-eight operating lease agreements, which include operating leases for eighteen branch locations, seven offices that are used for general office space, and 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-eight operating leases have maturity dates ranging from June 2020 to August 2059 most of which include options for multiple five and ten year extensions which the Company is reasonably certain to exercise. No operating leases include variable lease payments that are based on an index or rate, such as the CPI. The weighted average remaining operating lease term for these leases is 19.7 years as of March 31, 2020. The weighted average operating lease discount rate was 3.58% at March 31, 2020.

The following table presents operating lease costs net of sublease income for the three months ended March 31, 2021 and 2020.

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
(dollars in thousands)
Operating lease cost	$	2,137	$	1,917
Sublease income		-		-
Total lease cost	$	2,137	$	1,917

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 for the three months ended March 31, 2021 and 2020.

	Three Months Ended March 31, 2021			Three Months Ended March 31, 2020
(dollars in thousands)
Operating lease payments due:
Within one year	$	8,153		$	6,991
One to three years		15,481			11,541
Three to five years		15,207			10,173
More than five years		83,223			73,691
Total undiscounted cash flows		122,064			102,396
Discount on cash flows		(35,980	)		(32,163	)
Total operating lease liability obligations	$	86,084		$	70,233

The following table presents cash and non-cash activities for the three months ended March 31, 2020 and 2019.

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
(dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	2,029	$	1,734

Non-cash investing and financing activities
Additions to Operating leases – right of use asset
New operating lease liability obligation	$	8,114	$	2,510

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Executive Summary

Republic First Bancorp, Inc. was organized and incorporated under the laws of the Commonwealth of Pennsylvania in 1987 and is the holding company for Republic First Bank, which does business under the name Republic Bank. We offer a variety of credit and depository banking services to individuals and businesses primarily in Greater Philadelphia, Southern New Jersey and New York City through our offices and branch locations in those markets. We commonly refer to our branch locations as stores to reflect our retail oriented approach to customer service and convenience.

As of March 31, 2021, we serve our customers through 31 store locations, in addition to 4 loan offices that specialize in commercial, small business and residential mortgage lending. Our stores are open 7 days a week, 361 days a year, with extended lobby and drive-thru hours providing customers with some of the most convenient hours compared to any bank in the markets which we operate. We offer free checking, free coin counting, and ATM/Debit cards issued on the spot. We also provide access to more than 55,000 surcharge free ATM machines worldwide through the Allpoint network to our customers. Our commitment to deliver best in class customer service not only applies to our store locations, but includes by phone, online and mobile options as well. Our business model is built on customer loyalty and engagement, understanding customer needs and offering the financial products and services to help them achieve their goals and objectives.

Current Economic Environment

The coronavirus (“COVID-19”) outbreak and the public health response to contain it have resulted in unprecedented economic and financial market conditions over the last twelve months. In response to these evolving conditions, the Board of Governors of the Federal Reserve System (“Federal Reserve”) reduced the federal funds target range by 150 basis points to 0.00% to 0.25% in March 2020. It has remained at that level through the period ended March 31, 2021. The Federal Reserve has taken additional steps to bolster the economy by promoting liquidity in certain securities markets and providing funding sources for small and mid-sized businesses, as well as, state and local governments as they work through the cash flow stresses caused by the COVID-19 pandemic.

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

In a period of economic contraction, elevated levels of loan losses and lost interest income may occur. The Company continues to accrue interest on loans modified in accordance with the CARES Act. To the extent those borrowers are unable to resume normal contractual payments, the Company could experience additional losses of principal and interest. The extent to which the COVID-19 pandemic has a further impact the Company's business, results of operations, and financial condition, as well as the Company's regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the COVID-19 pandemic.

COVID-19 Response Efforts

Republic is committed to providing the financial resources necessary to support the economic recovery in our market. We took an active role in participating in the first round of the Paycheck Protection Program. We quickly developed a process to accept PPP loan applications not only from our valued small business customers, but from non-customers throughout our community as well. During the first round of the PPP program we processed and obtained SBA approval for nearly 5,000 PPP loan applications resulting in more than $680 million in loans. We are now assisting the recipients of those loans through the application process for forgiveness of the outstanding loan balance with the SBA. In addition, we are processing applications for the second round of the PPP program which was authorized by the Economic Aid Act in December 2020. In the first quarter of 2021 we have originated nearly $240 million in new PPP loans and have received approval from the SBA on more than 2,100 applications in this second round.

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

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

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

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

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

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

Loss Mitigation and Loan Portfolio Analysis

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

Pursuant to the CARES Act, loan modifications made between March 1, 2020 and the earlier of i) December 30, 2020 or ii) 60 days after the President declares a termination of the COVID-19 national emergency are not classified as TDRs if the related loans were not more than 30 days past due as of December 31, 2019. In December 2020, the Economic Aid Act was signed into law which amended certain sections of the CARES Act. This amendment extended the period to suspend the requirements under TDR accounting guidance to the earlier of i) January 1, 2022 or ii) 60 days after the President declares a termination of the national emergency related to the COVID-19 pandemic. As of March 31, 2021, deferrals declined to three customer relationships with outstanding balances of $3 million, or less than 1% of total loans outstanding. At December 31, 2020, twenty-one customers with outstanding balances of $16 million, or less than 1% of total loans outstanding were deferring loan payments. As of March 31, 2021, there were no deferral requests that were for deferment of principal balances only compared to approximately $4 million at December 31, 2020. The remaining deferrals include requests to defer both principal and interest payments. As of March 31, 2021, the three deferrals were second deferrals with outstanding balances of $3 million. At December 31, 2020, deferrals were comprised of the following categories: 90 day deferrals amounted to eight customers with outstanding balances of $3 million and second deferrals amounted to thirteen customers with outstanding balances of $13 million.

