UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2000
Commission File Number: 0-17007
Republic First Bancorp, Inc.
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(Exact name of business issuer as specified in its charter)
Pennsylvania 23-2486815
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(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip code)
215-735-4422
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
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
filing requirements for the past 90 days.
YES X NO
------- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
Issuer's classes of common stock, as of the latest practicable date.
6,343,901 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of October 31, 2000
Page 1 of 39
Exhibit index appears on page 37
TABLE OF CONTENTS
Page
Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 24
Part II: Other Information
Item 1: Legal Proceedings 37
Item 2: Changes in Securities and Use of Proceeds 37
Item 3: Defaults Upon Senior Securities 37
Item 4: Submission of Matters to a Vote of Security Holders 37
Item 5: Other Information 37
Item 6: Exhibits and Reports on Form 8-K 37
2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Page Number
(1) Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999........... 4
(2) Consolidated Statements of Operations for three and nine months ended
September 30, 2000 and 1999.......................................................... 5
(3) Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999.......................................................... 7
(4) Notes to Consolidated Financial Statements........................................... 8
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of September 30, 2000 and December 31, 1999
Dollars in Thousands, Except Share Data
(unaudited)
ASSETS: September 30, 2000 December 31, 1999
------------------- -------------------
Cash and due from banks $ 16,604 $ 20,789
Interest bearing deposits with banks 509 321
Federal funds sold 29,233 --
------------------- -------------------
Total cash and cash equivalents 46,346 21,110
Securities available for sale, at fair value 154,391 169,285
Securities held to maturity at amortized cost
(Fair value of $17,918 and $18,038, respectively) 17,933 18,023
Loans receivable (net of allowance for loan losses of
$3,804 and $3,208, respectively) 405,414 354,748
Loans held for sale -- 4,857
Premises and equipment, net 5,023 5,013
Real estate owned, net -- 643
Accrued income and other assets 12,162 12,651
------------------- -------------------
Total Assets $ 641,269 $ 586,330
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 41,647 $ 35,053
Demand - interest-bearing 25,832 19,174
Money market and savings 73,679 49,667
Time under $100,000 177,510 141,445
Time over $100,000 93,192 60,454
------------------- -------------------
Total Deposits 411,860 305,793
Other borrowed funds 180,040 236,640
Accrued expenses and other liabilities 9,978 8,857
------------------- -------------------
Total Liabilities 601,878 551,290
------------------- -------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares authorized; shares
issued and outstanding 6,343,901 and 6,343,901 as of September 30, 2000 and
December 31, 1999, respectively 63 63
Additional paid in capital 32,083 32,083
Retained earnings 13,716 11,082
Treasury stock at cost (175,172 shares
at September 30, 2000 and December 31, 1999) (1,541) (1,541)
Accumulated other comprehensive loss (4,930) (6,647)
------------------- -------------------
Total Shareholders' Equity 39,391 35,040
------------------- -------------------
Total Liabilities and Shareholders' Equity $ 641,269 $ 586,330
=================== ===================
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30,
Dollars in Thousands, Except Per Share Data
(unaudited)
Quarter to Date Year to Date
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Interest income:
Interest and fees on loans $ 9,111 $ 6,855 $ 24,739 $ 19,670
Interest on federal funds sold 231 16 298 18
Interest on investments 2,958 3,243 9,225 9,311
------------- ------------- ------------- -------------
Total interest income 12,300 10,114 34,262 28,999
------------- ------------- ------------- -------------
Interest expense:
Demand interest-bearing 189 37 387 149
Money market and savings 800 433 1,942 1,234
Time over $100,000 1,365 698 3,412 1,351
Time under $100,000 2,699 2,202 7,137 7,035
Other borrowings 2,709 2,882 8,711 8,161
------------- ------------- ------------- -------------
Total interest expense 7,762 6,252 21,589 17,930
------------- ------------- ------------- -------------
Net interest income 4,538 3,862 12,673 11,069
------------- ------------- ------------- -------------
Provision for loan losses 200 210 600 670
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 4,338 3,652 12,073 10,399
------------- ------------- ------------- -------------
Non-interest income:
Service fees 413 325 1,048 653
Tax Refund Program revenue -- -- 181 2,715
Other income 24 29 82 80
------------- ------------- ------------- -------------
437 354 1,311 3,448
Non-interest expenses:
Salaries and benefits 1,855 1,430 5,034 4,112
Occupancy/equipment 490 460 1,409 1,305
Other expenses 1,315 898 3,010 2,846
------------- ------------- ------------- -------------
3,660 2,788 9,453 8,263
------------- ------------- ------------- -------------
Income before income taxes 1,115 1,218 3,931 5,584
Provision for income taxes 368 403 1,297 1,839
------------- ------------- ------------- -------------
Income before cumulative effect of a
change in accounting principle 747 815 2,634 3,745
Cumulative effect of a change in
accounting principle (Note 4) -- -- -- (63)
------------- ------------- ------------- -------------
Net income $ 747 $ 815 $ 2,634 $ 3,682
============= ============= ============= =============
Net income per share-basic:
Income before cumulative effect of a
change in accounting principle $ 0.12 $ 0.13 $ 0.43 $ 0.62
Cumulative effect of a change in
accounting principle (Note 4) -- -- -- (0.01)
------------- ------------- ------------- -------------
Net Income $ 0.12 $ 0.13 $ 0.43 $ 0.61
============= ============= ============= =============
5
Quarter to Date Year to Date
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Net income per share-diluted:
Income before cumulative effect of a
change in accounting principle $ 0.12 $ 0.13 $ 0.42 $ 0.60
Cumulative effect of a change in
accounting principle (Note 4) -- -- -- (0.01)
------------- ------------- ------------- -------------
Net Income $ 0.12 $ 0.13 $ 0.42 $ 0.59
============= ============= ============= =============
(See notes to consolidated financial statements)
6
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
Dollars in thousands
(unaudited)
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 2,634 $ 3,682
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 600 670
Write down or loss on sale of other real estate owned 53 75
Depreciation and amortization 456 688
Decrease in loans held for sale 4,857 6,757
Increase (decrease) in accrued income
and other assets 489 (241)
(Decrease)/Increase in accrued expenses
and other liabilities 1,122 (462)
Net increase in deferred fees 155 77
-------- --------
Net cash provided by operating activities 10,366 11,246
-------- --------
Cash flows from investing activities:
Purchase of securities:
Available for Sale -- (44,978)
Held to Maturity (1,100) (5,418)
Proceeds from principal receipts, sales, and
maturities of securities 17,799 27,080
Net increase in loans (51,420) (27,320)
Net proceeds from sale of other real estate owned 590 --
Premises and equipment expenditures (466) (1,326)
-------- --------
Net cash used in investing activities (34,597) (51,962)
-------- --------
Cash flows from financing activities:
Net increase in demand, Money
Market, and savings deposits 37,264 388
Net (decrease) in borrowed funds less than 90 days (6,600) (18,246)
Net increase/(decrease) in borrowed funds greater than (50,000) 52,600
90 days
Net increase in time deposits 68,803 9,061
Purchase of treasury stock -- (1,028)
Net proceeds from exercise of stock options -- 972
-------- --------
Net cash provided by financing activities 49,467 43,747
-------- --------
Increase in cash and cash equivalents 25,236 3,031
Cash and cash equivalents, beginning of period 21,110 18,295
-------- --------
Cash and cash equivalents, end of period $ 46,346 $ 21,326
======== ========
Supplemental disclosure:
Interest paid $ 21,735 $ 17,862
======== ========
Taxes paid $ 995 $ 2,075
======== ========
Non-cash transactions:
Change in unrealized gain/(loss) on securities available
for sale, net of tax $ 1,717 $ (4,874)
Change in deferred tax liability due to change in unrealized
Loss on securities available for sale 884 2,510
======== ========
(See notes to consolidated financial statements)
7
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Republic First Bancorp, Inc. (the "Company"), is a two-bank holding
company organized and incorporated under the laws of the Commonwealth of
Pennsylvania. Its wholly-owned subsidiary, First Republic Bank (the "Bank"),
offers a variety of banking services to individuals and businesses throughout
the Greater Philadelphia and South Jersey area through its offices and branches
in Philadelphia and Montgomery Counties.
The Company opened a second wholly-owned banking subsidiary on June 1,
1999 in the State of Delaware. Republic First Bank of Delaware (the "Delaware
Bank") is a Delaware State chartered bank, located at Brandywine Commons II,
Concord Pike and Rocky Run Parkway in Brandywine, New Castle County Delaware.
