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: March 31, 2001
Commission File Number: 0-17007
Republic First Bancorp, Inc.
----------------------------
(Exact name of business issuer as specified in its charter)
Pennsylvania 23-2486815
------------ ----------
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
----------------------------------------------------
(Address of principal executive offices) (Zip code)
215-735-4422
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(Registrant's telephone number, including area code)
N/A
------------
(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.
6,358,126 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of April 30, 2001
Page 1 of 32
Exhibit index appears on page 31
1
TABLE OF CONTENTS
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Page
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Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3: Quantitative and Qualitative Information about Market Risk 17
Part II: Other Information
Item 1: Legal Proceedings 30
Item 2: Changes in Securities and Use of Proceeds 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 5: Other Information 30
Item 6: Exhibits and Reports on Form 8-K 30
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1: Financial Statements (unaudited)
--------------------------------
Page Number
-----------
(1) Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000................................................ 4
(2) Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000.............................................. 5
(3) Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2000.............................................. 6
(4) Notes to Consolidated Financial Statements........................... 7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of March 31, 2001 and December 31, 2000
dollars in thousands, except share data
(unaudited)
ASSETS: March 31, December 31,
2001 2000
--------- ---------
Cash and due from banks $ 15,233 $ 20,990
Interest bearing deposits with banks 461 460
Federal funds sold 45,193 29,207
--------- ---------
Total cash and cash equivalents 60,887 50,657
Other interest-earning restricted cash 4,105 --
Securities available for sale, at fair value 139,398 152,134
Securities held to maturity at amortized cost
(Fair value of $13,725 and $17,750, respectively) 13,732 17,707
Loans receivable (net of allowance for loan losses of
$4,195 and $4,072, respectively) 423,476 418,313
Premises and equipment, net 5,112 5,153
Accrued income and other assets 9,561 11,673
--------- ---------
Total Assets $ 656,271 $ 655,637
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 53,593 $ 44,281
Demand - interest-bearing 30,382 29,784
Money market and savings 90,777 76,510
Time under $100,000 177,510 175,834
Time over $100,000 101,567 99,142
--------- ---------
Total Deposits 453,829 425,551
Other borrowed funds 147,500 176,442
Accrued expenses and other liabilities 9,687 10,614
--------- ---------
Total Liabilities 611,016 612,607
--------- ---------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000
shares authorized; shares issued 6,358,126 as of
March 31, 2001 and December 31, 2000 63 63
Additional paid in capital 32,117 32,117
Retained earnings 15,207 14,446
Treasury stock at cost (175,172 shares
at March 31, 2001 and December 31, 2000) (1,541) (1,541)
Accumulated other comprehensive loss (591) (2,055)
--------- ---------
Total Shareholders' Equity 45,255 43,030
--------- ---------
Total Liabilities and Shareholders' Equity $ 656,271 $ 655,637
========= =========
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31,
dollars in thousands, except per share data
(unaudited)
2001 2000
------- -------
Interest income:
Interest and fees on loans $ 9,151 $ 7,501
Interest on federal funds sold and
other interest-earning balances 652 8
Interest on investments 2,599 3,204
------- -------
Total interest income 12,402 10,714
------- -------
Interest expense:
Demand interest-bearing 150 52
Money market and savings 905 528
Time over $100,000 1,596 897
Time under $100,000 2,836 2,009
Other borrowed funds 2,541 3,218
------- -------
Total interest expense 8,028 6,704
------- -------
Net interest income 4,374 4,009
------- -------
Provision for loan losses 157 200
------- -------
Net interest income after provision
for loan losses 4,217 3,809
------- -------
Non-interest income:
Service fees 540 313
Gains on securities sold 13 --
Tax Refund Program revenue 186 181
Other income 19 20
------- -------
758 514
Non-interest expenses:
Salaries and benefits 2,016 1,543
Occupancy/equipment 566 459
Other expenses 1,257 823
------- -------
3,839 2,825
------- -------
Income before income taxes 1,136 1,498
Provision for income taxes 375 494
------- -------
------- -------
Net income $ 761 $ 1,004
======= =======
Net income per share:
------- -------
Basic $ 0.12 $ 0.16
======= =======
------- -------
Diluted $ 0.12 $ 0.16
======= =======
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
Dollars in thousands
(unaudited)
2001 2000
-------- --------
Cash flows from operating activities:
Net income $ 761 $ 1,004
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 157 200
Depreciation and amortization 314 116
Decrease in loans held for sale -- 4,857
Increase in accrued income
and other assets 1,351 79
Decrease in accrued expenses and other liabilities (927) (625)
Net increase (decrease) in deferred fees (47) 26
-------- --------
Net cash provided by operating activities 1,609 5,657
-------- --------
Cash flows from investing activities:
Purchase of securities:
Held to Maturity (2,420) --
Proceeds from principal receipts, sales, and
maturities of securities 21,259 5,088
Net increase in loans (5,273) (11,298)
Increase in other interest-earning restricted cash (4,105) --
Premises and equipment expenditures (177) (133)
-------- --------
Net cash provided by (used in) investing activities 9,284 (6,343)
-------- --------
Cash flows from financing activities:
Net increase in demand, money
market and savings deposits 24,177 15,233
Net decrease in borrowed funds less than 90 days (16,442) (13,035)
Repayment of borrowed funds greater than 90 days (12,500) (25,000)
Net increase in time deposits 4,102 22,528
-------- --------
Net cash used in financing activities (663) (274)
-------- --------
Increase (decrease) in cash and cash equivalents 10,230 (960)
Cash and cash equivalents, beginning of period 50,657 21,110
-------- --------
Cash and cash equivalents, end of period $ 60,887 $ 20,150
======== ========
Supplemental disclosure:
Interest paid $ 8,258 $ 7,349
======== ========
Taxes paid $ 1,350 $-
======== ========
Non-cash transactions:
Change in unrealized gain/(loss) on securities available
for sale, net of tax $ 1,464 $ (372)
Change in deferred taxes due to change in unrealized
Loss (Gain) on securities available for sale (761) 193
======== ========
(See notes to consolidated financial statements)
6
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 subsidiaries, First Republic Bank (the "Bank"),
and First Bank of Delaware (formerly Republic First Bank of Delaware) (the
"Delaware Bank"), (together the "Banks") offer a variety of banking services to
individuals and businesses throughout the Greater Philadelphia, Delaware and
South Jersey area through their offices and branches in Philadelphia and
Montgomery Counties in Pennsylvania and in New Castle County, Delaware.