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

CARES Act and Related Recent Legislation

The CARES Act. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted to address the economic effects of the COVID-19 pandemic. Among other things, the CARES Act provides for the following:

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Paycheck Protection Program (“PPP”). The CARES Act appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated was subsequently increased to $659 billion. Loans under the PPP that meet U.S. Small Business Administration (“SBA”) requirements may be forgiven in certain circumstances, and are 100% guaranteed by the SBA. In conjunction with the PPP, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) has created a lending facility for qualified financial institutions. The Paycheck Protection Program Liquidity Facility (“PPPLF”) will extend credit to depository institutions with a term equal to the term of the pledged loans at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility. The Company participated in both the PPP loan program and the PPPLF in 2020 and 2021.

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Troubled Debt Restructuring Relief. From March 1, 2020 through the earlier of December 31, 2020 or 60 days after the termination date of the national emergency declared by the President on March 13, 2020 concerning the COVID–19 outbreak (the “national emergency”), a financial institution may elect to suspend the requirements under accounting principles generally accepted in the U.S. for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a troubled debt restructured (“TDR”), including impairment accounting. This TDR relief is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable. The Company elected to exclude modifications meeting these requirements from TDR classification.

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CECL Delay. Banks, savings associations, credit unions, bank holding companies and their affiliates are not required to comply with the Financial Accounting Standards Board Accounting Standards Update No. 2016–13 (“Measurement of Credit Losses on Financial Instruments”), including the current expected credit losses methodology for estimating allowances for credit losses (“CECL”), from the date of the law’s enactment until the earlier of the end of the national emergency or December 31, 2020. On March 27, 2020, the Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”), and the Office of the Comptroller of the Currency issued an interim final rule that allows banking organizations that are required to adopt CECL this year to mitigate the estimated cumulative regulatory capital effects for up to two years. The relief afforded by the CARES Act and interim final rule is in addition to the three-year transition period already in place. The Company has elected to delay the adoption of CECL.

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Forbearance. The CARES Act codified in part guidance from state and federal regulators and government-sponsored enterprises, including the 60-day suspension of foreclosures on federally-backed mortgages and requirements that servicers grant forbearance to borrowers affected by COVID-19.

The Economic Aid Act. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Non-profits and Venues Act (the “Economic Aid Act”) became law. The Economic Aid Act reauthorized lending by the U.S. Small Business Administration under the Paycheck Protection Program of the CARES Act to eligible first-time borrowers and also to certain borrowers that previously received first draw PPP loans. The Economic Aid Act allocated an additional $286 billion for PPP loans. The Act also amended or revised certain PPP requirements, including borrower eligibility criteria, expanded permitted uses of PPP loans, and revised loan forgiveness procedures. Under the Economic Aid Act, the SBA had authority to make PPP loans until March 31, 2021; that application deadline was extended to May 31, 2021 as a result of passage of the Paycheck Protection Extension Act on March 25, 2021, and the SBA was also provided with an additional 60 days to complete processing of applications received by May 31, 2021. The Economic Aid Act also extended the provisions of the CARES Act described above (i) permitting financial institutions to suspend TDR assessment and reporting requirements under generally accepted accounting principles until the earlier of 60 days after the date that the President terminates the COVID-19 national emergency or January 1, 2022 and (ii) exempting insured depository institutions, bank holding companies, and any of their affiliates from compliance with CECL, until the earlier of the first day of an eligible financial institution’s fiscal year that begins after the COVID-19 national emergency is terminated or January 1, 2022.

Financial Condition

Assets

Total assets increased by $330.2 million, or 7%, to $5.4 billion at March 31, 2021, compared to $5.1 billion at December 31, 2020. In addition to the ongoing success with our expansion strategy, the growth in assets was also driven by our participation in the PPP loan program which resulted in a significant increase in new business relationships and account openings.

Cash and Cash Equivalents

Cash and due from banks and interest bearing deposits comprise this category, which consists of our most liquid assets. The aggregate amount in these three categories increased by $53.6 million to $828.9 million at March 31, 2021, from $775.3 million at December 31, 2020.

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 loans, which we also intend to sell in the future. Total SBA loans held for sale were $552,000 at March 31, 2021 compared to $3.0 million at December 31, 2020. Residential mortgage loans held for sale totaled $28.1 million at March 31, 2021, a decrease of $22.3 million, versus $50.4 million at December 31, 2020. A decrease in the volume of residential mortgage loans originated during the three months ended March 31, 2021 drove the decrease in residential mortgage loans held for sale compared to December 31, 2020. Loans held for sale, as a percentage of our total assets, were less than 1% at March 31, 2021.

Loans Receivable

The loan portfolio represents our largest asset category and is our most significant source of interest income. Our lending strategy is focused on small and medium sized businesses and professionals that seek highly personalized banking services. The loan portfolio consists of secured and unsecured commercial loans including commercial real estate, construction loans, residential mortgages, home improvement loans, home equity loans and lines of credit, overdraft lines of credit, and others. Commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to our legal lending limit to a customer, which was approximately $45.0 million at March 31, 2021.

