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: June 30, 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
------------
(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 July 31, 2001
Page 1 of 37
Exhibit index appears on page 35
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 13
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 23
Part II: Other Information
Item 1: Legal Proceedings 35
Item 2: Changes in Securities and Use of Proceeds 35
Item 3: Defaults Upon Senior Securities 35
Item 4: Submission of Matters to a Vote of Security Holders 35
Item 5: Other Information 35
Item 6: Exhibits and Reports on Form 8-K 35
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1: Financial Statements (unaudited)
Page Number
(1) Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000...................................................... 4
(2) Consolidated Statements of Operations for the three and six months ended
June 30, 2001 and 2000................................................ 5
(3) Consolidated Statements of Cash Flows for the six months ended
June 30, 2001 and 2000................................................ 6
(4) Notes to Consolidated Financial Statements............................ 7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of June 30, 2001 and December 31, 2000
dollars in thousands, except share data
(unaudited)
ASSETS: June 30, 2001 December 31, 2000
------------------------- -------------------------
Cash and due from banks $20,793 $20,990
Interest bearing deposits with banks 451 460
Federal funds sold 22,691
29,207
------------------------- -------------------------
Total cash and cash equivalents 43,935 50,657
Other interest-earning restricted cash 5,883 -
Securities available for sale, at fair value 129,496 152,134
Securities held to maturity at amortized cost
(Fair value of $14,043 and $17,750, respectively) 14,020 17,707
Loans receivable (net of allowance for loan losses of
$4,758 and $4,072, respectively) 438,027 418,313
Premises and equipment, net 5,185 5,153
Accrued income and other assets 13,479 11,673
------------------------- -------------------------
Total Assets $650,025 $655,637
========================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $48,609 $44,281
Demand - interest-bearing 35,757 29,784
Money market and savings 114,169 76,510
Time under $100,000 170,542 175,834
Time $100,000 or more 80,179 99,142
------------------------- -------------------------
Total Deposits 449,256 425,551
Other borrowed funds 142,500 176,442
Accrued expenses and other liabilities 13,264 10,614
------------------------- -------------------------
Total Liabilities 605,020 612,607
------------------------- -------------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000
Shares authorized; shares
issued 6,358,126 as of June 30, 2001 and
December 31, 2000 63 63
Additional paid in capital 32,117 32,117
Retained earnings 15,846 14,446
Treasury stock at cost (175,172 shares
at June 30, 2001 and December 31, 2000) (1,541) (1,541)
Accumulated other comprehensive loss (1,480) (2,055)
------------------------- -------------------------
Total Shareholders' Equity 45,005 43,030
------------------------- -------------------------
Total Liabilities and Shareholders' Equity $650,025 $655,637
========================= =========================
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30,
dollars in thousands, except per share data
(unaudited)
Quarter to Date Year to Date
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Interest and fees on loans $9,472 $8,127 $18,622 $15,628
Interest and dividend income on
federal funds sold and other
interest-earning balances 404 59 1,057 67
Interest on investments 2,330 3,063 4,929 6,267
------------------- ----------------- ------------- --------------
Total interest income 12,206 11,249 24,608 21,962
------------------- ----------------- ------------- --------------
Interest expense:
Demand interest-bearing 145 146 295 198
Money market and savings 809 614 1,714 1,141
Time $100,000 or more 1,537 1,149 3,133 2,047
Time under $100,000 2,718 2,430 5,554 4,438
Other borrowed funds 2,241 2,783 4,782 6,003
------------------- ----------------- ------------- --------------
Total interest expense 7,450 7,122 15,478 13,827
------------------- ----------------- ------------- --------------
Net interest income 4,756 4,127 9,130 8,135
------------------- ----------------- ------------- --------------
Provision for loan losses 620 200 777 400
------------------- ----------------- ------------- --------------
Net interest income after provision
for loan losses 4,136 3,927 8,353 7,735
------------------- ----------------- ------------- --------------
Non-interest income:
Service fees 510 333 1,046 635
Gains on securities sold
- - 13 -
Tax Refund revenue 27 - 253 181
Other income 24 26 47 58
------------------- ----------------- ------------- --------------
561 359 1,359 874
Non-interest expenses:
Salaries and benefits 2,023 1,636 4,039 3,179
Occupancy/equipment 565 459 1,131 918
Other expenses 1,156 873 2,452 1,696
------------------- ----------------- ------------- --------------
3,744 2,968 7,622 5,793
------------------- ----------------- ------------- --------------
Income before income taxes 953 1,318 2,090 2,816
Provision for income taxes 314 435 690 929
------------------- ----------------- ------------- --------------
------------------- ----------------- ------------- --------------
Net income $639 $883 $1,400 $1,887
=================== ================= ============= ==============
Net income per share:
------------------- ----------------- ------------- --------------
Basic $0.10 $0.14 $0.23 $0.31
=================== ================= ============= ==============
------------------- ---------------- -------------
Diluted $0.10 $0.14 $0.22 $0.30
=================== ================ ============= =====
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
Dollars in thousands
(unaudited)
2001 2000
----------- ------------
Cash flows from operating activities:
Net income $1,400 $1,887
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 777 400
Depreciation and amortization 624 281
Decrease in loans held for sale - 4,857
Increase in accrued income
and other assets (2,103) (561)
Increase in accrued expenses
and other liabilities 2,651 549
Net increase (decrease) in deferred fees (36) 19
----------- ------------
Net cash provided by operating activities 3,313 7,432
----------- ------------
Cash flows from investing activities:
Purchase of securities:
Held to Maturity (2,829) -
Proceeds from principal collected on securities 16,360 10,347
Proceeds from calls of held to maturity securities 5,647 -
Proceeds from sale of available for sale securities 7,842 -
Net increase in loans (20,455) (31,824)
Increase in other interest-earning restricted cash (5,883) -
Premises and equipment expenditures (480) (188)
----------- ------------
Net cash provided by (used in) investing activities 202 (21,665)
----------- ------------
Cash flows from financing activities:
Net increase in demand, money
Market and savings deposits 47,960 26,682
Net decrease in borrowed funds less than 90 days (16,442) (22,640)
Repayment of borrowed funds greater than 90 days (17,500) (25,000)
Net increase (decrease) in time deposits (24,255) 46,322
----------- ------------
Net cash provided by (used in) financing activities (10,237) 25,364
----------- ------------
Increase (decrease) in cash and cash equivalents (6,722) 11,131
Cash and cash equivalents, beginning of period 50,657 21,110
----------- ------------
Cash and cash equivalents, end of period $43,935 $32,241
=========== ============
Supplemental disclosure:
Interest paid $15,888 $13,921
=========== ============
Taxes paid $1,750 $ 500
=========== ============
Non-cash transactions:
Change in unrealized gain/(loss) on securities available
for sale, net of tax $ 575 $(432)
Change in deferred taxes due to change in unrealized
Loss (gain) on securities (297) 214
available for sale
(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 in 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
June 30, 2001, the results of operations for the three and six month periods
ended June 30, 2001 and 2000, and the cash flows for the six month periods ended
June 30, 2001 and 2000. The interim results of operations may not be indicative
of 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 Form 10-K for the
year ended December 31, 2000, 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, (together 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 interest-earning assets, such as loans
and investments, and the interest paid on interest-bearing liabilities, such as
deposits and borrowings. Accordingly, the operations of the Banks are subject to
the risks and uncertainties resulting from changes in interest rates.
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 may differ from those
estimates.
Significant estimates are made by management in determining the allowance
for loan losses 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 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 may differ materially in the near
term.
Other interest-earning restricted cash:
Other interest-earning restricted cash represents cash to fund an offsite
ATM network. The dispensed cash is returned to the Company through the MAC
network on the next business day, and the Bank may obtain access to the cash for
liquidity, if necessary.
Note 3: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits in the ordinary course of business. While any litigation
involves uncertainty, management, after reviewing pending litigation with
counsel, is of the opinion that the liability of the Company and the Banks, if
any, resulting from such litigation 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
Business Combinations
In June 2001, the FASB issued Statement No. 141, "Business Combinations."
The Statement addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB
Statement No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises. All business combinations in the scope of the Statement are to be
accounted for using the purchase method.
The provisions of the Statement apply to all business combinations
initiated after June 30, 2001. The Statement also applies to all business
combinations accounted for using the purchase method for which the date of
acquisition is July 1, 2001, or later. There is no expected impact on earnings,
financial condition, or equity upon adoption of Statement No. 141.
Goodwill and Other Intangible Assets
In June 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets." The Statement addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. The Statement also addresses how goodwill and
8
other intangible assets should be accounted for after they have been initially
recognized in the financial statements.
The provisions of the Statement are required to be applied starting with
fiscal years beginning after December 15, 2001, except that goodwill and
intangible assets acquired after June 30, 2001, will be subject immediately to
the nonamortization and amortization provisions of the Statement. Early
application is permitted for entities with fiscal years beginning after March
15, 2001, provided that the first interim financial statements have not
previously been issued. The Statement is required to be applied at the beginning
of an entity's fiscal year and to be applied to all goodwill and other
intangible assets recognized in its financial statements at that date. There is
no expected impact on earnings, financial condition, or equity upon adoption of
Statement No. 142.
Note 5: 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 tax refunds. 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. Tax
refunds include 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. Tax refund results are evaluated based upon income before
provision for income taxes.
Tax refunds were developed as a business segment to further expand the
Company's products and services offered to consumers and businesses.