These interim financial statements have been prepared in accordance with
instructions to Form 10-Q. Accordingly, these financial statements do not
include information or footnotes necessary for a complete presentation of
financial statements in accordance with accounting principles generally accepted
in the United States of America. 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
March 31, 2001, the results of operations for the three months ended March 31,
2001 and 2000, and the cash flows for the three months ended March 31, 2001 and
2000. 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 2000 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 First Bank of Delaware, (the "Banks"). 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 primarily 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.
The preparation of financial statements 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 (of which the
Bank had none for any of the periods presented herein) 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
7
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.
Other interest-earning restricted cash:
Other interest-earning restricted cash represents cash to fund our
offsite ATM network. The dispensed cash is returned to the Company through the
Mac network on the next business day.
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: 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 First Bank
of Delaware. 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 Liberty Tax Services, a national tax preparation firm. In 1999,
a similar arrangement with Jackson Hewitt, a national tax participation firm was
terminated. However, recoveries of previously delinquent loans were recorded in
the first quarter of 2000.
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.
8
As of and for the three months ended March 31,
(dollars in thousands)
2001 2000
---- ----
First Tax First Tax
Republic Delaware Refund Republic Delaware Refund
Bank Bank Program Total Bank Bank Program Total
------- -------- -------- -------- -------- -------- -------- --------
External customer revenues:
Interest Income $11,803 $599 -- $12,402 $10,483 $231 $ -- $10,714
Other Income 429 143 186 758 315 18 181 514
------- -------- -------- -------- -------- -------- -------- --------
Total external customer revenues 12,232 742 -- 13,160 10,798 249 181 11,228
------- -------- -------- -------- -------- -------- -------- --------
Intersegment revenues:
Interest Income -- -- -- -- 69 -- -- 69
Other Income 19 -- -- 19 18 -- -- 18
------- -------- -------- -------- -------- -------- -------- --------
Total intersegement revenues 19 -- -- 19 87 -- -- 87
------- -------- -------- -------- -------- -------- -------- --------
Total Revenue 12,251 742 186 13,179 10,885 249 181 11,315
------- -------- -------- -------- -------- -------- -------- --------
Depreciation and amortization
187 30 -- 217 112 23 -- 135
Other operating expenses -
external 11,044 763 -- 11,807 9,309 286 -- 9,595
Intersegment Expense:
Other operating expense -- 19 -- 19 -- 18 -- 18
Interest Expense -- -- -- -- -- 69 -- 69
------- -------- -------- -------- -------- -------- -------- --------
Segment expenses 11,231 812 -- 12,043 9,421 396 -- 9,817
------- -------- -------- -------- -------- -------- -------- --------
Segment income before taxes and
extraordinary items $1,020 ($70) 186 $1,136 $1,464 ($147) 181 $1,498
======== ======== ======== ======== ======== ======== ======== ========
Segment assets $624,769 $31,502 -- $656,271 574,367 $12,138 -- $586,505
-------- -------- -------- -------- -------- -------- -------- --------
Capital expenditures $140 $37 -- $177 $109 $24 -- $133
-------- -------- -------- -------- -------- -------- -------- --------
9
Note 5: 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 March 31, 2001 and 2000, there were 101,940
and 179,930 CSEs that were antidilutive, respectively. These options may be
dilutive in the future.
The following table is a comparison of EPS for the three months ended
March 31, 2001 and 2000.
1st Quarter
2001 2000
Net Income $761,000 $1,004,000
Shares Per Share Share Per Share
------ --------- ----- ---------
Weighted average shares
For period 6,182,954 6,168,729
Basic EPS $0.12 $0.16
Add common stock equivalents
Representing dilutive stock options 154,475 136,190
--------- ---------
Effect on basic EPS of dilutive CSE - -
Equals total weighted average
Shares and CSE (diluted) 6,337,429 6,304,919
========= =========
Diluted EPS $0.12 $0.16
===== =====
Note 6: 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
March 31,
-----------------------
2001 2000
------- -------
Net income $761 $1,004
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) during
the period 1,473 (372)
Less: Reclassification adjustment for gains
Included in net income
(9) --
------- -------
Comprehensive income $2,225 $632
======= =======
10
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, 2000, 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:
March 31, 2001 Compared to December 31, 2000
Total assets remained constant at $656.3 million at March 31, 2001
versus $655.6 million at December 31, 2000. Cash from net maturities and sales
of securities and increased deposit generation were used to fund loan growth and
to pay down other borrowed funds.