Loans increased $57.4 million, or 2%, to $2.7 billion at March 31, 2021, versus $2.6 billion at December 31, 2020. This growth was primarily the result of the successful execution of our relationship banking model which has driven a steady flow in quality loan demand. We also expect many of the new business relationships that grew from our success with PPP to provide significant opportunities for commercial loan growth in future periods. As of March 31, 2021, we held approximately $649.7 million in PPP loans compared to $636.6 million at December 31, 2020.

Investment Securities

Investment securities available for sale are investments that may be sold in response to changing market and interest rate conditions, and for liquidity and other purposes. Our debt securities consist primarily of U.S. Government agency Small Business Administration (“SBA”) bonds, U.S. Government agency collateralized mortgage obligations (“CMO”), agency mortgage-backed securities (“MBS”), municipal securities, and corporate bonds. Investment securities available for sale totaled $626.6 million at March 31, 2021 as compared to $528.5 million at December 31, 2020. The $98.1 million increase was primarily due to the purchase of securities totaling $134.8 million partially offset by the paydowns, maturities, and calls of securities totaling $26.4 million during the three months ended March 31, 2021. At March 31, 2021, the portfolio had a net unrealized loss of $8.2 million compared to a net unrealized gain of $1.3 million at December 31, 2020. The $9.5 million decrease in the market value of the investment portfolio was driven by an increase in market interest rates which drove a decrease in value of the securities held in our portfolio at March 31, 2021.

Investment securities held-to-maturity are investments for which there is the intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of U.S. Government agency Small Business Investment Company bonds (SBIC) and Small Business Administration (SBA) bonds, CMO’s and MBS’s. The fair value of securities held-to-maturity totaled $948.4 million and $837.0 million at March 31, 2021 and December 31, 2020, respectively. The $111.4 million increase was primarily due to the purchase of securities held to maturity totaling $203.0 million partially offset by paydowns, maturities, and calls of securities held in the portfolio totaling $69.3 million during the three month period ended March 31, 2021.

Equity securities consist of investments in the preferred stock of domestic banks. Equity securities are held at fair value. The fair value of equity securities totaled $9.1 million at March 31, 2021 compared to $9.0 million at December 31, 2020.

Restricted Stock

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

At March 31, 2021 and December 31, 2020, the investment in FHLB of Pittsburgh capital stock totaled $2.6 million. At both March 31, 2021 and December 31, 2020, ACBB capital stock totaled $143,000. Both the FHLB and ACBB issued dividend payments during the first quarter of 2021.

Premises and Equipment

The balance of premises and equipment decreased by $303 thousand to $122.9 million at March 31, 2021 from $123.2 million at December 31, 2020. The decrease was primarily due to depreciation and amortization expense of $2.3 million offset by purchases of premises and equipment totaling $2.0 million during the three months ended March 31, 2021. The total store count was thirty-one at March 31, 2021 and December 31, 2020 with additional sites in various stages of development for future store locations.

Other Real Estate Owned

At both March 31, 2021 and December 31, 2020, the balance of other real estate owned was $1.2 million.

Operating Leases – Right of Use Asset

Under ASC 842, the right-of-use asset is valued as the initial amount of the lease liability obligation adjusted for any initial direct costs, prepaid or accrued rent, and any lease incentives. At March 31, 2021 and December 31, 2020, the balance of operating leases – right-of-use asset was $79.6 million and $72.9 million, respectively.

Deposits

Deposits, which include non-interest and interest-bearing demand deposits, money market, savings, and time deposits, are Republic’s major source of funding. Deposits are generally solicited from our market area through the offering of a variety of products to attract and retain customers, with a primary focus on multi-product relationships. Total deposits increased by $349.3 million to $4.4 billion at March 31, 2021 from $4.0 billion at December 31, 2020. We constantly focus our efforts on the growth of deposit balances through the successful execution of our relationship banking model which is based upon a high level of customer service and satisfaction. This strategy has also allowed us to build a stable core-deposit base and nearly eliminate our dependence upon the more volatile sources of funding found in brokered and internet certificates of deposit. Our participation in the PPP loan program also continues to result in significant growth in new deposit relationships. Many of those applicants were so pleased with their experience during the PPP process that they chose to move their primary banking relationship to Republic.

Other Borrowings

At March 31, 2021 and December 31, 2020, we borrowed $611.1 million and $633.9 million, respectively, through the Paycheck Protection Program Liquidity Facility (“PPPLF”) provided by the Federal Reserve Bank at a rate of 35 basis points. The borrowings were repaid in full during the first week following each quarter end.

Operating Lease Liability Obligation

Under ASC 842, the operating lease liability obligation is calculated as the present value of the lease payments, using the discount rate specified in the lease, or if that is not available, our incremental borrowing rate. At March 31, 2021 and December 31, 2020, the balance of the operating lease liability obligation was $86.1 million and $77.6 million, respectively.