The Delaware Bank offers many of the same services and financial products as
First Republic Bank, described in Part I, Item I of the Company's 1999 Form
10-K. The Delaware Bank also has a Loan Production Office in Wilmington,
Delaware, which serves as a headquarters for the Delaware Bank's commercial
bankers.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (including normal recurring accruals)
necessary to present fairly the financial position as of September 30, 2000, the
results of operations for the three months and nine months ended September 30,
2000 and 1999, and the cash flows for the nine months ended September 30, 2000
and 1999. Accordingly, these financial statements do not include information or
footnotes necessary for a complete presentation of financial statements in
accordance with GAAP. These interim financial statements have been prepared in
accordance with instructions to Form 10-Q. The interim results of operations may
not be indicative of the results of operations for the full year. The
accompanying unaudited financial statements should be read in conjunction with
the Company's audited financial statements, and the notes thereto, included in
the Company's 1999 Form 10-K filed with the Securities and Exchange Commission.
Note 2: Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements of the Company include the
accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries,
First Republic Bank and Republic First Bank of Delaware, (the "Banks"). Such
statements have been presented in accordance with generally accepted accounting
principles as applicable to the banking industry. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The
Banks 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 operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
8
Additionally, the Company had derived income from First Republic Bank's
participation in a program (the "Tax Refund Program") which indirectly funded
consumer loans collateralized by federal income tax refunds, and provided
accelerated check refunds. Approximately $2.7 million in gross revenues were
earned on these loans during the nine months ended September 30, 1999. The Bank
terminated its participation in the program after 1999, and therefore did not
participate in the tax refund program during 2000. However, the Bank earned
$181,000 in 2000, representing recoveries of delinquent receivables from prior
years.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the
allowance for loan losses, carrying values of real estate owned and deferred tax
assets. Consideration is given to a variety of factors in establishing the
allowance for loan losses, including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. Since the allowance for loan
losses and carrying value of real estate owned is dependent, to a great extent,
on the general economy and other conditions that may be beyond the Banks'
control, it is at least reasonably possible that the estimates of the allowance
for loan losses and the carrying values of the real estate owned could differ
materially in the near term.
Note 3: Legal Proceedings
The Company and the Banks 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, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
Note 4: Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement supercedes and replaces the
guidance in Statement 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, although it carries over most of Statement 125's
provisions without reconsideration.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001 and for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. This Statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application of
its accounting provisions is not permitted. The Company has not yet determined
the impact, if any of this statement on the Company's financial condition,
equity, results of operations, or disclosure.
9
Note 5: Cumulative Effect of a Change in Accounting Principle
During the first quarter of 1999, the Company expensed $94,000 which represented
all of its business start-up costs, upon the adoption of the Statement of
Position 98-5 "Reporting on the Costs of Startup Activities", on January 1,
1999. This statement requires costs of startup activities, including
organization costs, to be expensed as incurred. This resulted in a $63,000
charge or $0.01 per diluted share, net of an income tax benefit of $31,000,
which was recorded as a cumulative effect of a change in accounting principle.
Note 6: Segment Reporting
The Company's reportable segments represent strategic businesses that
offer different products and services. The segments are managed separately
because each segment has unique operating characteristics, management
requirements and marketing strategies.
Republic First Bancorp has three reportable segments; two community
banking segments and the Tax Refund Program. The community banking segments are
primarily comprised of the results of operations and financial condition of the
Company's wholly owned banking subsidiaries, First Republic Bank and Republic
First Bank of Delaware ("Delaware Bank"). The Tax Refund Program enabled the
Bank to provide accelerated check refunds ("ACRs") and refund anticipation loan
("RALs") on a national basis to customers of Jackson Hewitt, a national tax
preparation firm.
The accounting policies of the segments are the same as those described
in the notes to consolidated financial statements from the Company's Form 10-K.
The Company evaluates the performance of the community banking segments based
upon income before the provision for income taxes, return on equity and return
on average assets. The Tax Refund Program is evaluated based upon income before
provision for income taxes.
The Tax Refund Program was developed as a business segment to further
expand the Company's products and services offered to consumers and businesses.
Effective after 1999, the Company will no longer participate in the Tax Refund
program with Jackson Hewitt.
10
The segment information presented below reflects that the Delaware Bank
began operations in June 1999, and therefore 1999 amounts are not comparable.
As of and for the nine months ended September 30,
(dollars in thousands)
2000 1999
First Tax First Tax
Republic Delaware Refund Republic Delaware Refund
Bank Bank Program Total Bank Bank Program Total
External customer revenues:
Interest Income $33,314 $948 $ -- $34,262 $28,924 $75 $ -- $28,999
Other Income 1,038 92 181 1,311 730 3 2,715 3,448
-------- ------- ---- -------- -------- ------ ------ --------
Total external customer revenues
34,352 1,040 181 35,573 29,654 78 2,715 32,447
-------- ------- ---- -------- -------- ------ ------ --------
Intersegment revenues:
Interest Income -- -- -- -- -- -- -- --
Other Income 57 -- -- 57 25 -- -- 25
-------- ------- ---- -------- -------- ------ ------ --------
Total intersegement revenues 57 -- -- 57 25 -- -- 25
-------- ------- ---- -------- -------- ------ ------ --------
Total Revenue 34,409 1,040 181 35,630 29,679 78 2,715 32,472
-------- ------- ---- -------- -------- ------ ------ --------
Depreciation and amortization
384 72 -- 456 672 16 -- 688
Other operating expenses -
external 29,749 1,437 -- 31,186 25,582 443 150 26,175
Intersegment Expense:
Other operating expense -- 57 -- 57 -- 25 -- 25
Interest Expense -- -- -- -- -- -- -- --
Segment expenses 30,133 1,566 -- 31,699 26,254 484 150 26,888
-------- ------- ---- -------- -------- ------ ------ --------
Segment income before taxes and
extraordinary items $4,276 ($526) $181 $3,931 $3,425 $(406) $2,565 $5,584
======== ======= ==== ======== ======== ====== ====== ========
Segment assets $613,245 $28,024 -- $641,269 $552,474 $6,263 -- $558,737
-------- ------- ---- -------- -------- ------ ------ --------
Capital expenditures $401 $65 -- $466 $340 $986 -- $1,326
-------- ------- ---- -------- -------- ------ ------ --------
11
As of and for the three months ended September 30,
(dollars in thousands)
2000 1999
First Tax First Tax
Republic Delaware Refund Republic Delaware Refund
Bank Bank Program Total Bank Bank Program Total
External customer revenues:
Interest Income $11,853 $447 -- $12,300 $10,071 $43 $ -- $10,114
Other Income 411 26 -- 437 351 3 -- 354
-------- ------- ---- -------- -------- ------ ------ --------
Total external customer revenues
12,264 473 -- 12,737 10,422 46 -- 10,468
-------- ------- ---- -------- -------- ------ ------ --------
Intersegment revenues:
Interest Income -- -- -- -- -- -- -- --
Other Income 19 -- -- 19 19 -- -- 19
-------- ------- ---- -------- -------- ------ ------ --------
Total intersegement revenues 19 -- -- 19 19 -- -- 19
-------- ------- ---- -------- -------- ------ ------ --------
Total Revenue 12,283 473 -- 12,756 10,441 46 -- 10,487
-------- ------- ---- -------- -------- ------ ------ --------
Depreciation and amortization 145 26 -- 171 192 13 -- 205
Other operating expenses -
external 10,811 640 -- 11,451 8,785 260 -- 9,045
Intersegment Expense:
Other operating expense -- 19 -- 19 -- 19 -- 19
Interest Expense -- -- -- -- -- -- -- --
Segment expenses 10,956 685 -- 11,641 8,977 292 -- 9,269
-------- ------- ---- -------- -------- ------ ------ --------
Segment income before taxes and
extraordinary items $1,327 ($212) -- $1,115 $1,464 ($246) -- $1,218
======== ======= ==== ======== ======== ====== ====== ========
Segment assets $613,245 $28,024 -- $641,269 552,474 $6,263 -- $558,737
-------- ------- ---- -------- -------- ------ ------ --------
Capital expenditures $250 $28 -- $278 $238 $149 -- $387
-------- ------- ---- -------- -------- ------ ------ --------
12
Note 7: 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 ("CSE").
Common stock equivalents consist of dilutive stock options granted through the
Company's stock option plan or otherwise. The following table is a
reconciliation of the numerator and denominator used in calculating basic and
diluted EPS. Common stock equivalents which are anti-dilutive are not included
for purposes of this calculation. At September 30, 2000 and 1999, there were
275,310 and 138,610 CSEs that were antidilutive, respectively. These options may
be dilutive in the future.