9
As of and for the six months ended June 30,
(dollars in thousands)
2001 2000
---- ----
First First
Republic Delaware Tax Republic Delaware Tax
Bank Bank Refunds Total Bank Bank Refunds Total
------------ ------------ ----------- ----------- ----------- ----------- ----------- ----------
External customer revenues:
Interest income $23,188 $1,420 $ - $24,608 $21,461 $501 $ - $21,962
Other income 829 277 253 1,359 627 66 181 874
------ ----- --- ------ ------ --- --- ------
Total external customer revenues 24,017 1,697 253 25,967 22,088 567 181 22,836
------ ----- --- ------ ------ --- --- ------
Intersegment revenues:
Interest income - - - - 69 - - 69
Other income 38 - - 38 38 - - 38
------ ----- --- ------ ------ --- --- ------
Total intersegement revenues 38 - - 38 107 - - 107
------ ----- --- ------ ------ --- --- ------
Total revenue 24,055 1,697 253 26,005 22,195 567 181 22,943
------ ----- --- ------ ------ --- --- ------
Depreciation and amortization
386 62 - 448 235 46 - 281
Other operating expenses -
external 21,843 1,546 40 23,429 19,011 728 - 19,739
Intersegment expense:
Other operating expense - 38 - 38 - 38 - 38
Interest expense = = = = = 69 - 69
-- --
Segment expenses 22,229 1,646 40 23,915 19,246 881 - 20,127
------ ----- --- ------ ------ --- --- ------
Segment income (loss) before
taxes $1,826 $51 $213 $2,090 $2,949 $(314) $181 $2,816
====== === ==== ====== ====== ====== ==== ======
Segment assets $611,534 $38,491 - $650,025 $595,697 $18,001 - $613,698
-------- ------- --- -------- -------- ------- --- --------
Capital expenditures $421 $59 - $480 $151 $37 - $188
------ ----- --- ------ ------ --- --- ------
10
As of and for the three months ended June 30,
(dollars in thousands)
2001 2000
---- ----
First First
Republic Delaware Tax Republic Delaware Tax
Bank Bank Refunds Total Bank Bank Refunds Total
----------- ------------ ----------- ----------- ----------- ----------- ------------ -----------
External customer revenues:
Interest income $11,385 $821 - $12,206 $10,979 $270 $ - $11,249
Other income 400 134 27 561 311 48 - 359
--- --- -- --- --- -- - ---
Total external customer revenues 11,785 955 27 12,767 11,290 318 - 11,608
------ --- -- ------ ------ --- - ------
Intersegment revenues:
Interest income - - - - - - - -
Other income 19 - - 19 19 - - 19
-- -- --
Total intersegment revenues 19 - - 19 19 - - 19
-- -- -- --
Total revenue 11,804 955 27 12,786 11,309 318 - 11,627
------ --- -- ------ ------ --- - ------
Depreciation and amortization
199 32 - 231 122 23 - 145
Other operating expenses -
external 10,800 783 - 11,583 9,702 443 - 10,145
Intersegment expense:
Other operating expense - 19 - 19 - 19 - 19
Interest expense - - - - - - - -
- - -
Segment expenses 10,999 834 - 11,833 9,824 485 - 10,309
------ --- - ------ ----- --- ------
Segment income (loss) before
taxes $805 $121 27 $953 $1,485 ($167) - $1,318
==== ==== == ==== ====== ====== ======
Segment assets $611,534 $38,491 - $650,025 $595,697 $18,001 - $613,698
-------- ------- - -------- -------- ------- --------
Capital expenditures $282 $22 - $304 $42 $13 - $55
---- --- - ---- --- --- ---
11
Note 6: 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 not dilutive are not included
for purposes of this calculation. At June 30, 2001 and 2000, there were 104,940
and 179,930 CSEs that were not dilutive, respectively. These options may be
dilutive in the future.
The following table is a comparison of EPS for the three and six months
ended June 30, 2001 and 2000.
Quarter to Date Year to Date
2001 2000 2001 2000
Net income $639,000 $883,000 $1,400,000 $1,887,000
Shares Per Share Share Per Share Shares Per Share Share Per Share
------ --------- ----- --------- ------ --------- ----- ---------
Weighted average shares
For period 6,182,954 6,168,729 6,182,954 6,168,729
Basic EPS $0.10 $0.14 $0.23 $0.31
Add common stock equivalents
Representing dilutive stock options 202,666 93,752 190,618 110,760
------- ------ ------- -------
Effect on basic EPS of dilutive CSE - $ - $(0.01) $(0.01)
--- -------
Equals total weighted average
Shares and CSE (diluted) 6,385,620 6,262,481 6,373,572 6,279,489
========= ========= ========= =========
Diluted EPS $0.10 $0.14 $0.22 $0.30
----- ===== ----- =====
Note 7: 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 available
for sale securities.
(dollar amounts in thousands) Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- --------- -------- ---------
Net income $639 $883 $1,400 $ 1,887
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) during
the period (889) (59) 584 (432)
Less: Reclassification adjustment for gains
Included in net income
- - (9) -
-------- --------- -------- ---------
Comprehensive (loss)/income $(250) $824 $1,975 $1,455
========= ========= ======== =========
12
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" "strategy" and similar
expressions or variations on such expressions. Any 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 2001, Current Reports on Form 8-K filed by the Company,
as well as other filings.