Shareholders’ Equity

Total shareholders’ equity decreased $29 thousand to $308.4 million at March 31, 2021 compared to $308.1 million at December 31, 2020. The decrease was primarily due to an increase in the accumulated other comprehensive loss of $6.5 million along with the payment of preferred dividends in the amount of $875,000 offset by net income of $7.1 million. The shift in market value of the securities portfolio was primarily driven by an increase in market interest rates which drove a decrease in the market value of the securities held in our portfolio.

Results of Operations

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

We reported net income available to common shareholders of $6.2 million or $0.09 per diluted share, for the three month period ended March 31, 2021 compared to a net loss of $593,000 or ($0.01) per diluted share, for the three month period ended March 31, 2020. Earnings in 2021 were positively impacted by our participation in the PPP program and our ongoing focus on cost control initiatives while driving revenue growth.

Net interest income was $31.4 million for the three month period ended March 31, 2021 compared to $20.8 million for the three months ended March 31, 2020. Interest income increased $9.1 million, or 34%, primarily due to the growth in interest earning assets year over year. The recognition of $1.5 million in fees related to the PPP loan program during the first quarter of 2021 also drove the increase in interest income. Interest expense decreased $1.5 million, or 24%, primarily due to a decrease in the average yield on deposit balances driven by the lower interest rate environment. The net interest margin increased by 21 basis points to 2.97% during the first quarter of 2021 compared to 2.76% during the first quarter of 2020.

We recorded a provision for loan losses of $3.0 million for the three months ended March 31, 2021 compared to $950,000 for the three months ended March 31, 2020. The provision recorded is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that management believes is adequate to absorb inherent losses in the loan portfolio. The increase in the provision year over year was a result of an increase in both the allowance required for loans collectively and individually evaluated for impairment. The increase related to the allowance for loans collectively evaluated for impairment was largely associated with assumptions and estimates related to the uncertainty surrounding the economic environment caused by the impact of the COVID-19 pandemic.

Non-interest income increased by $3.7 million to $10.3 million during the three months ended March 31, 2021 compared to $6.5 million during the three months ended March 31, 2020. The increase during the three months ended March 31, 2021 was primarily due to growth in mortgage banking income of $2.1 million driven by the increase in residential mortgage loan originations. Service fees on deposit accounts also increased by $1.9 million as a result of the significant growth in deposit balances and new account relationships. The recognition of revenue associated with the conversion of all ATM and debit cards to the VISA platform also contributed to the growth in service fees on deposit accounts.

Non-interest expenses increased $2.1 million to $29.3 million during the three months ended March 31, 2021 compared to $27.3 million during the three months ended March 31, 2020. The increase in non-interest expenses was a result of growth in salaries and employee benefit costs, in addition to occupancy and equipment expense. The main cause for the increase in salaries and benefits was related to higher commissions paid to residential mortgage lenders based on production. The increase in occupancy and equipment expense was driven by the addition of two new store locations during 2020, along with an increase in snow removal costs during the first quarter of 2021. The overall growth in non-interest expense of 8% compared to total growth in revenue of 53% reflects management’s effort to control expense growth while driving higher revenue to improve earnings.

A provision for income taxes of $2.3 million was recorded during the three months ended March 31, 2021, an increase of $2.6 million, compared to a $330,000 benefit for income taxes during the three months ended March 31, 2020.

Return on average assets and average equity from continuing operations was 0.62% and 9.25%, respectively, during the three months ended March 31, 2021 compared to (0.07%) and (0.95%), respectively, for the three months ended March 31, 2020.

Analysis of Net Interest Income

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

Average Balances and Net Interest Income

	For the three months ended March 31, 2021							For the three months ended March 31, 2020
(dollars in thousands)	Average Balance		Interest Income/ Expense		Yield/ Rate⁽¹⁾			Average Balance		Interest Income/ Expense		Yield/ Rate⁽¹⁾
Interest-earning assets:
Federal funds sold and other interest-earning assets	$	208,397	$	49		0.09	%	$	81,339	$	289		1.43	%
Investment securities and restricted stock		1,430,854		6,488		1.81	%		1,156,504		6,826		2.36	%
Loans receivable		2,676,705		30,019		4.55	%		1,808,382		20,319		4.52	%
Total interest-earning assets		4,315,956		36,556		3.44	%		3,046,225		27,434		3.62	%
Other assets		276,967							260,829
Total assets	$	4,592,923						$	3,307,054

Interest-earning liabilities:
Demand – non-interest bearing	$	1,087,052						$	644,601
Demand – interest bearing		1,846,968		3,258		0.72	%		1,337,646		3,421		1.03	%
Money market & savings		1,013,275		1,118		0.45	%		752,510		1,783		0.95	%
Time deposits		184,831		539		1.18	%		226,185		1,221		2.17	%
Total deposits		4,132,126		4,915		0.48	%		2,960,942		6,425		0.87	%
Total interest-bearing deposits		3,045,074		4,915		0.65	%		2,316,341		6,425		1.12	%
Other borrowings		46,059		73		0.64	%		11,952		104		3.50	%
Total interest-bearing liabilities		3,091,133		4,988		0.65	%		2,328,293		6,529		1.13	%
Total deposits and other borrowings		4,178,185		4,988		0.48	%		2,972,894		6,529		0.88	%
Non-interest bearing other liabilities		104,843							84,211
Shareholders’ equity		309,895							249,949
Total liabilities and shareholders’ equity	$	4,592,923						$	3,307,054
Net interest income ⁽²⁾			$	31,568						$	20,905
Net interest spread						2.79	%						2.49	%
Net interest margin ⁽²⁾						2.97	%						2.76	%

⁽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 $136 and $151 for the three months ended March 31, 2021 and 2020, respectively, to adjust for tax equivalency. The tax equivalent net interest margin is calculated by dividing tax equivalent net interest income by average total interest earning assets.