The Company paid a 10% stock dividend on March 18, 1999. All relevant
financial data contained herein has been retroactively restated as if the
dividend had occurred at the beginning of each period presented herein.
13
The following table is a comparison of EPS for the three and nine months
ended September 30, 2000 and 1999.
Quarter to Date Year to Date
2000 1999 2000 1999
Income before cumulative
effect of a change in
accounting principle (numerator
for both calculations) $747,000 $815,000 $2,634,000 $3,745,000
Shares Per Share Share Per Share Shares Per Share Share Per Share
------ --------- ----- --------- ------ --------- ----- ---------
Weighted average shares
For period 6,168,729 6,086,569 6,168,729 5,971,786
Basic EPS $0.12 $0.13 $0.43 $0.63
Add common stock equivalents
representing dilutive
stock options 70,127 175,525 110,760 267,689
Effect on basic EPS of
dilutive CSE - $(0.00) $(0.01) $(0.03)
Equals total weighted average
Shares and CSE (diluted) 6,238,856 6,262,094 6,279,489 6,239,475
========= ========= ========= =========
Diluted EPS $0.12 $0.13 $0.42 $0.60
----- ----- ----- -----
The impact of the cumulative effect of a change in accounting principle
on the year-to-date 1999 EPS was to lower the numerator by $63,000 and the
resulting basic and diluted EPS by $0.01.
Note 8: Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only components of other comprehensive income are those related to SFAS
Statement No. 115 available for sale securities.
(dollar amounts in thousands) Three months ended Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
--------------- ---------------- --------------- ---------------
Net income $747 $815 $2,634 $ 3,682
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) during
the period 2,149 (1,545) 1,717 (4,874)
Less: Reclassification adjustment for gains
Included in net income - - - -
--------------- ---------------- --------------- ---------------
Comprehensive (loss)/income $2,896 ($730) $4,351 $(1,192)
=============== ================ =============== ===============
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the Company's results of operations, financial condition,
and capital resources presented in the accompanying consolidated financial
statements of Republic First Bancorp, Inc. This discussion should be read in
conjunction with the accompanying notes to the consolidated financial
statements.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may", "believes", "expect", "estimate", "project", anticipate", "should",
"intend", "probability", "risk", "target", "objective" and similar expressions
or variations on such expressions. 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 their impact on capital expenditures; new
service and product offerings by competitors and price pressures; and similar
items. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, Quarterly Reports on Form 10-Q,
filed by the Company in 2000, and any Current Reports on Form 8-K filed by the
Company, as well as other filings.
Financial Condition:
September 30, 2000 Compared to December 31, 1999
Total assets increased $54.9 million or 9.4%, to $641.3 million at
September 30, 2000 from $586.3 million at December 31, 1999. Net loans
(including loans held for sale) increased $45.8 million, or 12.7%, to $405.4
million at September 30, 2000 from $359.6 million at December 31, 1999. The
growth was a result of growth in commercial and industrial loans, commercial
construction loans, and the success of the new construction lending team who
were hired in the first quarter of 2000. In keeping with the companies long-term
strategy of changing the mix of loans to more variable rate loans from fixed
rate loans, most of the new loan originations were variable rate loans. These
new loans are generally in the range of $250,000 to $1.0 million. Investment
securities decreased $15.0 million, or 8.0%, to $172.3 million at September 30,
2000 from $187.3 million at December 31, 1999. This decrease was due to
principal payments received on securities which were used to fund loan growth
and to pay down other borrowed funds, partially offset by a $2.6 million
increase in market value on securities classified as Available-for-Sale.
Cash and due from banks, interest-bearing deposits, and federal funds
sold are all liquid funds. The aggregate amount in these three categories
increased by $25.2 million to $46.3 million at September 30, 2000 from $21.1
million at December 31, 1999 due to an increase in Federal Funds sold as a
result of funds generated from deposit growth.
Total liabilities increased $50.6 million or 9.2%, to $601.9 million at
September 30, 2000 from $551.3 million at December 31, 1999, due primarily to
deposit growth partially offset by a $56.6 million reduction in other borrowed
funds. Deposits, the Company's primary source of funds, increased $106.1
million, or 34.7% to
15
$411.9 million at September 30, 2000 from $305.8 million at December 31, 1999.
The aggregate of transaction accounts, which include demand, money market and
savings accounts, increased $37.3 million, or 35.9%, to $141.2 million at
September 30, 2000 from $103.9 million at December 31, 1999. Certificates of
deposit increased by $68.8 million, or 34.1%, to $270.7 million at September 30,
2000 from $201.9 million at December 31, 1999. The increase in all deposit
products was a result of the success of the Company's deposit generation
strategies instituted in 2000. The Company formed deposit teams and aggressively
targeted customers in five specific business categories. This will be an ongoing
part of the Company's long-term strategy going forward in order to reduce the
reliance on borrowed funds.
Other borrowed funds were $180.0 million at September 30, 2000 as
compared to $236.6 million at December 31, 1999. The decrease was primarily the
result of the Company's decision to put more emphasis on deposit gathering and
less reliance on other borrowed funds. Accordingly the Company paid down
borrowings.
The Company's shareholders' equity as of September 30, 2000 and
December 31, 1999 was $39.4 million and $35.0 million, respectively. Book value
per share of the Company's common stock increased from $5.68 as of December 31,
1999 to $6.39 as of September 30, 2000. This increase was mainly attributable to
the earnings for the year as well as the improvement in market value of the
available for sale securities portfolio.
Three Months Ended September 30, 2000 Compared to September 30, 1999
Results of Operations:
Overview
The Company's net income decreased $68,000 to $747,000 for the three
months ended September 30, 2000, from $815,000 for the three months ended
September 30, 1999. This decrease was a result of higher other operating costs,
partially offset by higher net interest income and other non-interest income.
Diluted earnings per share for the three months ended September 30, 2000 was
$0.12 compared to $0.13, for the three months ended September 30, 1999, due to
the decrease in net income. This resulted in a return on average assets and
average equity of 0.48% and 6.78% respectively, compared to 0.59% and 7.92%
respectively for the same period in 1999. The decline in both ratios is due
primarily to the decline in net income.
Analysis of Net Interest Income
Historically, the Company's earnings have depended heavily upon the
Banks' 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 Company's net interest income increased $676,000, or 17.5%, to $4.5
million for the three months ended September 30, 2000 from $3.9 million for the
three months ended September 30, 1999. As shown in the following Rate Volume
table, the increase in net interest income was due to the positive effect of
volume changes totaling $906,000 partially offset by the net costs associated
with higher interest rates of $230,000. The positive impact from volume changes
was attributable to a significant increase in average interest-earning assets,
which increased $65.4 million on average to $599.9 million during the quarter
ended September 30, 2000, from $533.4 million for the quarter ended September
30, 1999. The negative impact from changes in rates was attributable to higher
costing deposits and borrowed funds due to the rising-rate environment. Net
interest margin (net interest income as a percentage of average interest-earning
assets) was 3.03% for the three months ended September 30, 2000 versus 2.90% for
the three months ended September 30, 1999. The improvement in
16
net interest margin was the result of the change in the mix of interest-bearing
liabilities to lower costing deposits from higher costing other borrowed funds,
as well as recognition of interest income during the third quarter of 2000
totaling $204,000 from two loans that were restructured and reclassified to
accrual status from non-accrual status.
The Company's total interest income increased $2.2 million, or 21.6%,
to $12.3 million for the three months ended September 30, 2000 from $10.1
million for the three months ended September 30, 1999. Approximately $1.6
million of the increase was related to a $65.4 million increase in average
interest-earning assets while the remaining $554,000 was the result of the 63
basis point increase in the yield earned on interest-earning assets to 8.17%.
Interest and fees on loans increased $2.3 million, or 32.9%, to $9.1
million for the three months ended September 30, 2000 from $6.9 million for the
three months ended September 30, 1999. Approximately $1.7 million of the
increase was due to a $73.1 million, or 22.2%, increase in average loans
outstanding while the remaining $507,000 of the increase was due to an increase
in the average rate earned on these loans of 72 basis points to 9.02%. Interest
and dividend income on securities decreased $285,000, or 8.8%, to $3.0 million
for the three months ended September 30, 2000 from $3.2 million for the three
months ended September 30, 1999. This decrease in investment income was the
result of a decrease in the gross average balance of securities owned of $20.3
million, or 10.0%, to $184.1 million for the three months ended September 30,
2000 from $204.3 million for the three months ended September 30, 1999. This
more than offset the slight improvement in yield of 8 basis points. This decline
in securities is due to a plan to improve the mix of assets by redeploying the
cash resulting from maturities into higher yielding loans or alternatively to
pay down borrowed funds.