Loans:
The loan portfolio, which represents the Company's largest asset, is its most
significant source of interest income. The Company's lending strategy is to
focus on small and medium sized businesses and professionals that seek highly
personalized banking services. Net loans increased $5.2 million, or 1.2%, to
$423.5 million at March 31, 2001 from $418.3 million at December 31, 2000. The
loan portfolio consists of commercial and industrial ("C&I") loans, commercial
and residential construction loans, commercial real estate loans, residential
mortgages, home equity loans, lines of credit and others. During 2000, the
Company introduced two new products: commercial construction loans and
residential construction loans. Commercial construction loans are loans to
builders for commercial properties or residential construction. These loans
generally have a loan to value no greater than 80% and are generally secured by
the property and in some cases the guarantee of the owner. Residential
construction loans are loans to individuals, generally to build their primary
residence. Upon the completion of construction, residential construction loans
are repaid by the borrower generally when they obtain a first mortgage from
another institution. Consistent with the company's long-term strategy of
increasing the ratio of variable rate loans, most of the new loan originations
in first quarter 2001 were tied to
11
prime. New loans generally range from $250,000 to $1.0 million but may be as
high as the Banks combined legal lending limit of $6.9 million.
Securities:
Securities available-for-sale may be sold in response to changing market and
interest rate conditions or for other business purposes. Available-for-sale
securities decreased $12.7 million, or 8.4%, to $139.4 million at March 31, 2001
from $152.1 million at December 31, 2000. This decrease reflected both the sale
of an $8.0 million security for which a gain of $13,000 was recognized and
principal repayments which were partially offset by a $2.2 million increase in
market value on securities classified as Available-for-Sale. Securities
held-to-maturity are investments for which there is positive intent and ability
to hold to maturity. These investments are carried at amortized cost. Held-to
maturity securities decreased $4.0 million, or 22.3% to $13.7 million at March
31, 2001 from $17.7 million at December 31, 2000. The decline is primarily due
to the redemption of Federal Home Loan Bank stock.
Cash and due from banks:
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
$10.2 million to $60.9 million at March 31, 2001 from $50.7 million at December
31, 2000 due to an increase in federal funds sold resulting primarily from the
short-term reinvestment of proceeds from the sale of the available-for-sale
security.
Other interest earning restricted cash:
Other interest-earning restricted cash represent funds provided to the MBM/ATM
Group for usage in ATM machines, for which the Company is compensated.
Deposits:
Deposits, which include non-interest-bearing demand deposits, interest-bearing
time and savings deposits, are the Banks' major source of funding. Deposits are
generally solicited from the Company's market area through a variety of products
to attract and retain customers, with the primary focus on building and
expanding multi-product relationships.
Deposits, increased $28.3 million, or 6.7% to $453.8 million at March 31, 2001
from $425.6 million at December 31, 2000. The aggregate of transaction accounts,
which include demand, money market and savings accounts, increased $24.2
million, or 16.1%, to $174.8 million at March 31, 2001 from $150.6 million at
December 31, 2000. Certificates of deposit increased by $4.1 million, or 1.5%,
to $279.1 million at March 31, 2001 from $275.0 million at December 31, 2000.
The increase in all deposit products resulted from the Company's deposit
generation strategies instituted in 2000. The Company formed deposit generating
teams and aggressively targeted customers in selected business categories. This
is expected to be an ongoing part of the Company's long-term strategy in order
to reduce reliance on borrowed funds.
Other Borrowed Funds:
Other borrowed funds are comprised of overnight federal funds purchased and term
FHLB borrowings. These borrowings are used primarily to fund asset growth not
supported by deposit generation. Other borrowed funds
12
were $147.5 million at March 31, 2001, a decrease of $28.9 million, or 16.4%
when compared to the December 31, 2000 total of $176.4 million. The decrease in
borrowed funds was funded with increases in deposit balances, consistent with
the Banks' strategy to increase lower cost deposits through focused marketing
efforts, and decrease higher cost borrowings.
The Company's shareholders' equity as of March 31, 2001 and December 31,
2000 was $45.3 million and $43.0 million, respectively. Book value per share of
the Company's common stock increased from $6.96 as of December 31, 2000 to $7.32
as of March 31, 2001. This increase was mainly attributable to retained earnings
and the increase in market value of the available-for-sale securities portfolio.