Rate/Volume Analysis of Changes in Net Interest Income

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

	For the three months ended March 31, 2021 vs. 2020
	Changes due to:
(dollars in thousands)	Average Volume			Average Rate			Total Change
Interest earned:
Federal funds sold and other interest-earning assets	$	30		$	(270	)	$	(240	)
Securities		1,244			(1,582	)		(338	)
Loans		9,807			(107	)		9,700
Total interest-earning assets		11,081			(1,959	)		9,122

Interest expense:
Deposits
Interest-bearing demand deposits		899			(1,062	)		(163	)
Money market and savings		269			(934	)		(665	)
Time deposits		(120	)		(562	)		(682	)
Total deposit interest expense		1,048			(2,558	)		(1,510	)
Other borrowings		18			(49	)		(31	)
Total interest expense		1,066			(2,607	)		(1,541	)
Net interest income	$	10,015		$	648		$	10,663

Net Interest Income and Net Interest Margin

Net interest income, on a fully tax-equivalent basis, a non-GAAP measure, for the three months ended March 31, 2021, increased $10.7 million, or 51.0%, over the same period in 2020. Interest income on interest-earning assets totaled $36.6 million for the three months ended March 31, 2021, an increase of $9.1 million, compared to $27.4 million for the three months ended March 31, 2020. The increase in interest income earned was primarily the result of an increase in interest-earning assets. Loan growth was driven by continued success with our expansion strategy driving new customer relationships, in addition to our participation in the PPP loan program. Total interest expense for the three months ended March 31, 2021 decreased by $1.5 million, or 24%, over the same period in 2020. Interest expense on deposits decreased by $1.5 million for the three months ended March 31, 2021 versus the same period in 2020 due primarily to a decrease in the average rate on deposit balances. Interest expense on other borrowings decreased by $31,000 for the three months ended March 31, 2021 as compared to March 31, 2020 due primarily to a decrease in the average cost of overnight borrowings. The decline in interest rates was driven by the reduction in the Fed Funds rate during 2020.

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 2.79% during the first three months of 2021 compared to 2.49% during the first three months of 2020. Net interest margin represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest-earning assets. For the first three months of 2021 and 2020, the fully tax-equivalent net interest margin was 2.97% and 2.76%, respectively. The increase in the net interest margin was a result of an increase in the average balances of loans receivable and investment securities and a decrease in the average yield on deposit balances.

Provision for Loan Losses

We recorded a provision for loan losses in the amount of $3.0 million during the three-month period ended March 31, 2021 and a $950,000 provision during the three-month period ended March 31, 2020. The higher provision required during the first quarter of 2021 was driven by an increase in the allowance required for loans collectively evaluated for impairment, in addition to an increase in the allowance required for loans individually evaluated for impairment.

The change in the allowance required for loans collectively evaluated for impairment was primarily driven by the uncertainty surrounding the economic environment due to the impact of the COVID-19 pandemic. As a result of the changes in economic conditions caused by the pandemic, we have increased the qualitative factors for certain components included in the allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act and Economic Aid Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP Program should help mitigate potential future period losses. Although the economy has begun to demonstrate signs of recovery, many key economic indicators have not returned to pre-pandemic levels. Based on the incurred loss methodology currently utilized by the Bank, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and severity of the economic downturn and the corresponding impact on our loan portfolio.

The increase in the allowance required for loans individually evaluated for impairment during the first quarter of 2021 was related to an increase in the allowance required for certain loans that had been classified as impaired in prior periods. The market value of the properties held as collateral for these impaired loans have declined based on recent appraisals.

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

Non-interest Income

Total non-interest income for the three months ended March 31, 2021 increased by $3.7 million, or 57%, compared to the same period in 2020. Mortgage banking income totaled $4.6 million during the three months ended March 31, 2021 which represents an increase of $2.1 million compared to the same period in 2020. This increase was driven by significant growth in residential mortgage loan originations year over year. Lower interest rates have lead to a sharp increase in refinancing activity. Loans related to new home purchases have also grown year over year. Service fees on deposit accounts totaled $4.0 million for the three months ended March 31, 2021 compared to $2.1 million during the same period in 2020. This increase was due to the growth in the number of customer accounts and transaction volume. Revenue related to the transition of all ATM and debit cards to the VISA platform also drove the increase in service fees. Loan and servicing fees totaled $633,000 for the three months ended March 31, 2021 compared to $471,000 for the same period in 2020. Gains on the sale of SBA loans totaled $761,000 for the three months ended March 31, 2021, an increase of $112,000 compared to $649,000 for the same period in 2020.

Non-interest Expenses

Non-interest expenses increased $2.1 million, or 8%, to $29.3 million for the first three months of 2021 compared to $27.3 million for the same period in 2020. An explanation of changes in non-interest expenses for certain categories is presented in the following paragraphs.

Salaries and employee benefits increased by $1.3 million, or 10%, for the first three months of 2021 compared to the same period in 2020. The main cause for the increase in salaries and benefits was related to higher commissions paid to residential mortgage lenders based on production.