Interest expense increased $1.5 million, or 24.2%, to $7.8 million for
the three months ended September 30, 2000 from $6.3 million for the three months
ended September 30, 1999. Interest-bearing liabilities averaged $536.4 million,
an increase of $59.3 million, or 12.4%, from $477.0 million for the three months
ended September 30, 1999. The net growth in interest-bearing liabilities
contributed $725,000 to the increase in interest expense while the increase in
rates paid on interest-bearing liabilities of 54 basis points contributed the
remaining $784,000 to the increase. The growth in interest-bearing liabilities
was due to deposit growth which was used to fund the growth in interest-earning
assets and to repay certain other borrowed funds. This deposit growth was a
result of the Company's successful implementation of deposit generating
strategies. The average rate paid on interest-bearing liabilities increased to
5.74% for the three months ended September 30, 2000 from 5.20% for the three
months ended September 30, 1999 due primarily to the increase in average rates
paid on other borrowings and certain deposit accounts in response to the
rising-rate environment.
Interest expense on time deposits increased $1.2 million or 40.1%. This
increase was primarily due to an increase in the average volume of certificates
of deposit of $57.7 million, or 29.1%, to $256.3 million for the three months
ended September 30, 2000 from $198.6 million for the three months ended
September 30, 1999. This contributed $899,000 of the increase. The average rate
of interest paid on time deposits increased 50 basis points from 5.79% at
September 30, 1999 to 6.29% at September 30, 2000, and contributed the remaining
$265,000 to the increase in interest expense. The increase in the interest rate
is in response to the rising-rate environment.
Interest expense on FHLB advances and overnight federal funds purchased
was $2.7 million for the three months ended September 30, 2000 compared to $2.9
million for the three months ended September 30, 1999. This decrease was due to
a decrease in the average volume of other borrowed funds of $32.9 million to
$186.0 million for the three months ended September 30, 2000 from $219.0 million
for the three months ended September 30, 1999 as a result of successful deposit
generating strategies. The decline in volume more than
17
offset the increase in rate as the average rate paid for borrowed funds
increased 56 basis points from 5.22% at September 30, 1999 to 5.78% at September
30, 2000, due to the rising-rate environment.
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the period. Changes that are not due to volume or rate variances have been
allocated proportionally to both, based on their relative absolute values.
Rate/Volume Table
Three months ended September 30,
2000 versus 1999
(dollars in thousands)
Due to change in:
Volume Rate Total
------------ ------------ ------------
Interest Income
Loans
Commercial $ 1,709 $ 507 $ 2,216
Residential Mortgage (13) (10) (23)
Consumer and other 52 10 62
=====================================================================================================
Total Loans 1,748 507 2,255
Securities (326) 41 (285)
Other interest-earning assets 209 6 215
=====================================================================================================
Total interest-earning assets 1,631 554 2,185
Interest Expense
Deposits
Interest-bearing demand deposits (62) (90) (152)
Money market and savings (225) (142) (367)
Time deposits (899) (265) (1,164)
=====================================================================================================
Total deposit interest expense (1,186) (497) (1,683)
Other borrowed funds 461 (287) 174
=====================================================================================================
Total interest expense (725) (784) (1,509)
=====================================================================================================
Net interest income $ 906 $ (230) $ 676
=====================================================================================================
Provision for Loan Losses
The provision for loan losses is charged to operations to bring the
total allowance for loan losses to a level considered appropriate by management.
The level of the allowance for loan losses is determined by management based
upon its evaluation of the known and inherent risks within the Company's loan
portfolio. Management's periodic evaluation is based upon an examination of the
portfolio, past loss experience, current economic conditions, the results of the
most recent regulatory examinations and other relevant factors. The provision
for loan losses was $200,000 and $210,000 for the three months ended September
30, 2000 and 1999, respectively. The amounts recorded in the third quarters of
2000 and 1999 were the amounts management considered necessary to increase the
allowance for loan losses to an amount that reflects the known and inherent
losses in the portfolio. As of September 30, 2000 and 1999 the allowance for
loan losses to total loans, net of deferred loan fees was 0.93%.
18
Non-Interest Income
Total non-interest income increased $83,000 to $437,000 for the three
months ended September 30, 2000 from $354,000 for the three months ended
September 30, 1999. This increase is due to increased service fees on deposit
accounts as a result of the large growth in deposits as well as fees earned on
participated loans.
Non-Interest Expenses
Total non-interest expenses increased $872,000, or 31.3%, to $3.7
million for the three months ended September 30, 2000. Salaries and benefits
increased $425,000 or 29.7%, to $1.9 million for the three months ended
September 30, 2000 from $1.4 million for the three months ended September 30,
1999. The increase was due primarily to an increase in staff of First Republic
Bank as a result of business development efforts, bonus payments related to fee
generation, higher health insurance costs and normal merit increases.
Occupancy and equipment expenses increased $30,000, or 6.7%, to
$490,000 for the three months ended September 30, 2000 from $460,000 for the
three months ended September 30, 1999 due to increased rent and repairs and
maintenance expenses.
Other non-interest expense increased $417,000, to $1.3 million for the
three months ended September 30, 2000 from $898,000 for the same period in 1999.
This increase was primarily due to increased legal, advertising and professional
fee expense. In addition, the Company sold its last remaining OREO property in
the third quarter of 2000 at a loss of $53,000.
Provision for Income Taxes
The provision for income taxes decreased $35,000, or 8.7%, to $368,000
for the three months ended September 30, 2000 from $403,000 for the three months
ended September 30, 1999. This decrease is mainly the result of the decrease in
pre-tax income from third quarter 1999 to third quarter 2000. The effective tax
rate for both periods was approximately 33.0%.
19
Nine Months Ended September 30, 2000 Compared to September 30, 1999
Results of Operations:
Overview
The Company's net income decreased $1.0 million to $2.6 million for the
nine months ended September 30, 2000, from $3.7 million for the nine months
ended September 30, 1999. This decrease is a result of the decrease in revenue
from the Tax Refund Program of approximately $2.5 million, or $0.29 per diluted
share after tax. During the first quarter of 1999 the Company participated in
the program and earned revenues of $2.7 million. During the first nine months of
2000 the Company did not participate in the Tax Refund program and earned
$181,000 in revenue during the period representing recoveries of delinquent Tax
Refund program loans from prior years. Diluted earnings per share for the nine
months ended September 30, 2000, was $0.42 compared to $0.59, for the nine
months ended September 30, 1999, due to the decrease in net income. This
resulted in a return on average assets and average equity of 0.59% and 8.25%
respectively, compared to 0.92% and 12.99% respectively for the same period in
1999. The decline in these ratios is generally due to lower net income.
Excluding non-recurring revenue net of tax from the Tax Refund Program, diluted
earnings per share for the first nine months of 2000 of $0.40 grew 33.3% when
compared to $0.30 for the first nine months of 1999.
Analysis of Net Interest Income
Historically, the Company's earnings have depended heavily upon the
Banks' 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 Company's net interest income increased $1.6 million, or 14.5%, to
$12.7 million for the nine months ended September 30, 2000 from $11.1 million
for the nine months ended September 30, 1999. As shown in the Rate Volume table
below, the increase in net interest income was due to the positive effect of
volume changes of approximately $2.1 million partially offset by the effect of
higher interest rates which totaled $519,000. The positive impact of volume
changes was attributable to a significant increase in average interest earning
assets which increased $60.7 million, or 11.8%, to $575.6 million for the nine
months ended September 30, 2000, from $514.9 million for the nine months ended
September 30, 1999. Net interest margin (net interest income as a percentage of
average interest-earning assets) was 2.94% for the nine months ended September
30, 2000 versus 2.87% for the nine months ended September 30, 1999. The
improvement in net interest margin was the result of a shift in the mix of
interest-bearing liabilities from other borrowed funds to lower costing deposits
as well as growth in interest-earning assets and recognition of non-recurring
interest from two customers totaling $204,000 in the third quarter of 2000 that
were previously on non-accrual status.