Three Months Ended March 31, 2001 Compared to March 31, 2000
- ------------------------------------------------------------
Results of Operations:
Overview
The Company's net income decreased $243,000 to $761,000 for the three
months ended March 31, 2001, from $1.0 million for the three months ended March
31, 2000. The decrease reflected margin contractions resulting from the impact
of a rapid 150 basis point drop in the prime rate, as a result of Federal
Reserve Bank rate reductions. While the impact on variable rate loans tied to
prime was immediate, management estimates that, all else constant, two quarters
are required for offsetting amounts of deposits, primarily maturing certificates
of deposit, to reprice. Accordingly, the net interest margin decreased to 2.74%
from 2.89%. Non-interest expense also increased, partially offset by increases
in non-interest income. Diluted earnings per share for the three months ended
March 31, 2001 was $0.12 compared to $0.16, for the three months ended March 31,
2000, due to the decrease in net income. That decrease resulted in a return on
average assets and average equity of 0.47% and 6.86% respectively, compared to
0.70% and 9.58% respectively for the same period in 2000.
Analysis of Net Interest Income
Historically, the Company's earnings have depended significantly 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 impacted by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
Net interest margin (net interest income as a percentage of average
interest-earning assets) was 2.74% for the three months ended March 31, 2001
versus 2.89% for the three months ended March 31, 2000. As previously noted, the
decrease reflected margin contractions resulting from the impact of a rapid 150
basis point drop in the prime rate, as a result of Federal Reserve Bank rate
reductions. While the impact on variable rate loans tied to prime was immediate,
management estimates that, all else constant, two quarters are required for
offsetting amounts of deposits, primarily maturing certificates of deposit, to
reprice.
Accordingly, the Company's net interest income increased only $365,000,
or 9.1%, to $4.4 million for the three months ended March 31, 2001 from $4.0
million for the three months ended March 31, 2000. As shown in the following
Rate Volume table, the resulting lesser increase in net interest income was due
to the positive effect of volume changes totaling $1.0 million significantly
offset by rate changes (primarily higher interest rates) of $643,000. The
positive impact from volume changes was attributable to a significant increase
in average interest-earning assets, which increased $85.6 million on average to
$639.6 million during the quarter ended March 31, 2001, from $554.0 million for
the quarter ended March 31, 2000.
13
The Company's total interest income increased $1.7 million, or 15.8%, to
$12.4 million for the three months ended March 31, 2001 from $10.7 million for
the three months ended March 31, 2000. Approximately $1.7 million of the
increase was related to a $85.6 million increase in average interest-earning
assets while the remaining $15,000 was the result of an increase in the yield
earned on interest-earning assets.
Interest and fees on loans increased $1.6 million, or 22%, to $9.1
million for the three months ended March 31, 2001 from $7.5 million for the
three months ended March 31, 2000. Approximately $1.5 million of the increase
was due to a $71.7 million, or 20%, increase in average loans outstanding while
the remaining $107,000 of the increase was due to an increase in the average
rate earned on these loans. Interest and dividend income on securities decreased
$605,000, or 18.9%, to $2.6 million for the three months ended March 31, 2001
from $3.2 million for the three months ended March 31, 2000. This decrease in
investment income was the result of a decrease in the gross average balance of
securities owned of $31.9 million, or 16.4%, to $163.1 million for the three
months ended March 31, 2001 from $195.1 million for the three months ended March
31, 2000. The decline in securities reflects the Company's continuing strategy
to reduce securities and redeploy the proceeds into higher yielding assets. In
addition to the declining average oustandings, the yield earned on these
securities declined 20 basis points to 6.37% due to the amortization, maturity
and sale of higher yielding securities. Federal funds sold and other interest
earning balances income increased by $644,000 to $652,000 as cash from deposit
generation and securities reductions that was not used to fund loan growth or
pay down other borrowed funds, was sold as federal funds.
Interest expense increased $1.3 million, or 19.8%, to $8.0 million for
the three months ended March 31, 2001 from $6.7 million for the three months
ended March 31, 2000. Interest-bearing liabilities averaged $561.6 million, an
increase of $63.0 million, or 12.6%, from $498.6 million for the three months
ended March 31, 2000. The net growth in interest-bearing liabilities contributed
$667,000 to the increase in interest expense while the increase in rates paid on
interest-bearing liabilities contributed the remaining $658,000 to the increase.
The growth in interest-bearing liabilities reflected deposit growth which was
used to fund the growth in interest-earning assets and to repay certain other
borrowed funds. The average rate paid on interest-bearing liabilities increased
to 5.80% for the three months ended March 31, 2001 from 5.39% for the three
months ended March 31, 2000 reflecting the increase in average rates paid on
certificate deposit accounts due to a higher rate environment when the
certificates were issued. Certificates of deposit (time deposit) interest
expense increased $1.5 million or 52.5%. This increase was primarily due to an
increase in the average volume of certificates of deposit of $75.8 million, or
37.9%, to $275.8 million for the three months ended March 31, 2001 from $200.1
million for the three months ended March 31, 2000. This contributed $1.2 million
of the increase. The average rate of interest paid on time deposits contributed
the remaining $364,000 to the increase in interest expense.
Interest expense on FHLB advances and overnight federal funds purchased
was $2.5 million for the three months ended March 31, 2001 compared to $3.2
million for the three months ended March 31, 2000, a decline of $677,000, or
21.0%. This decrease was due to a decrease in the average volume of other
borrowed funds of $57.8 million to $169.1 million for the three months ended
March 31, 2001 from $226.9 million for the three months ended March 31, 2000 as
borrowings were replaced with deposits. The decline in volume more than offset
the increase in rate as the average rate paid for borrowed funds increased 40
basis points from 5.69% at March 31, 2000 to 6.09% at March 31, 2001. The
maturity of lower cost long term borrowings contributed to the increase in the
average rate paid on borrowed funds.