Occupancy expense, including depreciation and amortization expense, increased by $774,000 or 15%, for the first three months of 2021 compared to the same period last year as a result of our continuing growth and relocation strategy.

Other real estate expenses totaled $98,000 during the first three months of 2021, a decrease of $184,000, or 65%, compared to the same period in 2020. This decrease was a result of lower costs to carry foreclosed properties in the current period.

All other non-interest expenses increased by $145,000, or 2%, for the first three months of 2021 compared to the same period last year due to increases in expenses related to appraisal and other loan expenses, data processing fees, debit card processing, regulatory assessments and costs, professional fees, and other expenses 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 the purposes of this calculation, net non-interest expenses equal non-interest expenses less non-interest income. For the three month period ended March 31, 2021, the ratio was 2.59% compared to 2.52% for the three month period ended March 31, 2020. The increase in this ratio was mainly due to our growth and expansion strategy.

Another productivity measure utilized by management is the operating efficiency ratio, a non-GAAP measure. This ratio expresses the relationship of non-interest expenses to net interest income plus non-interest income. The efficiency ratio equaled 70.4% for the first three months of 2021, compared to 99.9% for the first three months of 2020. The decrease for the three months ended March 31, 2021 versus March 31, 2020 was due to net interest income and non-interest income increasing at a faster rate than non-interest expenses.

Provision (Benefit) for Federal Income Taxes

We recorded a provision for income taxes of $2.3 million for the three months ended March 31, 2021, compared to a $330,000 benefit for income taxes for the three months ended March 31, 2020. The effective tax rates for the three-month periods ended March 31, 2021 and 2020 were 24% and (36%), respectively. The effect of permanent deductions increases the effective tax benefit percentage when in a pre-tax loss 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 assessing the need for a valuation allowance, we carefully weighed both positive and negative evidence currently available. Judgment is required when considering the relative impact of such evidence. The weight given to the potential effect of positive and negative evidence must be commensurate with the extent to which it can be objectively verified.

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

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

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

The net deferred tax asset balance was $12.1 million as of March 31, 2021 and $12.0 million as of December 31, 2020. The deferred tax asset will continue to be analyzed on a quarterly basis for changes affecting realizability.

Preferred Dividends

Dividends of $875,000 were declared and paid on the Company’s outstanding preferred stock during the three months ended March 31, 2021 compared to $923,000 for the three months ended December 31, 2020.

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

Net income available to common shareholders for the first three months of 2021 was $6.2 million, an increase of $6.8 million, compared to a net loss of $593,000 recorded for the first three months of 2020. The increase in earnings was driven by dramatic growth in revenue, participation in the PPP program, and the Company’s focus on cost control initiatives limited expense growth. For the three month period ended March 31, 2021, basic and fully-diluted net income per common share was $0.11 and $0.09, respectively, compared to basic and fully-diluted net loss per common share of ($0.01) for the three month period ended March 31, 2020.

Return on Average Assets and Average Equity

Return on average assets (“ROA”) measures our net income in relation to our total average assets. The ROA for the first three months of 2021 and 2020 was 0.62% and (0.07%), respectively. Return on average equity (“ROE”) indicates how effectively we can generate net income on the capital invested by our stockholders. ROE is calculated by dividing annualized net income by average stockholders' equity. The ROE for the first three months of 2021 and 2020 was 9.25% and (0.95%), respectively.

Commitments, Contingencies and Concentrations

Financial instruments with contract amounts representing potential credit risk were commitments to extend credit of approximately $423.1 million and $428.9 million, and standby letters of credit of approximately $16.1 million and $16.6 million, at March 31, 2021 and December 31, 2020, respectively. These financial instruments constitute off-balance sheet arrangements. Commitments often expire without being drawn upon. Substantially all of the $423.1 million of commitments to extend credit at March 31, 2021 were committed as variable rate credit facilities.

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

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

Regulatory Matters

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

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

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

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

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

(dollars in thousands)	Actual					Minimum Capital Adequacy					Minimum Capital Adequacy with Capital Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
At March 31, 2021:

Total risk-based capital
Republic	$	309,027		12.28	%	$	201,270		8.00	%	$	264,166		10.50	%	$	251,587		10.00	%
Company		340,149		13.47	%		202,022		8.00	%		265,154		10.50	%		-		-	%
Tier 1 risk-based capital
Republic		292,936		11.64	%		150,952		6.00	%		213,849		8.50	%		201,270		8.00	%
Company		324,058		12.83	%		151,517		6.00	%		214,649		8.50	%		-		-	%
CET 1 risk-based capital
Republic		292,936		11.64	%		113,214		4.50	%		176,111		7.00	%		163,532		6.50	%
Company		264,733		10.48	%		113,637		4.50	%		176,769		7.00	%		-		-	%
Tier 1 leveraged capital
Republic		288,255		7.38	%		158,854		4.00	%		158,854		4.00	%		198,568		5.00	%
Company		308,376		8.14	%		159,239		4.00	%		159,239		4.00	%		-		-	%

At December 31, 2020:

Total risk-based capital
Republic	$	298,291		12.36	%	$	193,062		8.00	%	$	253,394		10.50	%	$	241,327		10.00	%
Company		326,554		13.50	%		193,498		8.00	%		253,967		10.50	%		-		-	%
Tier 1 risk-based capital
Republic		285,316		11.82	%		144,796		6.00	%		205,128		8.50	%		193,062		8.00	%
Company		313,579		12.96	%		145,124		6.00	%		205,592		8.50	%		-		-	%
CET 1 risk-based capital
Republic		285,316		11.82	%		108,597		4.50	%		168,929		7.00	%		156,863		6.50	%
Company		254,254		10.51	%		108,843		4.50	%		169,311		7.00	%		-		-	%
Tier 1 leveraged capital
Republic		287,114		7.44	%		153,414		4.00	%		153,414		4.00	%		191,767		5.00	%
Company		308,113		8.17	%		153,621		4.00	%		153,621		4.00	%		-		-	%

Dividend Policy

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

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

Liquidity

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

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

Our target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of interest-earning assets with projected future outflows of deposits and other liabilities. Our most liquid assets, comprised of cash and cash equivalents on the balance sheet, totaled $828.9 million at March 31, 2021, compared to $775.3 million at December 31, 2020. Loan maturities and repayments are another source of asset liquidity. At March 31, 2021, Republic estimated that more than $100.0 million of loans would mature or repay in the six-month period ending September 30, 2021. Additionally, a significant portion of our investment securities are available to satisfy liquidity requirements through sales on the open market or by pledging as collateral to access credit facilities. At March 31, 2021, we had outstanding commitments (including unused lines of credit and letters of credit) of $423.1 million. Certificates of deposit scheduled to mature in one year totaled $151.3 million at March 31, 2021. We anticipate that we will have sufficient funds available to meet all current commitments.

Daily funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds, or utilizing the credit facilities of the FHLB. We have established a line of credit with the FHLB of Pittsburgh. Our maximum borrowing capacity with the FHLB was $1.2 billion at March 31, 2021. At March 31, 2021 and December 31, 2020, we had no outstanding term borrowings and no outstanding overnight borrowings with the FHLB. As of March 31, 2021 and December 31, 2020, FHLB had issued letters of credit, on Republic’s behalf, totaling $150.0 million against our available credit line. We also established a contingency line of credit of $10.0 million with ACBB and a Fed Funds line of credit with Zions Bank in the amount of $15.0 million to assist in managing our liquidity position. We had no amounts outstanding against the ACBB line of credit or the Zions Fed Funds line at both March 31, 2021 and December 31, 2020. As part of the CARES Act, the Federal Reserve Bank of Philadelphia offered secured discounted borrowing capacity to banks that originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. At March 31, 2021, the Company pledged $611 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $611 million of funds at a rate of 0.35%. At December 31, 2020, the Company pledged $634 million of PPP loans to the Federal Reserve Bank of Philadelphia to borrow $634 million of funds at a rate of 0.35%.

Investment Securities Portfolio

At March 31, 2021, we identified certain investment securities that were being held for indefinite periods of time, including securities that will be used as part of our asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as available-for-sale and are intended to increase the flexibility of our asset/liability management. Our investment securities classified as available for sale consist primarily of SBAs, CMOs, MBSs, municipal securities, and corporate bonds. Available for sale securities totaled $626.6 million and $528.5 million as of March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, securities classified as available for sale had a net unrealized loss of $8.2 million and a net unrealized gain of $1.3 million at December 31, 2020.

Loan Portfolio

Our loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, construction and land development loans, commercial and industrial loans, owner occupied real estate loans, consumer and other loans, and residential mortgages. Commercial loans are primarily secured term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. Commercial loans are originated as either fixed or variable rate loans with typical terms of 1 to 5 years. Republic’s commercial loans typically range between $250,000 and $5.0 million, but customers may borrow significantly larger amounts up to Republic’s legal lending limit of approximately $45.0 million at March 31, 2021. Individual customers may have several loans often secured by different collateral.

Credit Quality

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

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

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

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

	March 31, 2021			December 31, 2020
Loans accruing, but past due 90 days or more	$	-		$	612
Non-accrual loans		13,190			12,246
Total non-performing loans		13,190			12,858
Other real estate owned		1,188			1,188
Total non-performing assets	$	14,378		$	14,046

Non-performing loans as a percentage of total loans, net of unearned income		0.49	%		0.49	%
Non-performing assets as a percentage of total assets		0.27	%		0.28	%

Non-performing asset balances increased by $332,000 to $14.4 million as of March 31, 2021 from $14.0 million at December 31, 2020. Non-accrual loans increased $944,000 to $13.2 million at March 31, 2021, from $12.2 million at December 31, 2020 due primarily to $1.3 million in transfers offset by payments of $300,000 during the three months ended March 31, 2021. There were no loans accruing, but past due 90 days or more at March 31, 2021 compared to $612,000 at December 31, 2020. At March 31, 2021 and December 31, 2020, all identified impaired loans are internally classified and individually evaluated for impairment in accordance with the guidance under ASC 310.

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

(dollars in thousands)	March 31,		December 31,
	2021		2020
30 to 59 days past due	$	1,037	$	2,321
60 to 89 days past due		48		938
Total loans 30 to 89 days past due	$	1,085	$	3,259

Loans with payments 30 to 59 days past due decreased to $1.1 million at March 31, 2021. This decrease was driven primarily by a $1.25 million loan that is now current.