The Company's total interest income increased $5.3 million, or 18.2%,
to $34.3 million for the nine months ended September 30, 2000 from $29.0 million
for the nine months ended September 30, 1999. Approximately $4.1 million of the
increase was the result of a $60.7 million increase in average volume of
interest-earning assets while the remaining $1.1 million of the increase was
related to the 42 basis point increase in the yield earned on interest-earning
assets to 7.93%. Interest and fees on loans increased $5.1 million, or 25.8%, to
$24.7 million for the nine months ended September 30, 2000 from $19.7 million
for the nine months ended September 30, 1999. Approximately $4.1 million of the
increase in loans was due primarily to a $60.6 million, or 19.0%, increase in
average loans outstanding while the remaining $935,000 of the increase was due
to an increase in the average rate earned on these loans of 47 basis points to
8.69%. The growth was primarily
20
realized in the Commercial loan area. The full-year effect of the Delaware bank
also contributed to the loan growth. Interest and dividend income on securities
decreased $86,000 to $9.2 million for the nine months ended September 30, 2000
from $9.3 million for the nine months ended September 30, 1999. This decline was
due to the $5.8 million decrease in volume to an average of $190.1 million which
offset the increase in rate earned on these securities of 13 basis points.
The Company's total interest expense increased $3.7 million, or 20.4%,
to $21.6 million for the nine months ended September 30, 2000 from $17.9 million
for the nine months ended September 30, 1999. Interest-bearing liabilities
averaged $515.9 million, an increase of $55.9 million, or 12.1%, from $460.1
million for the nine months ended September 30, 1999. The growth in
interest-bearing liabilities contributed $2.0 million to the growth in interest
expense while the increase in rates paid on interest-bearing liabilities
contributed the remaining $1.6 million of the increase. The increase in volume
is the result of very successful deposit generating strategies which allowed the
Bank's to fund growth with deposits and reduce the reliance on borrowed funds.
The average rate paid on interest-bearing liabilities increased 38 basis points
to 5.57% for the nine months ended September 30, 2000 from 5.19% for the nine
months ended September 30, 1999 due primarily to the increase in average rates
paid on other borrowings and certain deposit accounts in response to the higher
interest rate environment.
Interest expense on time deposits increased $2.2 million or 25.8%. This
increase was primarily due to an increase in the average volume of certificates
of deposit of $40.6 million, or 21.2%, to $231.6 million for the nine months
ended September 30, 2000 from $191.1 million for the nine months ended September
30, 1999. The average rate of interest paid on time deposits increased to 6.07%
at September 30, 2000 versus 5.85% at September 30, 1999 due to the higher
interest rate environment.
Interest expense on FHLB advances and overnight federal funds purchased
was $8.7 million for the nine months ended September 30, 2000 compared to $8.2
million for the nine months ended September 30, 1999. This increase was due to
an increase in the average rate of interest paid on other borrowed funds which
increased 58 basis points from 5.17% at September 30, 1999 to 5.75% at September
30, 2000, due to the rising-rate environment. The average volume of other
borrowed funds decreased by $8.3 million to $201.9 million for the nine months
ended September 30, 2000 from $210.3 million for the nine months ended September
30, 1999. This was a result of the success of the Bank's deposit generation
strategy which has reduced the reliance on other borrowed funds.
21
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the nine month period ending September 30, 2000 versus the comparable period for
1999. Changes that are not due to volume or rate variances have been allocated
proportionally to both, based on their relative absolute values.
Rate/Volume Table
Nine months ended September 30,
2000 versus 1999
(dollars in thousands)
Due to change in:
Volume Rate Total
Interest Income
Loans
Commercial $ 3,957 $ 813 $ 4,770
Residential Mortgage 44 73 117
Consumer and other 133 49 182
============================================================================================================
Total Loans 4,134 935 5,069
Securities (280) 194 (86)
Other interest-earning assets 283 (3) 280
============================================================================================================
Total interest-earning assets 4,137 1,126 5,263
Interest Expense
Deposits
Interest-bearing demand deposits (132) (106) (238)
Money market and savings (379) (329) (708)
Time deposits (1,837) (326) (2,163)
============================================================================================================
Total deposit interest expense (2,348) (761) (3,109)
Other borrowed funds 334 (884) (550)
============================================================================================================
Total interest expense (2,014) (1,645) (3,659)
============================================================================================================
Net interest income $ 2,123 $ (519) $ 1,604
============================================================================================================
Provision for Loan Losses
The provision for loan losses is charged to operations to bring the
total allowance for loan losses to a level considered appropriate by management.
The level of the allowance for loan losses is determined by management based
upon its evaluation of the known and inherent risks within the Company's loan
portfolio. Management's periodic evaluation is based upon an examination of the
portfolio, past loss experience, current economic conditions, the results of the
most recent regulatory examinations and other relevant factors. The provision
for loan losses was $600,000 and $670,000 for the nine months ended September
30, 2000 and 1999, respectively. The amounts recorded in 2000 and 1999 were the
amounts management considered necessary to increase the allowance for loan
losses to an amount that reflects the known and inherent losses in the
portfolio. As of September 30, 2000 and 1999 the allowance for loan losses to
total loans, net of deferred loan fees was 0.93%.
22
Non-Interest Income
Total non-interest income decreased $2.1 million to $1.3 million for
the nine months ended September 30, 2000 from $3.4 million for the nine months
ended September 30, 1999. This was mainly attributable to a $2.5 million
decrease in revenues related to the Tax Refund Program. This decrease results
from the termination of the Bank's participation in the Tax Refund Program after
the 1999 tax preparation season. Partially offsetting the tax refund amounts was
an increase in non-interest income from service fees on deposit accounts and
pre-payment penalty and forfeited commitment fees on loans as well as fees
earned on participated loans. These items increased $395,000 from $653,000 for
the nine months ended September 30, 1999. The increase in service fees on
deposits is the result of increased business development in transaction based
accounts.
Non-Interest Expenses
Total non-interest expenses increased $1.2 million to $9.5 million for
the nine months ended September 30, 2000 from $8.3 million at September 30,
1999. Salaries and benefits increased $922,000 or 22.4%, to $5.0 million for the
nine months ended September 30, 2000 from $4.1 million for the nine months ended
September 30, 1999. The increase was due primarily to an increase in staff
associated with business development efforts, the full year effect of the
Delaware branch opening, bonus payments related to the commercial loan incentive
program, higher health insurance costs and normal merit increases.
Occupancy and equipment expenses increased $104,000, or 8.0%, to $1.4
million for the nine months ended September 30, 2000 from $1.3 million for the
nine months ended September 30, 1999. This was principally the result of
increased rent and repairs and maintenance expense.
Other non-interest expense increased $164,000 to $3.0 million for the
nine months ended September 30, 2000 from $2.8 million for the same period in
1999. This was attributable to increases in advertising, business development,
correspondent service charges, other tax expense and the overall growth of the
company. In 1999, the Company accrued $233,000 for a legal settlement during the
first quarter. The Company also recorded a write-down of its only property held
in other real estate owned of $75,000, during the first quarter of 1999. This
property was subsequently sold in the third quarter of 2000.
Provision for Income Taxes
The provision for income taxes decreased $542,000, or 29.5%, to $1.3
million for the nine months ended September 30, 2000 from $1.8 million for the
nine months ended September 30, 1999. This decrease is mainly the result of the
decrease in pre-tax income from 1999 to 2000. For the year ended September 30,
1999, the Company recorded an income tax benefit of $31,000 in connection with
the cumulative effect of a change in accounting principle, upon the adoption of
SOP 98-5. The effective tax rate for both years was approximately 33.0%.
23
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Company typically defines interest-sensitive assets and interest-sensitive
liabilities as those that reprice within one year or less. Maintaining an
appropriate match is a method of avoiding wide fluctuations in net interest
margin during periods of changing interest rates.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods, and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP ratio suggests that a financial institution
may be better positioned to take advantage of declining interest rates rather
than increasing interest rates, and a positive GAP ratio suggests the converse.
Static gap analysis describes interest rate sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not impact all categories
of assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also involves assumptions on certain categories of assets and deposits.
For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at either their contractual maturity, estimated likely call date, or
earliest repricing opportunity. Mortgage-backed securities and amortizing loans
are scheduled based on their anticipated cash flow which also considers
prepayments based on historical data and current market trends. Savings
accounts, including passbook, statement savings, money market, and NOW accounts,
do not have a stated maturity or repricing term and can be withdrawn or repriced
at any time. This may impact the Company's margin if more expensive alternative
sources of deposits are required to fund loans or deposit runoff. Management
projects the repricing characteristics of these accounts based on historical
performance and assumptions that it believes reflect their rate sensitivity.
Therefore, for purposes of the GAP analysis, these deposits are not considered
to reprice simultaneously. Accordingly, a portion of the deposits are moved into
time brackets exceeding one year.
Shortcomings are inherent in a simplified and static GAP analysis that
may result in an institution with a negative GAP having interest rate behavior
associated with an asset-sensitive balance sheet. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Furthermore,
repricing characteristics of certain assets and liabilities may vary
substantially within a given time period. In the event of a change in interest
rates, prepayment and early withdrawal levels could also deviate significantly
from those assumed in calculating GAP in the manner presented in the table
below.