14
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 March 31,
2001 versus 2000
(dollars in thousands)
Due to change in:
Volume Rate Total
------ ---- -----
Interest earned on:
Federal funds sold $642 $2 $644
Securities (511) (94) (605)
Loans 1,544 107 1,651
- -----------------------------------------------------------------------------------------
Total interest-earning assets 1,675 15 1,690
Interest Expense of
Deposits
Interest-bearing demand deposits (48) (51) (99)
Money market and savings (340) (36) (376)
Time deposits (1,163) (364) (1,527)
- -----------------------------------------------------------------------------------------
Total deposit interest expense (1,551) (451) (2,002)
Other borrowed funds 884 (207) 677
- -----------------------------------------------------------------------------------------
Total interest expense (667) (658) (1,325)
- -----------------------------------------------------------------------------------------
Net interest income $1,008 $(643) $365
- -----------------------------------------------------------------------------------------
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 $157,000 and $200,000 for the three months ended March 31,
2001 and 2000, respectively. The amounts recorded in the first quarters of 2001
and 2000 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 March 31, 2001 and 2000, the allowance for loan
losses to total loans, net of deferred loan fees was 0.98% and 0.92%,
respectively.
15
Non-Interest Income
Total non-interest income increased $244,000 to $758,000 for the three
months ended March 31, 2001 from $514,000 for the three months ended March 31,
2000. This increase is due to increased loan advisory fees and income related to
short term loan programs.
Non-Interest Expenses
Total non-interest expenses increased $1.0 million or 35.9%, to $3.8
million for the three months ended March 31, 2001. Salaries and benefits
increased $473,000 or 30.6%, to $2.0 million for the three months ended March
31, 2001 from $1.5 million for the three months ended March 31, 2000. The
increase was due primarily to an increase in staff of both Banks as the Company
expanded its commercial loan department by adding commercial and residential
construction loan staff. In addition to continued loan production, the
commercial construction loan department generates non-interest income by
generating related fees. Also, higher health insurance costs and normal merit
increases contributed to the increase.
Occupancy and equipment expenses increased $107,000, or 23.4%, to
$566,000 for the three months ended March 31, 2001 from $459,000 for the three
months ended March 31, 2000. The increase resulted from increased depreciation
expense due to costs associated with the Company's implementation of an internal
e-mail system, the launching of the Company's website, www.frbkonline.com and
other technology projects.
Other non-interest expense increased $434,000, or 52.7%, to $1.3 million
for the three months ended March 31, 2001 from $823,000 for the same period in
2000. This increase was primarily due to expenses incurred in the development of
various business initiatives undertaken to diversify the earnings of the
Company, including short term loan programs. In addition, advertising expense
increased due to a continuation of the Company's branding campaign which began
in the fall of 2000.
Provision for Income Taxes
The provision for income taxes decreased $119,000, or 24.1%, to $375,000
for the three months ended March 31, 2001 from $494,000 for the three months
ended March 31, 2000. This decrease is mainly the result of the decrease in
pre-tax income from first quarter 2000 to first quarter 2001. The effective tax
rate for both periods was approximately 33.0%.
16
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, 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. However, management may choose not to reprice
liabilities proportionately to change in market interest rates, for competitive
or other reasons.
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 optimizes net interest income. 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 optimal growth in net interest income.
The following tables present a summary of the Company's interest rate
sensitivity GAP at March 31, 2001. 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
17
prepayment assumptions were made with regard to investment securities based upon
the expected prepayment of the underlying collateral of the mortgage backed
securities.
Republic First Bancorp
Interest Sensitive Gap
(dollars in thousands) As of March 31, 2001
-------------------------------------------------------------------------------------------------------
More Financial
0 - 90 91 - 180 181 - 365 1 - 2 2 - 3 3 - 4 4 - 5 than 5 Statement Fair
Days Days Days Years Years Years Years Years Total Value
------------------------------------------------------------------------------------ -------- --------
Interest Sensitive Assets:
Securities and interest
Bearing balances due
from banks $ 66,831 $ 9,539 $11,890 $ 22,562 $ 21,045 $ 15,905 $12,205 $ 42,912 $202,889 $202,882
Average interest rate 5.48% 5.76% 6.39% 6.42% 6.41% 6.42% 6.42% 6.43%
Loans receivable 160,011 18,631 32,754 49,713 41,615 50,949 22,981 46,823 423,476 435,137