Other Real Estate Owned

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

(dollars in thousands)	March 31, 2021		December 31, 2020
Beginning Balance, January 1^st	$	1,188	$	1,730
Additions		-		233
Valuation adjustments		-		(31	)
Dispositions		-		(744	)
Ending Balance	$	1,188	$	1,188

At March 31, 2021, we had no credit exposure to “highly leveraged transactions” as defined by the FDIC.

Allowance for Loan Losses

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

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

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

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

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

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

(dollars in thousands)	For the three months ended March 31, 2021			For the twelve months ended December 31, 2020			For the three months ended March 31, 2020

Balance at beginning of period	$	12,975		$	9,266		$	9,266
Charge‑offs:
Commercial real estate		-			-			-
Construction and land development		-			-			-
Commercial and industrial		-			333			-
Owner occupied real estate		-			48			-
Consumer and other		34			107			22
Residential mortgage		-			67			-
Paycheck protection program		-			-			-
Total charge‑offs		34			555			22
Recoveries:
Commercial real estate		-			-			-
Construction and land development		-			3			-
Commercial and industrial		104			48			17
Owner occupied real estate		43			1			-
Consumer and other		3			12			6
Residential mortgage		-			-			-
Paycheck protection program		-			-			-
Total recoveries		150			64			23
Net charge‑offs/(recoveries)		(116	)		491			(1	)
Provision for loan losses		3,000			4,200			950

Balance at end of period	$	16,091		$	12,975		$	10,217

Average loans outstanding⁽¹⁾	$	2,676,705		$	2,359,169		$	1,808,382
As a percent of average loans:⁽¹⁾
Net charge‑offs (annualized)		(0.02	)%		0.02	%		(0.00	)%
Provision for loan losses (annualized)		0.45	%		0.18	%		0.21	%
Allowance for loan losses		0.60	%		0.55	%		0.56	%
Allowance for loan losses to:
Total loans, net of unearned income		0.59	%		0.49	%		0.54	%
Total non‑performing loans		121.99	%		100.91	%		72.03	%

⁽¹⁾ Includes non-accruing loans

The change in the allowance required for loans collectively evaluated was primarily driven by the uncertainty surrounding the economic environment due to the impact of the COVID-19 pandemic. As a result of the changes in economic conditions caused by the pandemic, we have increased the qualitative factors for certain components included in the allowance for loan loss calculation. We have also taken into consideration the probable impact that the various stimulus initiatives provided through the CARES Act and Economic Aid Act, along with other government programs, may have to assist borrowers during this period of economic stress. We believe the combination of ongoing communication with our customers, loan payment deferrals, increased focus on risk management practices, and access to government programs such as the PPP Program should help mitigate potential future period losses. Although the economy has begun to demonstrate signs of recovery, many key economic indicators have not returned to pre-pandemic levels. Based on the incurred loss methodology currently utilized by the Bank, the provision for loan losses and charge-offs may be impacted in future periods, but more time is needed to fully understand the magnitude and severity of the economic downturn and the corresponding impact on our loan portfolio.

The allowance for loan losses as a percentage of non-performing loans (coverage ratio) was 122% at March 31, 2021, compared to 101% at December 31, 2020 and 72% at March 31, 2020. Total non-performing loans were $13.2 million, $12.8 million, and $14.2 million at March 31, 2021, December 31, 2020, and March 31, 2020, respectively. The increase in the coverage ratio at March 31, 2021 compared to both December 31, 2020 and March 31, 2020 was a result of an increase in the allowance for loan losses during the first three months of 2021.

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

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

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

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

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

(dollars in thousands)	March 31, 2021			December 31, 2020
Total nonperforming loans	$	13,190		$	12,858
Nonperforming and impaired loans with partial charge-offs		4,376			4,398

Ratio of nonperforming loans with partial charge-offs to total loans		0.16	%		0.17	%
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans		33.18	%		34.20	%
Coverage ratio net of nonperforming loans with partial charge-offs		367.71	%		295.02	%

Our charge-off policy is reviewed on an annual basis and updated as necessary. During the three month period ended March 31, 2021, there were no changes made to this policy.

Effects of Inflation

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

ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

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

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Controls

The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter ended March 31, 2020 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 March 31, 2020.

Limitations on the Effectiveness of Controls

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

Exhibit Number	Description	Location


3.1	Amended and Restated Articles of Incorporation of Republic First Bancorp, Inc.	Incorporated by reference to Form 10-K filed March 10, 2017

3.2	Amended and Restated By-laws of Republic First Bancorp, Inc.	Incorporated by reference to Form 10-Q filed May 11, 2020

10.13	Republic First Bancorp, Inc. 2021 Equity Incentive Plan*	Incorporated by reference to the definitive proxy statement on Schedule 14A filed March 23, 2021

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

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

32.1	Section 1350 Certification of Vernon W. Hill, II	Furnished herewith

32.2	Section 1350 Certification of Frank A. Cavallaro	Furnished herewith

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

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

SIGNATURES

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

		REPUBLIC FIRST BANCORP, INC.

Date: May 10, 2021	By:	/s/ Vernon W. Hill, II
		Vernon W. Hill, II
		Chief Executive Officer (principal executive officer)

Date: May 10, 2021	By:	/s/ Frank A. Cavallaro
		Frank A. Cavallaro
		Executive Vice President and Chief Financial Officer (principal financial and accounting officer)