The Company attempts to manage its assets and liabilities in a manner
that stabilizes net interest income under a broad range of interest rate
environments. Management uses GAP analysis and simulation models to attempt to
monitor effects of its interest sensitive assets and liabilities. Adjustments to
the mix of assets and liabilities are made periodically in an effort to provide
dependable and steady growth in net interest income regardless of the behavior
of interest rates.
The following tables present a summary of the Company's interest rate
sensitivity GAP at September 30, 2000. For purposes of these tables, the Company
has used assumptions based on industry data and historical experience to
calculate the expected maturity of loans because, statistically, certain
categories of loans are prepaid before their maturity date, even without regard
to interest rate fluctuations. Additionally certain prepayment assumptions were
made with regard to investment securities based upon the expected prepayment of
the underlying collateral of the mortgage backed securities.
24
Republic First Bancorp
Interest Sensitive Gap
(dollars in thousands) As of September 30, 2000
More Financial
0 - 90 91 - 180 181 - 365 1 - 2 2 - 3 3 - 4 4 - 5 than 5 Statement
Days Days Days Years Years Years Years Years Total Fair Value
Interest Sensitive
Assets:
Securities and interest
Bearing balances due
from banks $53,957 $ 6,121 $10,013 $ 18,819 $ 20,486 $ 17,250 $14,441 $60,979 $202,066 $201,035
Average interest rate 6.76% 6.50% 6.59% 6.47% 6.45% 6.44% 6.45% 7.24%
Loans receivable 153,812 14,575 26,435 51,191 51,799 36,782 25,322 45,498 405,414 408,107
Average interest rate 9.85% 8.26% 8.20% 8.26% 8.28% 8.08% 8.10% 7.47%
Total 207,769 20,696 36,448 70,010 72,285 54,032 39,763 106,477 607,480 609,142
-----------------------------------------------------------------------------------------------------------
Cumulative Totals $207,769 $228,465 $264,913 $334,923 $407,208 $461,240 $501,003 $607,480
=======================================================================================
Interest Sensitive
Liabilities:
Demand Interest Bearing $13,497 $ 237 $ 474 $ 948 $ 948 $ 948 $ 8,779 $-- $25,832 $25,832
Average interest rate 3.14% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 0.00%
Savings Accounts 3,357 59 118 236 236 236 2,184 $-- 6,425 6,425
Average interest rate 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 0.00%
Money Market Accounts 35,139 617 1,234 2,469 2,469 2,469 22,856 $-- 67,254 67,254
Average interest rate 4.79% 4.79% 4.79% 4.79% 4.79% 4.79% 4.79% 4.79%
Time Deposits 58,500 41,954 73,877 81,316 3,722 3,204 8,128 2 270,702 269,837
Average interest rate 6.18% 6.18% 6.30% 6.25% 6.25% 6.25% 6.25% 6.25%
FHLB Borrowings 20,040 12,500 30,000 117,500 -- -- -- -- 180,040 180,070
Average interest rate 6.65% 5.32% 5.84% 6.17% 0.00% 0.00% 0.00% 0.00%
Total 130,533 55,367 105,703 202,469 7,375 6,857 41,947 2 550,252 549,418
-----------------------------------------------------------------------------------------------------------
Cumulative Totals $130,533 $185,900 $291,603 $494,072 $501,447 $508,304 $550,250 $550,252
=======================================================================================
Interest Rate
Sensitivity GAP $ 77,236 $(34,671) $(69,255) $(132,458) $ 64,910 $ 47,175 $(2,183) $106,475
Cumulative GAP $ 77,236 $42,565 $(26,690) $(159,148) $(94,238) $(47,063) $(49,246) $ 57,229
Interest Sensitive
Assets/
Interest Sensitive
Liabilities 159% 37% 34% 35% 980% 788% 95% 53,239%
Cumulative GAP/
Total Earning Assets 13% 7% -4% -26% -16% -8% -8% 9%
Total Earning Assets $607,480
========
Off balance sheet items
Notional value:
Commitments to
Extend credit $ 4,335 $52,321 $56,656 $563
------------------- -----------------
Average interest rate 10.00% 10.00%
25
In addition to the GAP analysis, the Company utilizes income
simulation modeling in measuring its interest rate risk and managing its
interest rate sensitivity. Income simulation considers not only the impact of
changing market interest rates on forecasted net interest income, but also other
factors such as yield curve relationships, the volume and mix of assets and
liabilities and general market conditions.
Through the use of income simulation modeling, the Company has
calculated an estimate of net interest income for the year ending September 30,
2001, based upon the assets, liabilities and off-balance sheet financial
instruments in existence at September 30, 2000. The Company has also estimated
changes to that estimated net interest income based upon immediate and sustained
changes in the interest rates ("rate shocks"). Rate shocks assume that all of
the interest rate increases or decreases occur on the first day of the period
modeled and remain at that level for the entire period. The following table
reflects the estimated percentage change in estimated net interest income for
the years ending September 30, 2001 and December 31, 2000.
Percentage Change
Rate shocks to interest rates 9/30/01 12/31/00
----------------------------- ------- --------
+2% 1.6% (1.9%)
+1% 0.9 (1.2)
-1% (2.2) 0.1
-2% (6.7) 1.0
The Company's management believes that the assumptions utilized in
evaluating the Company's estimated net interest income are reasonable; however,
the interest rate sensitivity of the Company's assets, liabilities and
off-balance sheet financial instruments, as well as the estimated effect of a
change in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from the experience on which the assumptions were based.
26
Regulatory Matters
Dividend payments by the Banks to the Company are subject to the
Pennsylvania Banking Code of 1965 ("the Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act ("FDIA"). Under the Banking Code, no
dividends may be paid except from the "accumulated net earnings" (generally,
undivided profits). Under the FRB's regulations, the Banks cannot pay dividends
that exceed its net income from the current and preceding two years. Under the
FDIA, an insured bank may pay no dividends if the bank is in arrears in the
payment of insurance due to the FDIC.
Federal banking agencies impose three minimum capital requirements on
the Company's risk-based capital ratios based on total capital, "Tier 1 capital,
and a leverage capital ratio. The risk-based capital ratios measure the adequacy
of a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level of
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks. The Banks and the Company are
subject to periodic examinations by regulatory agencies.
Under FRB and FDIC regulations, a bank is deemed to be "well
capitalized" when it has a "leverage ratio" ("Tier l capital to total assets")
of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%,
and a total capital to weighted-risk assets ratio of at least 10%. At September
30, 2000 and December 31, 1999, First Republic Bank, Republic First Bank of DE
and Republic First Bancorp, Inc. exceeded all requirements to be considered well
capitalized.
The following table presents the Company's capital regulatory ratios at
September 30, 2000 and December 31, 1999:
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ----------- ----------- -----------
Dollars in thousands
At September 30, 2000
Total risk based capital
First Republic Bank 41,244 11.86% 27,828 8.00% 34,785 10.00%
Republic First Bank of DE 3,597 18.35% 1,568 8.00% 1,960 10.00%
Republic First Bancorp, Inc. 47,875 13.01% 29,448 8.00% 36,810 10.00%
Tier one risk based capital
First Republic Bank 37,664 10.83% 13,914 4.00% 20,871 6.00%
Republic First Bank of DE 3,373 17.21% 784 4.00% 1,176 6.00%
Republic First Bancorp, Inc. 44,071 11.97% 14,724 4.00% 22,086 6.00%
Tier one leveraged capital
First Republic Bank 37,664 6.21% 30,330 5.00% 30,330 5.00%
Republic First Bank of DE 3,373 16.35% 1,032 5.00% 1,032 5.00%
Republic First Bancorp, Inc. 44,071 7.03% 31,328 5.00% 31,328 5.00%
27
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
At December 31, 1999
Total risk based capital
First Republic Bank 37,591 11.75% 25,593 8.00% 31,992 10.00%
Republic First Bank of DE 3,086 34.52% 715 8.00% 894 10.00%
Republic First Bancorp, Inc. 44,646 13.23% 25,202 8.00% 31,503 10.00%
Tier one risk based capital
First Republic Bank 34,469 10.77% 12,797 4.00% 19,195 6.00%
Republic First Bank of DE 3,000 33.55% 358 4.00% 536 6.00%
Republic First Bancorp, Inc. 41,438 12.28% 12,601 4.00% 18,902 6.00%
Tier one leveraged capital
First Republic Bank 34,469 6.14% 28,049 5.00% 28,049 5.00%
Republic First Bank of DE 3,000 40.70% 369 5.00% 369 5.00%
Republic First Bancorp, Inc. 41,438 7.22% 28,369 5.00% 28,369 5.00%
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. At the present
time, the Company does not intend to pay cash dividends to shareholders and
intends to retain all earnings to fund the growth of the Company and the Banks.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, take advantage of market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. Sources of asset
liquidity are provided by cash and amounts due from banks, interest-bearing
deposits with banks, and federal funds sold.