Average interest rate 8.59% 8.26% 8.42% 8.29% 8.17% 8.22% 8.37% 7.24%
Total 226,842 28,170 44,644 72,275 62,660 66,854 35,186 89,735 626,365 638,019
------------------------------------------------------------------------------------ -------- --------
Cumulative Totals $226,842 $255,012 $299,655 $371,930 $434,590 $501,444 $536,630 $626,365
===================================================================================
Interest Sensitive
Liabilities:
Demand Interest Bearing $ 16,825 $ 250 $ 957 $ 1,001 $ 1,001 $ 1,001 $ 9,349 $ - $30,382 $30,382
Average interest rate 1.86% 0.76% 0.76% 0.76% 0.76% 0.76% 0.76% 0.00%
Savings Accounts 5,535 82 314 329 329 329 3,075 $ - 9,994 9,994
Average interest rate 1.68% 1.68% 1.68% 1.68% 1.68% 1.68% 1.68% 0.00%
Money Market Accounts 44,745 665 2,541 2,660 2,660 2,660 24,852 $ - 80,783 80,783
Average interest rate 4.63% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% -%
Time Deposits 64,864 60,467 101,465 36,532 5,811 4,851 5,056 32 279,077 282,281
Average interest rate 5.87% 6.22% 6.44% 6.49% 6.31% 6.83% 6.71% 4.63%
FHLB Borrowings 5,000 - 12,500 5,000 - 125,000 - - 147,500 152,823
Average interest rate 5.86% -% 5.39% 6.05% 0.00% 6.19% 0.00% 0.00%
Total 136,969 61,464 117,776 45,522 9,801 133,841 42,332 32 547,736 556,263
------------------------------------------------------------------------------------ -------- --------
Cumulative Totals $136,969 $198,433 $316,209 $361,731 $371,532 $505,373 $547,705 $547,736
===================================================================================
Interest Rate
Sensitivity GAP $ 89,873 $(33,294) $(73,132) $26,753 $52,589 $(66,987) $ (7,146) $89,704
Cumulative GAP $ 89,873 $56,578 $(16,554) $10,200 $63,059 $(3,928) $(11,074) $78,629
Interest Sensitive
Assets/ Interest
Sensitive Liabilities 166% 129% 95% 103% 117% 99% 98% 114%
Cumulative GAP/
Total Earning Assets 14% 9% -3% 2% 10% -1% -2% 13%
Total Earning Assets $626,365
=========
Off balance sheet items
Notional value:
Commitments to
extend credit $ 3,290 $52,509
--------- -------
Average interest rate 8.00% 8.00%
18
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 March 31,
2002, based upon the assets, liabilities and off-balance sheet financial
instruments in existence at March 31, 2001. 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 March 31, 2002 and December 31, 2001. Quarterly changes could
be significantly more or less than annual estimates. In fact, certain quarters
within a year period could show an increase while other quarters might reflect a
decrease.
Percentage Change
-----------------
Rate shocks to interest rates 3/31/02 12/31/01
----------------------------- ------- --------
+2% 3.2% (0.3%)
+1% 1.9 0.4
-1% (4.0) (2.9)
-2% (10.3) (9.8)
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.
19
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 March 31,
2001 and December 31, 2000, First Republic Bank, First Bank of Delaware and
Republic First Bancorp, Inc. exceeded all requirements to be considered well
capitalized.
The following table presents the Company's capital regulatory ratios at
March 31, 2001 and December 31, 2000:
To be well
Actual For Capital capitalized under FRB
Adequacy purposes capital guidelines
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
Dollars in thousands
At March 31, 2001
Total risk based capital
First Republic Bank 43,209 12.28% 28,144 8.00% 35,180 10.00%
First Bank of DE 3,706 19.21% 1,543 8.00% 1,929 10.00%
Republic First Bancorp, Inc. 49,793 13.40% 29,735 8.00% 37,169 10.00%
Tier one risk based capital
First Republic Bank 39,281 11.17% 14,072 4.00% 21,108 6.00%
First Bank of DE 3,465 17.96% 772 4.00% 1,157 6.00%
Republic First Bancorp, Inc. 45,597 12.27% 14,867 4.00% 22,301 6.00%
Tier one leveraged capital
First Republic Bank 39,281 6.23% 31,535 5.00% 31,535 5.00%
First Bank of DE 3,465 11.05% 1,568 5.00% 1,568 5.00%
Republic First Bancorp, Inc. 45,597 6.89% 33,090 5.00% 33,090 5.00%
20
To be well
Actual For Capital capitalized under FRB
Adequacy purposes capital guidelines
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
At December 31, 2000
Total risk based capital
First Republic Bank 42,281 11.92% 28,639 8.00% 35,461 10.00%
First Bank of DE 3,648 19.34% 1,509 8.00% 1,886 10.00%
Republic First Bancorp, Inc. 48,907 13.08% 29,917 8.00% 37,396 10.00%
Tier one risk based capital
First Republic Bank 38,471 10.85% 14,184 4.00% 21,277 6.00%
First Bank of DE 3,387 17.96% 754 4.00% 1,132 6.00%
Republic First Bancorp, Inc. 44,835 11.99% 14,958 4.00% 22,438 6.00%
Tier one leveraged capital
First Republic Bank 38,471 6.19% 31,060 5.00% 31,060 5.00%
First Bank of DE 3,387 12.15% 1,394 5.00% 1,394 5.00%
Republic First Bancorp, Inc. 44,835 6.91% 32,446 5.00% 32,446 5.00%
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. The Company
does not plan to pay cash dividends to shareholders in the next year 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 $65.0 million at March 31, 2001
compared to $50.7 million at December 31, 2000 as the Company sold securities
and had redemptions of certain securities during the first quarter. At March 31,
2001, the Company estimated that an additional $211.4 million of loans will
mature or repay in the next one year period ending March 31, 2002.