Financial Condition:
June 30, 2001 Compared to December 31, 2000
- -------------------------------------------
Total assets declined $5.6 million to $650.0 million at June 30, 2001
versus $655.6 million at December 31, 2000. Cash from net maturities and sales
of securities and federal funds sold were used to pay down other borrowed funds.
Loans:
The loan portfolio, which represents the Company's largest consolidated 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 $19.7 million, or
4.7%, to $438.0 million at June 30, 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, short-term consumer loans, 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 developers for commercial 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 a primary residence. Upon the completion of construction, residential
construction loans are repaid by the borrowers with proceeds of a permanent
first mortgage. Consistent with the Company's long-term strategy of increasing
the ratio of variable rate loans, most of the new loan originations in the year
2001 were tied to the
13
prime rate of interest. At June 30, 2001, the Bank had approximately $3.5 of
short-term consumer loans outstanding. These loans have principal amounts of
less than $1,000, and terms of approximately two weeks. Securities available for
sale and held to maturity:
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 $22.6 million, or 14.9%, to $129.5 million at June 30, 2001
from $152.1 million at December 31, 2000. This decrease reflected both the sale
of an $8.0 million security on which a gain of $13,000 was realized and
principal repayments which were partially offset by a $872,000 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 $3.7 million, or 20.8% to $14.0 million at June 30, 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 decreased by
$6.7 million to $43.9 million at June 30, 2001 from $50.7 million at December
31, 2000 due to a decrease in federal funds as funds were used to pay down other
borrowed funds.
Other interest-earning restricted cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. The dispensed cash is
returned to the Company through the MAC network on the next business day. At
June 30, 2001, the balance was $5.9 million versus $0 at December 31, 2000.
Deposits:
Deposits, which include non-interest-bearing demand deposits and
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 a primary focus on
building and expanding multi-product relationships.
Deposits increased $23.7 million, or 5.6%, to $449.3 million at June 30, 2001
from $425.6 million at December 31, 2000. The aggregate of transaction accounts,
which include demand, money market and savings accounts, increased $48.0
million, or 31.8%, to $198.5 million at June 30, 2001 from $150.6 million at
December 31, 2000. Certificates of deposit decreased by $24.3 million, or 8.8%,
to $250.7 million at June 30, 2001 from $275.0 million at December 31, 2000. The
increase in transaction deposit products resulted from the Company's deposit
generation strategies instituted in 2000. The Company is emphasizing deposit
growth as part of a long-term strategy to reduce reliance on borrowed funds. The
decline in time deposits resulted from the Company's decision to let higher
costing time deposits mature and not be replaced.
14
Other Borrowed Funds:
Other borrowed funds are comprised of overnight federal funds purchased and term
FHLB borrowings. Other borrowed funds were $142.5 million at June 30, 2001, a
decrease of $33.9 million, or 19.2%, when compared to the December 31, 2000
total of $176.4 million. The decrease in borrowed funds was funded primarily
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 June 30, 2001 and December 31,
2000 was $45.0 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 $7.28
as of June 30, 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 June 30, 2001 Compared to June 30, 2000
- ----------------------------------------------------------
Results of Operations:
Overview
The Company's net income decreased $244,000 to $639,000 for the three
months ended June 30, 2001, from $883,000 for the three months ended June 30,
2000. Notwithstanding a 20.8% increase in combined average commercial loans and
residential construction loans, earnings were negatively impacted by margin
contractions resulting from the impact of the 125 basis point drop in the prime
rate during the quarter, as a result of Federal Reserve Bank rate reductions.
This compounded the residual effect of comparable rate reductions in the first
quarter. While the impact on variable rate loans tied to prime was immediate,
management estimates that, all else constant, two fiscal quarters are normally
required for offsetting amounts of deposits, primarily maturing certificates of
deposit, to reprice. The decrease also reflected increased operating expenses
and a higher provision for loan loss during the quarter resulting from the
introduction of a new short-term consumer loan product line and the
classification of loans to one borrower as substandard. Diluted earnings per
share for the three months ended June 30, 2001 was $0.10 compared to $0.14, for
the prior year period due to the decrease in net income. That decrease resulted
in a return on average assets and average equity of 0.40% and 5.63%
respectively, compared to 0.60% and 8.23%, respectively for the corresponding
period in 2000.
Analysis of Net Interest Income
Net interest margin (net interest income as a percentage of average
interest-earning assets) was 3.04% for the three months ended June 30, 2001
compared to 2.88% for the three months ended June 30, 2000. This increase
reflected an increase in short-term consumer loan fees which contributed
$520,000 in interest income and resulted in a 32 basis point increase in margin.
These short-term loan fees are earned on loans with principal amounts less than
$1,000 and with terms of approximately two weeks. The Company however, was
negatively impacted by the 125 basis point decline in the prime rate of interest
during the quarter and the continuing net effect of the 150 basis point decline
in the first quarter.
Net interest income increased $629,000, or 15.2%, to $4.8 million for the
three months ended June 30, 2001 from $4.1 million for the three months ended
June 30, 2000. This increase resulted from the growth in the commercial and
residential construction loans and the addition of the short-term consumer loans
as detailed above. As shown in the following Rate Volume table, the increase in
net interest income was due to the positive effect of volume changes totaling
$660,000 partially offset by the negative impact of rate changes of $31,000.