The Company's liquid assets totaled $46.3 million at September 30, 2000
compared to $21.1 million at December 31, 1999 as the Company used excess funds
from deposit generation to increase its on-balance sheet liquidity. Maturing and
repaying loans are another source of asset liquidity. At September 30, 2000, the
Company estimated that an additional $194.8 million of loans will mature or
repay in the next one year period ending September 30, 2001.
Liquidity can be met by attracting deposits with competitive rates,
buying federal funds or utilizing the facilities of the Federal Reserve System
or the Federal Home Loan Bank System. At September 30, 2000, the Banks had $75.2
million in unused lines of credit available to it under informal arrangements
with correspondent banks compared to $27.4 million at December 31, 1999. These
lines of credit enable the Banks to purchase funds for short-term needs at
current market rates.
At September 30, 2000, the Company had outstanding commitments
(including unused lines of credit and letters of credit) of $56.7 million.
Certificates of deposit which are scheduled to mature within one year totaled
$174.3 million at September 30, 2000, and borrowings that are scheduled to
mature within the same
28
period amounted to $62.5 million. The Company anticipates that it will have
sufficient funds available to meet its current commitments.
The Banks' target and actual liquidity levels are determined and
managed based on Management's comparison of the maturities and marketability of
the Banks' interest-earning assets with its projected future maturities of
deposits and other liabilities. Management currently believes that floating rate
commercial loans, short-term market instruments, such as 2-year United States
Treasury Notes, adjustable rate mortgage-backed securities issued by government
agencies, and federal funds, are the most appropriate approach to satisfy the
Banks' liquidity needs. The Bank has established lines of credit from its
correspondent, in the amount of $10.0 million, to assist in managing the Bank's
liquidity position. Additionally, the Bank has established a line of credit with
the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of
approximately $245.3 million. As of September 30, 2000 and December 31, 1999,
the Company had borrowed $180.0 million and $236.6 million, respectively, under
its lines of credit.
The Company's Board of Directors has appointed an Asset/Liability
Committee (ALCO) to assist Management in establishing parameters for
investments. The Asset/Liability Committee is responsible for managing the
liquidity position and interest sensitivity of the Banks. Such committee's
primary objective is to maximize net interest margin in an ever changing rate
environment, while balancing the Banks' interest-sensitive assets and
liabilities and providing adequate liquidity for projected needs.
Since the assets and liabilities of the Company have diverse repricing
characteristics that influence net interest income, management analyzes interest
sensitivity through the use of gap analysis and simulation models. Interest rate
sensitivity management seeks to minimize the effect of interest rate changes on
net interest margins and interest rate spreads, and to provide growth in net
interest income through periods of changing interest rates.
Securities Portfolio
At September 30, 2000, the Company had identified certain investment
securities that are being held for indefinite periods of time, including
securities that will be used as part of the Company's 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 the Company's
asset/liability management. Available-for-sale securities consist of US
Government Agency securities and other investments. The book and market values
of securities available-for-sale were $161.9 million and $154.4 million as of
September 30, 2000, respectively. The net unrealized loss on securities
available-for-sale, as of this date, was $7.5 million.
29
The following table represents the carrying and estimated fair values
of Investment Securities at September 30, 2000.
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized
Available-for-Sale Cost Gain Loss Fair Value
--------------------------------------------------------------------------
Mortgage-backed $ 159,449 $ 22 $(7,481) $ 151,990
U.S. Government Agencies 2,412 25 (36) 2,401
--------------------------------------------------------------------------
Total Available-for-Sale $ 161,861 $ 47 $(7,517) $ 154,391
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Cost Gain Loss Fair Value
--------------------------------------------------------------------------
Mortgage-backed $ 1,736 $ - $ (10) $ 1,726
US Government Agencies 1,387 5 - 1,392
Other 14,810 5 (15) 14,800
--------------------------------------------------------------------------
Total Held-to-Maturity $ 17,933 $ 10 $ (25) $ 17,918
Loan Portfolio
The Company's loan portfolio consists of commercial loans, commercial
real estate loans, commercial loans secured by one-to-four family residential
property, as well as residential, home equity loans and consumer loans.
Commercial loans are primarily term loans made to small-to-medium-sized
businesses and professionals for working capital purposes. The majority of these
commercial loans are collateralized by real estate and further secured by other
collateral and personal guarantees. The Company's commercial loans generally
range from $250,000 to $1,000,000 in amount.
The Company's net loans increased $45.8 million, or 12.7%, to $405.4
million at September 30, 2000 from $359.6 million at December 31, 1999
(including loans held for sale), which were funded by increased deposits.
30
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
(dollars in thousands) As of September 30, 2000 As of December 31, 1999
Balance % of Total Balance % of Total
Commercial:
Real Estate Secured (1) $ 180,337 44.1 $183,783 50.7
Non Real Estate Secured 50,904 12.4 41,067 11.3
---------------------------------------------------------------------
231,241 56.5 224,850 62.0
Residential Real Estate 175,304 42.8 136,129 37.5
Consumer & Other 2,673 0.7 1,834 0.5
---------------------------------------------------------------------
Total Loans (1) 409,218 100.0% 362,813 100.0%
Less allowance for loan losses (3,804) (3,208)
--------- --------
Net loans $ 405,414 $359,605
========= ========
(1) Includes loans held for sale at December 31, 1999.
Credit Quality
The Company's written lending policies require underwriting, loan
documentation, and credit analysis standards to be met prior to funding. In
addition, a senior loan officer reviews all loan applications. The Board of
Directors reviews the status of loans monthly to ensure that proper standards
are maintained.
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal and/or interest for
a period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest 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 (generally a minimum of six months) by the borrower, in accordance
with the contractual terms of the loan.
While a loan is classified as nonaccrual or as an impaired loan and the
future collectability of the recorded loan balance is doubtful, 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. In the case where a
nonaccrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the remaining
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.
31
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
September 30, 2000 December 31, 1999
---------------------------------------------
(Dollars in thousands)
Loans accruing, but past due 90 days or more $740 $333
Non-accrual loans 793 1,778
Restructured loans 1,982 --
---------------------------------------------
Total non-performing loans (1) 3,515 2,111
Foreclosed real estate -- 643
---------------------------------------------
Total non-performing assets (2) $3,515 $2,754
=============================================
Non-performing loans as a percentage of total
loans net of unearned
Income (3) 0.86% 0.58%
Non-performing assets as a percentage of total
assets 0.55% 0.47%
<FN>
(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual
basis; (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans.
(2) Non-performing assets are composed of non-performing loans and foreclosed
real estate (assets acquired in foreclosure).
(3) Includes loans held for sale at December 31, 1999.
</FN>
Total non-performing loans increased by $1.4 million to $3.5 million at
September 30, 2000 from $2.1 million at December 31, 1999. Total non-performing
assets increased by $761,000 at September 30, 2000 to $3.5 million from $2.8
million at December 31, 1999. The increase in non-performing loans and
non-performing assets are primarily due the addition of a restructured loan to
one borrower totaling $2.0 million during the second quarter of 2000. This was
partially offset by one non-accrual loan totaling $816,000 that was restructured
under terms that enabled the credit to be returned to accrual status. Management
believes that collateral pledged against both the non-accrual and restructured
loans is adequate to protect the Bank from potential losses associated with
these credits. The foreclosed real estate property was sold in the third
quarter.
32
The Company had delinquent loans as of September 30, 2000 and December
31, 1999 as follows; (i) 30 to 59 days past due, consisted of commercial, and
consumer and home equity loans in the aggregate principal amount of $436,000 and
$3,403,000 respectively; and (ii) 60 to 89 days past due, consisted of
commercial and consumer loan in the aggregate principal amount of $82,000 and
$169,000 respectively. In addition, the Company has classified certain loans as
substandard and doubtful (as those terms are defined in applicable Bank
regulations). At September 30, 2000 and December 31, 1999, substandard loans
totaled approximately $3.3 million and $2.2 million respectively; and doubtful
loans totaled $223,000 and $274,000, respectively at the end of both periods.
This increase in substandard loans was primarily the result of classifying loans
made to one borrower for $2.0 million as substandard, partially offset by the
movement of one substandard and non-accruing loan of $816,000 back to accrual
and standard status. The $2.0 million credit is included in the non-performing
loan and asset totals above. Management believes that there is sufficient
collateral securing this credit to protect the Bank from potential losses
associated with this loan.