Liquidity needs can be met by attracting deposits with competitive
rates, buying federal funds or utilizing the facilities of the Federal Home Loan
Bank System. At March 31, 2001, the Bank had $178.5 million in unused lines of
credit available to it under informal arrangements with correspondent banks
compared to $149.6 million at December 31, 2000. These lines of credit enable
the Bank to purchase funds for short-term needs at current market rates.
At March 31, 2001, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $55.8 million. Certificates of
deposit which are scheduled to mature within one year totaled $226.8 million at
March 31, 2001, and other borrowed funds that are scheduled to mature within the
same
21
period amounted to $17.5 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 securities, 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 correspondents, in the amount of $10.0 million,
as contingent sources of liquidity. Additionally, the Bank has established a
line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum
borrowing capacity of approximately $316.0 million. As of March 31, 2001 and
December 31, 2000, the Company had borrowed $147.5 million and $176.4 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 optimize the effect of interest rate changes on
net interest margins and interest rate spreads, and to provide growth in net
interest margins and interest rate spreads, and to provide growth in net
interest income through periods of changing interest rates.
Securities Portfolio
At March 31, 2001, 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 $140.3 million and $139.4 million as of
March 31, 2001, respectively. The net unrealized loss on securities
available-for-sale, as of this date, was $889,000.
22
The following table represents the carrying and estimated fair values of
Investment Securities at March 31, 2001.
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized
Available-for-Sale Cost Gain Loss Fair Value
------------------------------------------------------------------------------
Mortgage-backed $ 139,130 $ 104 $ (1,006) $ 138,228
U.S. Government Agencies 1,157 13 - 1,170
-----------------------------------------------------------------------------
Total Available-for-Sale $ 140,287 $ 117 $ (1,006) $ 139,398
-----------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Cost Gain Loss Fair Value
-----------------------------------------------------------------------------
Mortgage-backed $ 1,663 $ - $ (13) $ 1,650
US Government Agencies 3,359 4 (4) 3,359
Other 8,710 6 - 8,716
-----------------------------------------------------------------------------
Total Held-to-Maturity $ 13,732 $ 10 $ (17) $ 13,725
-----------------------------------------------------------------------------
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, commercial construction loans, residential construction loans as well
as residential, home equity loans, consumer loans, and others. Commercial loans
are primarily term loans made to small-to-medium-sized businesses and
professionals for working capital and other purposes. The majority of these
commercial loans are collateralized by real estate and may be secured by other
collateral and personal guarantees. The Company's commercial loans generally
range from $250,000 to $1,000,000 in amount up to the Banks' combined legal
lending limit of $6.9 million at March 31, 2001.
The Company's loans increased $5.2 million, or 1.2%, to $423.5 million
at March 31, 2001 from $418.3 million at December 31, 2000.
23
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
(dollars in thousands) As of March 31, 2001 As of December 31, 2000
-----------------------------------------------------------------------
Balance % of Total Balance % of Total
-----------------------------------------------------------------------
Commercial:
Real estate secured $ 175,009 40.9 $ 181,607 43.0
Non real estate secured 40,816 9.6 39,016 9.2
Unsecured 8,154 1.9 10,543 2.5
-------------------------------------------------------------------
223,979 52.4 231,166 54.7
Residential Real Estate 200,697 46.9 188,432 44.6
Consumer & Other 2,995 0.7 2,787 0.7
-------------------------------------------------------------------
Total Loans 427,671 100.0% 422,385 100.0%
Less allowance for loan losses (4,195) (4,072)
---------- ----------
Net loans $ 423,476 $ 418,313
========== ==========
Credit Quality
The Company's written lending policies require underwriting, loan
documentation, and credit analysis standards to be met prior to funding. The
Board of Directors reviews selected loans monthly to monitor 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.
24
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
March 31, December 31,
2001 2000
------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $2,131 $91
Non-accrual loans 1,349 1,350
Restructured loans -- 1,982
------------------------------
Total non-performing loans (1) 3,480 3,423
Foreclosed real estate -- --
------------------------------
Total non-performing assets (2) $3,480 $3,423
==============================
Non-performing loans as a percentage of total
loans net of unearned
Income 0.81% 0.81%
Non-performing assets as a percentage of total
assets 0.53% 0.52%
<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).
</FN>
Total non-performing loans remained relatively flat at March 31, 2001
when compared to December 31, 2000, while the mix has changed. The restructured
loan of $2.0 million at December 31, 2000 has been repaid. The large increase in
over 90 day past due loans resulted from several loans, which management
believes are well collateralized and at March 31, 2001, believed to be in the
process of collection. Management believes that collateral pledged against the
non-accrual and over 90 day loans is adequate to protect the Bank from potential
losses associated with these credits.
The Company had delinquent loans as of March 31, 2001 and December 31,
2000 as follows; (i) 30 to 59 days past due, consisted of commercial, and
consumer and home equity loans in the aggregate principal amount of $5.1 million
and $1.5 million respectively; and (ii) 60 to 89 days past due, consisted of
commercial and consumer loan in the aggregate principal amount of $1.0 million
and $435,000 respectively. These loans are believed to be well collateralized
and in the process of collection. In addition, the Company has classified
certain loans as substandard and doubtful (as those terms are defined in
applicable Bank regulations). At March 31, 2001 and December 31, 2000,
substandard loans totaled approximately $4.9 million and $4.0 million
respectively; and doubtful loans totaled $113,000 at the end of both periods.