15
The positive impact from volume changes was attributable to a significant
increase in average interest-earning assets, which increased $53.3 million on
average to $625.2 million during the quarter ended June 30, 2001, from $571.8
million for the quarter ended June 30, 2000. The negative effect of the rate
changes was driven by the decline in prime rate resulting from Federal Reserve
Bank rate cuts, as previously noted.
The Company's total interest income increased $1.0 million, or 8.5%, to
$12.2 million for the three months ended June 30, 2001 from $11.2 million for
the three months ended June 30, 2000. Approximately $1.1 million of the increase
reflected a $53.3 million increase in average interest-earning assets. This was
partially offset by a $173,000 negative variance resulting from the lower
interest rate environment.
Interest and fees on loans increased $1.3 million, or 16.6%, to $9.5
million for the three months ended June 30, 2001 from $8.1 million for the three
months ended June 30, 2000. This increase was driven by a $60.2 million increase
in average loans outstanding. The yield earned on loans was increased by
$520,000 in processing fees earned on short-term consumer loans. Interest and
dividend income on securities decreased $733,000, or 23.9%, to $2.3 million for
the three months ended June 30, 2001 from $3.1 million for the three months
ended June 30, 2000 reflecting a decrease in the gross average balance of
securities owned of $38.9 million, or 20.4%, to $151.7 million for the three
months ended June 30, 2001 from $190.6 million for the three months ended June
30, 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 outstandings, the yield earned on these
securities declined 29 basis points to 6.14% due to the amortization, maturity
and sale of higher yielding securities. Federal funds sold and other interest
earning balances income increased by $345,000 to $404,000 as cash from deposit
generation and securities sales and reductions that was not used to fund loan
growth or pay down other borrowed funds, was sold as federal funds.
Interest expense increased $328,000 or 4.6%, to $7.4 million for the three
months ended June 30, 2001 from $7.1 million for the three months ended June 30,
2000. Interest-bearing liabilities averaged $545.2 million, an increase of $33.5
million, or 6.6%, from $511.7 million for the three months ended June 30, 2000.
The net growth in interest-bearing liabilities contributed $470,000 to the
increase which partially offset the effect of the 10 basis point decline in
rates paid on interest-bearing liabilities yielding a benefit of $142,000. 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 decreased
to 5.48% for the three months ended June 30, 2001 from 5.58% for the three
months ended June 30, 2000 reflecting the lower interest rate environment
resulting from the Federal Reserve rate cuts. Certificates of deposit (time
deposit) interest expense increased $676,000 or 18.9%. This increase was
primarily due to an increase in the average volume of certificates of deposit of
$32.7 million, or 13.7%, to $270.8 million for the three months ended June 30,
2001 from $238.1 million for the three months ended June 30, 2000. This
contributed $511,000 of the increase. The increase in average rate of interest
paid on time deposits of contributed the remaining $165,000 to the increase in
interest expense. Although the company was able to reduce the rates paid on
certain transaction accounts, certificates of deposit rates cannot be changed
until the certificates reprice.
Interest expense on FHLB advances and overnight federal funds purchased was
$2.2 million for the three months ended June 30, 2001 compared to $2.8 million
for the three months ended June 30, 2000, a decline of $542,000, or 19.5%. This
decrease reflected a decrease in the average volume of other borrowed funds of
$47.8 million to $145.5 million for the three months ended June 30, 2001 from
$193.3 million for the three months ended June 30, 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
5.78% at June 30, 2000 to 6.18% at June 30, 2001. The rate increased in a
decreasing rate environment as lower yielding shorter term advances were repaid
while long-term advances at higher rates remained outstanding.
16
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 June 30,
2001 versus 2000
(dollars in thousands)
Due to change in:
Volume Rate Total
------------------- ------------- -------------------
Interest earned on:
Federal funds sold $ 366 $ (21) $ 345
Securities (602) (131) (733)
Loans 1,366 (21) 1,345
- -----------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,130 (173) 957
Interest Expense of
Deposits
Interest-bearing demand deposits (104) 105 1
Money market and savings (581) 386 (195)
Time deposits (511) (165) (676)
- -----------------------------------------------------------------------------------------------------------------
Total deposit interest expense (1,196) 326 (870)
Other borrowed funds 726 (184) 542
- -----------------------------------------------------------------------------------------------------------------
Total interest expense (470) 142 (328)
- -----------------------------------------------------------------------------------------------------------------
Net interest income $ 660 $ (31) $ 629
- -----------------------------------------------------------------------------------------------------------------
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 $620,000 and $200,000 for the three months ended June 30,
2001 and 2000, respectively. The increase was due primarily to the
classification of $5.4 million in loans to a single borrower as substandard. The
amounts recorded in the second 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 estimated inherent losses in the portfolio.
As of June 30, 2001 and 2000, the allowance for loan losses to total loans, net
of deferred loan fees was 1.07% and 0.93%, respectively.