The recorded investment in loans for which impairment has been
recognized in accordance with SFAS 114 totaled $2.8 million and $1.8 million at
September 30, 2000 and December 31, 1999 respectively, of which $2.8 million and
$1.4 million respectively, related to loans with no valuation allowance because
the loans have been partially written down through charge-offs. Loans with
valuation allowances at September 30, 2000, and December 31, 1999 were $0 and
$353,000, respectively. The increase in impaired loans is due primarily to the
classification of loans to one borrower totaling $2.0 million as an impaired
loan, partially offset by one loan to one customer of $816,000 that is no longer
impaired. The $2.0 million loan is included in restructured and substandard
loans. There were no commitments to extend credit to any borrowers with impaired
loans as of the end of the periods presented herein.
At September 30, 2000, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to real
estate agents and managers in the aggregate amount of $89.7 million, which
represented 21.9% of gross loans receivable. Loan concentrations are considered
to exist when there are amounts loaned to a multiple number of borrowers engaged
in similar activities that would cause them to be similarly impacted by economic
or other conditions.
Real estate owned is initially recorded at the lower or cost or fair
value, net of estimated selling costs at the date of foreclosure. After
foreclosure, management periodically performs valuations and any subsequent
deteriations in fair value, and all other revenue and expenses are charged
against operating expenses in the period in which they occur.
Potential problem loans consist of loans that are included in
performing loans, but for which potential credit problems of the borrowers have
caused management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At September 30, 2000, all
identified potential problem loans are included in the preceding table with the
exception of loans classified as substandard but still accruing which totaled
$735,000 as of September 30, 2000.
The Company had no credit exposure to "highly leveraged transactions"
at September 30, 2000, as defined by the Federal Reserve Bank.
33
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the nine
months ended September 30, 2000, and 1999 and the twelve months ended December
31, 1999 is as follows:
For the nine months For the twelve months For the nine months
ended ended ended
(dollars in thousands) September 30, 2000 December 31, 1999 September 30, 1999
---------------------- ----------------------- -----------------------
Balance at beginning of period ............ $3,208 $2,395 $2,395
Charge-offs:
Commercial ............................. 34 91 27
Real estate ............................ -- -- --
Consumer ............................... 49 117 97
---------------------- ----------------------- -----------------------
Total charge-offs ................... 83 208 124
---------------------- ----------------------- -----------------------
Recoveries:
Commercial ............................. 77 124 93
Real estate ............................ -- -- --
Consumer ............................... 2 17 17
---------------------- ----------------------- -----------------------
Total recoveries .................... 79 141 110
---------------------- ----------------------- -----------------------
Net charge-offs/(recoveries) .............. 4 67 14
---------------------- ----------------------- -----------------------
Provision for loan losses ................. 600 880 670
---------------------- ----------------------- -----------------------
Balance at end of period ............... 3,804 $3,208 $3,051
====================== ======================= =======================
Average loans outstanding (1)(2) ....... $379,351 $322,363 318,770
====================== ======================= =======================
As a percent of average loans (1)(2):
Net charge-offs/Recoveries ............. 0.0% 0.02% 0.01%
Provision for loan losses .............. 0.16% 0.27% 0.21%
Allowance for loan losses .............. 1.00% 1.00% 0.96%
Allowance for loan losses to:
Total loans, net of unearned income at
period end .......................... 0.93% 0.88% 0.93%
Total non-performing loans at
period end .......................... 108.23% 151.97% 185.25%
<FN>
(1) Includes nonaccruing loans.
(2) Includes loans held for sale.
</FN>
Management makes a monthly determination as to an appropriate provision
from earnings necessary to maintain an allowance for loan losses that is
adequate based upon the loan portfolio composition, classified problem loans,
and general economic conditions. The Company's Board of Directors periodically
reviews the status of all nonaccrual and impaired loans and loans criticized by
the Company's regulators and internal loan review officer. The internal loan
review officer reviews both the loan portfolio and the overall adequacy of the
loan loss reserve. During the review of the loan loss reserve, the Board of
Directors considers specific loans, pools of similar loans, and historical
charge-off activity. The sum of these components is compared to the loan loss
reserve balance. Any additions deemed necessary to the loan loss reserve balance
are charged to operations.
The Company has an existing loan review program, which monitors the
loan portfolio on an ongoing basis. Loan review is conducted by a loan review
officer and is reported quarterly to the Board of Directors. The Board of
Directors reviews the finding of the loan review program on a bi-monthly basis.
34
Determining the appropriate level of the allowance for loan losses at
any given date is difficult, particularly in a continually changing economy.
However, there can be no assurance that, if asset quality deteriorates in future
periods, additions to the allowance for loan losses will not be required.
The Company's management considers the entire allowance for loan losses
to be adequate, however, to comply with regulatory reporting requirements,
management has allocated the allowance for loan losses as shown in the table
below into components by loan type at each period end. Through such allocations,
management does not intend to imply that actual future charge-offs will
necessarily follow the same pattern or that any portion of the allowance is
restricted.
At September 30, 2000 At December 31, 1999
Percent of Loans Percent of Loans
Amount In Each Category Amount (in In Each Category
(in 000's) To Loans 00's) to Loans (1)
Allocation of allowance for loan losses:
Commercial $2,820 56.5% $2,119 62.0%
Residential real estate 227 42.8% 423 37.5%
Consumer and other 128 0.7% 84 0.5%
Unallocated 629 --% 582 -%
--------------- ------------ ------------- ------------
Total $3,804 100.00% $3,208 100.00%
=============== =============
The unallocated allowance increased $47,000 to $629,000 at September
30, 2000 from $582,000 at December 31, 1999. The Company's internal loan
guidelines require all classified credits to have a specific reserve allocated
to the credit, even though management believes the loan to be adequately
collateralized. Movement of two loans to accrual from non-accrual status in part
contributed to the rise in the unallocated allowance.
(1) Includes loans held for sale
35
Commitments
In the normal course of its business, the Company makes commitments to
extend credit and issues standby letters of credit. Generally, such commitments
are provided as a service to its customers. 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 may require 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
requirement. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The type and amount of collateral obtained, if deemed
necessary upon extension of credit, are based on Management's credit evaluation
of the borrower. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers and is based on Management's
evaluation of the creditworthiness of the borrower and the quality of the
collateral. At September 30, 2000 and December 31, 1999, firm loan commitments
approximated $52.3 million and $17.5 million respectively, and commitments of
standby letters of credit approximated $4.3 million and $2.4 million,
respectively.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's need and ability to react to
changes in interest rates. As discussed previously, management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest income
from being affected by wide interest rate fluctuations.
Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (FASB)
issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." This statement supercedes and replaces the
guidance in Statement 125. It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, although it carries over most of Statement 125's
provisions without reconsideration.
This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001 and for
recognition and reclassification of collateral and for disclosures relating to
securitization transactions and collateral for fiscal years ending after
December 15, 2000. This Statement is to be applied prospectively with certain
exceptions. Other than those exceptions, earlier or retroactive application of
its accounting provisions is not permitted. The Company has not yet determined
the impact, if any of this statement on the Company's financial condition,
equity, results of operations, or disclosure.
36
Part II Other Information
Item 1: Legal Proceedings
The Company and the Banks 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, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
Item 2: Changes in Securities and use of proceeds
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
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 an
annual report on Form 10-K)
37
Exhibit No.
10 Amended and Restated Material Contracts.- None
11 Computation of Per Share Earnings See footnote No. 2 to Notes to
Consolidated Financial Statements under Earnings per Share.
21 Subsidiaries of the Company. First Republic Bank (the "Bank"), a
wholly-owned subsidiary, commenced operations on November 3,
1988. The Bank is a commercial bank chartered pursuant to the
laws of the Commonwealth of Pennsylvania. Republic First Bank of
Delaware (the "Delaware Bank") is also a wholly-owned subsidiary
of the Company, commenced operations on June 1, 1999. The
Delaware Bank is a commercial bank chartered pursuant to the laws
of the State of Delaware. The Bank and the Delaware Bank are both
members of the Federal Reserve System and their primary federal
regulators are the Federal Reserve Board of Governors.
27 Financial Data Schedule.
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
**Incorporated by reference in the Company's Form 10-K, filed March 23,
2000.
Reports on Form 8-K
None
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic First Bancorp, Inc.
---------------------------------------
Jere A. Young
President and Chief Executive Officer
---------------------------------------
Larry Poppert
Vice President Finance
Dated: November 14, 2000
39