This increase in substandard loans was primarily the result of the increase in
delinquent loans.
25
The recorded investment in loans for which impairment has been
recognized totaled $1.3 million and $3.3 million at March 31, 2001 and December
31, 2000 respectively, of which $1.1 million and $3.1 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
March 31, 2001, and December 31, 2000 were $175,000 for both periods. There were
no commitments to extend credit to any borrowers with impaired loans as of the
end of the periods presented herein.
At March 31, 2001, 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 $72.7 million, which
represented 17.2% 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 management believes 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. The Company had no
real estate owned for any periods presented herein.
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 March 31, 2001, all
identified potential problem loans are included in the preceding table with the
exception of loans classified as substandard but still accruing which totaled
$2.3 million as of March 31, 2001.
The Company had no credit exposure to "highly leveraged transactions" at
March 31, 2001, as defined by the Federal Reserve Bank.
26
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the three
months ended March 31, 2001, and 2000, and the twelve months ended December 31,
2000 is as follows:
For the three For the twelve months For the three months
months ended ended ended
(dollars in thousands) March 31, 2001 December 31, 2000 March 31, 2000
-------------- ----------------- --------------
Balance at beginning of period .............. $4,072 $3,208 $3,208
Charge-offs:
Commercial ............................... -- 66 34
Real estate .............................. -- -- --
Consumer ................................. 47 90 --
--------- --------- ---------
Total charge-offs ..................... 47 156 34
--------- --------- ---------
Recoveries:
Commercial ............................... 3 340 23
Real estate .............................. -- -- --
Consumer ................................. 10 14 --
--------- --------- ---------
Total recoveries ...................... 13 354 23
--------- --------- ---------
Net charge-offs/(recoveries) ................ 34 (198) 11
--------- --------- ---------
Provision for loan losses ................... 157 666 200
--------- --------- ---------
Balance at end of period ................. $4,195 $4,072 $3,397
========= ========= =========
Average loans outstanding (1) ............ $429,967 $389,156 359,015
========= ========= =========
As a percent of average loans (1):
Net charge-offs/Recoveries ............... -% (0.05)% -%
Provision for loan losses ................ 0.04% 0.17% 0.06%
Allowance for loan losses ................ 0.98% 1.05% 0.95%
Allowance for loan losses to:
Total loans, net of unearned income at
period end ............................ 0.98% 0.96% 0.92%
Total non-performing loans at period
end ................................... 120.54% 118.96% 92.63%
<FN>
(1) Includes nonaccruing loans.
</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, historical
charge-off activity, and a reserve allocation to provide for imperfections in
the methodology used by management in determining the loan loss reserve
requirements. 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.
27
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. The Board
of Directors reviews the findings of the loan review program on a monthly basis.
Based on the recommendations of this program, past performance of the Banks'
loan portfolio and general economic conditions, Management believes that the
reserve for loan losses is reasonable and would be adequate to absorb known and
inherent losses.
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 March 31, 2001 At December 31, 2000
----------------- --------------------
Percent of Loans Percent of Loans
Amount In Each Category Amount In Each Category
(in 000's) To Loans (in 000's) to Loans
---------- -------- ---------- --------
Allocation of allowance for loan losses:
Commercial $3,134 52.4% $3,055 54.7%
Residential real estate 223 46.9% 224 44.6%
Consumer and other... 220 0.7% 246 0.7%
Unallocated 618 -% 547 -%
----------------------------------------------------------------
Total $4,195 100.00% $4,072 100.00%
=========== ===========
The unallocated allowance increased $71,000 to $618,000 at March 31,
2001 from $547,000 at December 31, 2000. The Company's reserve methodology
requires all credits to have a specific reserve, and all classified credits to
have higher specific reserves, even though management believes the loan to be
adequately collateralized.
28
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 March 31, 2001 and December 31, 2000, firm loan commitments
approximated $52.5 million and $60.3 million respectively, and commitments of
standby letters of credit approximated $3.3 million and $3.8 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.
29
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
---------------------------------------------------
The annual meeting of shareholders of Republic First Bancorp, Inc., to
take action upon the re-election of certain directors of the Company
was held on the 24thday of April, 2001 at 4:00 p.m., at the Pyramid
Club, 1735 Market Street 52nd Floor, Philadelphia, PA., after written
notice of said meeting, according to law, was mailed to each
shareholder of record entitled to receive notice of said meeting, 32
days prior thereto. As of the record date for said meeting of
shareholders, the number of shares then issued and outstanding was
6,358,126 shares of common stock, of which 6,358,126 shares were
entitled to vote. A total of 5,524,893 shares were voted. No nominee
received less than 92.7% of the voted shares. Therefore, pursuant to
such approval, the following directors were re-elected to the Company.
Harry D. Madonna
Neal I. Rodin
Steven J. Shotz
Michael J. Bradley
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)
30
Exhibit No.
-----------
10 Amended and Restated Material Contracts.- None
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. 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.
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,
2001.
Reports on Form 8-K
None
31
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.
/s/ Jere A. Young
---------------------------------------
Jere A. Young
President and Chief Executive Officer
/s/ Paul Frenkiel
---------------------------------------
Paul Frenkiel
Executive Vice President and
Chief Financial Officer
Dated: May 15, 2001
32