17
Non-Interest Income
Total non-interest income increased $202,000 to $561,000 for the three
months ended June 30, 2001 from $359,000 for the three months ended June 30,
2000. This increase is due to increased loan advisory fees and increased service
charges on deposit accounts resulting from growth in deposit accounts.
Non-Interest Expenses
Total non-interest expenses increased $776,000 or 26.1% to $3.7 million for
the three months ended June 30, 2001. Salaries and benefits increased $387,000
or 23.7% to $2.0 million for the three months ended June 30, 2001 from $1.6
million for prior year comparable period. The increase reflected an expansion of
the commercial and residential construction loan departments. In addition to
continued loan production, the commercial and residential construction loan
department generates non-interest income by generating related fees. Also,
higher health insurance costs of $74,000, a decline of $95,000 in loan cost
deferrals and normal merit increases contributed to the increase.
Occupancy and equipment expenses increased $106,000, or 23.1%, to $565,000
for the three months ended June 30, 2001 from $459,000 for the comparable prior
year period. The increase resulted primarily 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 $283,000, or 32.4%, to $1.2 million
for the three months ended June 30, 2001 from $873,000 for the comparable prior
year 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 the short-term consumer loan program.
Provision for Income Taxes
The provision for income taxes decreased $121,000, or 27.8%, to $314,000
for the three months ended June 30, 2001 from $435,000 for the three months
ended June 30, 2000. This decrease is mainly the result of the decrease in
pre-tax income from the comparable prior year period. The effective tax rate for
both periods was approximately 33.0%.
18
Six Months Ended June 30, 2001 Compared to June 30, 2000
- --------------------------------------------------------
Results of Operations:
Overview
The Company's net income decreased $487,000 million to $1.4 million for the
six months ended June 30, 2001, from $1.9 million for the six months ended June
30, 2000. Notwithstanding a 22.5% increase in combined average commercial loans
and residential construction loans, earnings were negatively impacted by margin
contractions resulting from the impact of the 275 basis point drop in the prime
rate of interest during the first six months of the year, 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. The decrease also reflected increased operating expenses
and a higher provision for loan loss during the second quarter resulting from
the addition of the new short-term consumer loan product line and the
classification of loans to one borrower as substandard. Diluted earnings per
share for the six months ended June 30, 2001, was $0.22 compared to $0.30, for
the six months ended June 30, 2000, due primarily to the decrease in net income.
This resulted in a return on average assets and average equity of 0.43% and
6.25% respectively, compared to 0.65% and 8.89% respectively for the same period
in 2000. The decline in these ratios is due to lower net income.
Analysis of Net Interest Income
Net interest margin (net interest income as a percentage of average
interest-earning assets) was 2.90% for the six months ended June 30, 2001 versus
2.89% for the six months ended June 30, 2000. The modest increase in net
interest margin reflected the impact of fees on short-term consumer loans in the
second quarter of 2001. These fees totaled $520,000 and contributed
approximately 16 basis points to the margin in 2001. The Company was negatively
impacted by the 275 basis point decline in the prime rate in the year 2001 which
immediately impacted the yield on interest-earning assets in advance of
repricing certificates of deposit.
The Company's net interest income increased $1.0 million, or 12.2%, to $9.1
million for the six months ended June 30, 2001 from $8.1 million for the six
months ended June 30, 2000. 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 $1.9 million partially offset by the effect of lower interest
rates which totaled $859,000. The positive impact of volume changes was
attributable to a $66.0 million increase in average interest earning assets of
11.7%, to $629.7 million for the six months ended June 30, 2001, from $563.7
million for the six months ended June 30, 2000.
The Company's total interest income increased $2.6 million, or 12.1%, to
$24.6 million for the six months ended June 30, 2001 from $22.0 million for the
six months ended June 30, 2000. Substantially all of the $2.6 million increase
was the result of a $66.0 million increase in average volume of interest-earning
assets. Interest and fees on loans increased $3.0 million, or 19.2%, to $18.6
million for the six months ended June 30, 2001 from $15.6 million for the six
months ended June 30, 2000. Approximately $2.7 million of the increase in loans
was due primarily to a $63.0 million, or 17.1%, increase in average loans
outstanding while the remaining $250,000 of the increase was due to an increase
in the average rate earned on these loans of 19 basis points to 8.70%. The
improvement primarily reflected commercial and residential construction loan
growth as well as the short-term consumer loan fees noted earlier. Interest and
dividend income on securities decreased $1.3 million, or 21.3%, to $4.9 million
for the six months ended June 30, 2001 from $6.3 million for the six months
ended June 30, 2000. This decline was due to the $35.4 million, or 18.3%
decrease in volume to an average of $157.9
19
million and a decline in rate of 25 basis points to 6.24%. The decline in
securities reflects the Company's continuing strategy to reduce securities and
redeploy the proceeds into higher yielding assets. Federal funds sold and other
interest earning balances income increased by $990,000 to $1.1 million. Cash
inflows from deposit generation and securities reductions which exceeded loan
growth and pay downs of other borrowed funds, was invested as federal funds.
The Company's total interest expense increased $1.7 million, or 12.0%, to
$15.5 million for the six months ended June 30, 2001 from $13.8 million for the
six months ended June 30, 2000. Interest-bearing liabilities averaged $553.6
million, an increase of $46.1 million, or 9.1%, from $507.5 million for the six
months ended June 30, 2000. Total interest-bearing deposits on average increased
$101.2 million or 34.3% to $396.4 million. A portion of these funds were used to
pay down other borrowed funds which declined $55.1 million on average. The
growth in interest-bearing liabilities contributed $777,000 to the increase in
interest expense while the increase in rates on interest-bearing liabilities
contributed the remaining $874,000 of the increase. The average rate paid on
interest-bearing liabilities increased 18 basis points to 5.64% for the six
months ended June 30, 2001 from 5.46% for the six months ended June 30, 2000 due
primarily to the increase in average rates paid on other borrowings and time
deposit accounts.
Interest expense on time deposits increased $2.2 million or 34.0%. This
increase was primarily due to an increase in average certificates of deposit of
$54.1 million, or 24.7%, to $273.3 million for the six months ended June 30,
2001 from $219.2 million for the six months ended June 30, 2000. The average
rate of interest on time deposits increased to 6.41% at June 30, 2001 versus
5.92% at June 30, 2000 due to the higher interest rate environment during
periods in the year 2000 when most of these certificates were originated.
Interest expense on other borrowed funds (FHLB advances and overnight
federal funds purchased) declined $1.2 million, or 20.3% to $4.8 million for the
six months ended June 30, 2001 compared to $6.0 million for the six months ended
June 30, 2000. This decrease reflected a $55.1 million, or 26.0% decrease in the
average volume of other borrowed funds to $157.2 million for the six months
ended June 30, 2001 from $212.3 million for the six months ended June 30, 2000.
This decline was partially offset by the increase in the average rate on other
borrowed funds which increased 46 basis points from 5.67% at June 30, 2000 to
6.13% at June 30, 2001. The maturity of lower cost borrowings resulted in an
increase in the average rate.
20
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 six month period ending June 30, 2001 versus the comparable period for 2000.
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
Six months ended June 30,
2001 versus 2000
(dollars in thousands)
Due to change in:
Volume Rate Total
------------------- ------------- --------------------
Interest Income
Federal Funds $ 999 $ (9) $ 990
Securities (1,112) (226) (1,338)
Loans 2,744 250 2,994
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,631 15 2,646
Interest Expense
Deposits
Interest-bearing demand deposits (83) (14) (97)
Money market and savings (701) 128 (573)
Time deposits (1,665) (537) (2,202)
- -------------------------------------------------------------------------------------------------------------------
Total deposit interest expense (2,449) (423) (2,872)
Other borrowed funds 1,672 (451) 1,221
- -------------------------------------------------------------------------------------------------------------------
Total interest expense (777) (874) (1,651)
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,854 $ (859) $ 995
- ----------------------------------------------------------------------------------------------------------------------
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 $777,000 and $400,000 for the six months ended June 30, 2001
and 2000, respectively. The increase was due primarily to the classification of
$5.4 million of loans to a single borrower as substandard. The amounts recorded
in 2001 and 2000 were the amounts management considered necessary to increase
the allowance for loan losses to an amount that reflects the known and estimated
inherent losses in the portfolio. As of June 30, 2001 and 2000 the allowance for
loan losses to total loans, net of deferred loan fees was 1.07% and 0.93%
respectively.
21
Non-Interest Income
Total non-interest income increased $485,000 to $1.4 million for the six
months ended June 30, 2001 from $873,000 for the six months ended June 30, 2000.
This was mainly attributable to an increase in non-interest income from loan
advisory fees, fees earned on participated loans and an increase in Tax refunds
revenue. The increase in service fees on deposits is the result of increases in
transaction based accounts.
Non-Interest Expenses
Total non-interest expenses increased $1.8 million to $7.6 million for the
six months ended June 30, 2001 from $5.8 million for the prior year comparable
period. Salaries and benefits increased $860,000 or 27.1%, to $4.0 million for
the six months ended June 30, 2001 from $3.2 million for the prior comparable
period. The increase reflected an expansion of the commercial and residential
construction loan departments. In addition to continued loan production, the
commercial construction loan department generates non-interest income by
generating related fees. Higher health insurance costs of $140,000, a decline of
$118,000 in loan cost deferrals and normal merit increases also contributed to
the rise in salary and benefits.
Occupancy and equipment expenses increased $213,000, or 23.2%, to $1.1
million for the six months ended June 30, 2001 from $918,000 for the prior
comparable period. 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 expenses increased $756,000 to $2.4 million for the six months ended
June 30, 2001 from $1.7 million for the same period in 2000. This was
attributable to increases in telephone, professional fees, correspondent service
charges, printing and supplies due to the overall growth of the company. In
addition, expenses increased due to expenses incurred in the development of
various business initiatives undertaken to diversify the earnings of the
Company, including the short-term consumer loan program. Finally, 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 $239,000, or 25.8%, to $690,000
for the six months ended June 30, 2001 from $929,000 for the prior comparable
period. This decrease is mainly the result of the decrease in pre-tax income
from 2000 to 2001. The effective tax rate for both years was approximately
33.0%.
22
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 behavior of its interest sensitive assets and
liabilities. Adjustments to the mix of assets and liabilities are made
periodically in an effort to optimize net interest income.
The following tables present a summary of the Company's interest rate
sensitivity GAP at June 30, 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
23
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 June 30, 2001
----------------------------------------------------------------------------------------------------
0 - 90 91 - 181 - More Financial
180 365 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 $ 49,200 $ 5,974 $11,654 $20,934 $18,681 $14,622 $11,314 $40,164 $172,543 $172,821
Average interest rate 4.42% 6.24% 6.27% 6.31% 6.31% 6.31% 6.29% 6.34%
Loans receivable 180,688 25,054 38,997 56,259 45,611 38,102 16,630 36,686 438,027 451,575
Average interest rate 7.37% 8.51% 8.36% 8.23% 8.12% 8.20% 7.86% 7.00%
Total 229,888 31,028 50,651 77,193 64,292 52,724 27,944 76,850 610,570 624,396
----------------------------------------------------------------------------------------------------
Cumulative Totals $229,888 $260,916 $311,567 $388,760 $453,052 $505,776 $533,720 $610,568
===========================================================================
Interest Sensitive Liabilities:
Demand Interest Bearing $20,807 $ 847 $ 510 $ 1,021 $ 1,021 $ 1,021 $10,532 $ - $35,757 $35,757
Average interest rate 2.87% 0.86% 0.86% 0.86% 0.86% 0.86% 0.86% 0.00%
Savings Accounts 5,631 229 138 276 276 276 2,850 $ - 9,677 9,677
Average interest rate 1.91% 1.91% 1.91% 1.91% 1.91% 1.91% 1.91% 0.00%
Money Market Accounts 64,984 2,238 1,348 2,697 2,697 2,697 37,831 $ - 104,492 94,492
Average interest rate 3.12% 1.55% 1.55% 1.55% 1.55% 1.55% 1.55% -%
Time Deposits 62,129 71,174 91,715 11,119 5,129 6,274 3,158 23 250,721 253,556
Average interest rate 6.15% 6.23% 5.99% 5.98% 6.12% 6.91% 6.63% 4.59%
FHLB Borrowings - - 17,500 - - 125,000 - - 142,500 147,100
Average interest rate -% -% 5.58% -% 0.00% 6.19% 0.00% 0.00%
Total 153,551 74,488 111,211 15,113 9,123 135,268 54,371 23 543,147 540,582
----------------------------------------------------------------------------------------------------
Cumulative Totals $153,551 $228,038 $339,250 $354,363 $363,485 $498,753 $543,124 $543,147
===========================================================================
Interest Rate
Sensitivity GAP $76,337 $(43,460) $(60,561) $62,082 $55,169 $(82,544) $(26,427) $76,825
Cumulative GAP $76,337 $32,878 $(27,683) $34,397 $89,567 $7,023 $(9,404) $67,421
Interest Sensitive Assets/
Interest Sensitive
Liabilities 150% 114% 92% 110% 125% 101% 98% 112%
Cumulative GAP/
Total Earning Assets 13% 5% -5% 6% 15% 1% -2% 11%
Total Earning Assets $610,570
========
Off balance sheet items Notional value:
Commitments to
extend credit $ 3,345 $49,636
------------------
Average interest rate 8.00% 8.00%
24
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 estimated
net interest income for the year ending June 30, 2002, based upon the assets,
liabilities and off-balance sheet financial instruments in existence at June 30,
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 June 30, 2002 and
December 31, 2001. Quarterly changes could be significantly more or less than
annual estimates. In fact, certain quarters within a one-year period could show
an increase while other quarters might reflect a decrease.
Percentage Change
Rate shocks to interest rates 6/30/02 12/31/01
----------------------------- ------- --------
+2% 0.7% (0.3%)
+1% 1.3 0.4
-1% (2.3) (2.9)
-2% (5.4) (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
changes in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from the experience on which the assumptions were based.
25
Regulatory Matters
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 June 30, 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 regulatory capital ratios at
June 30, 2001 and December 31, 2000:
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
Dollars in thousands
At June 30, 2001
Total risk based capital
First Republic Bank 44,350 11.88% 29,870 8.00% 37,338 10.00%
First Bank of DE 4,851 18.92% 2,051 8.00% 2,564 10.00%
Republic First Bancorp, Inc. 50,994 12.80% 31,865 8.00% 39,831 10.00%
Tier 1 risk based capital
First Republic Bank 39,879 10.68% 14,935 4.00% 22,403 6.00%
First Bank of DE 4,564 17.80% 1,026 4.00% 1,538 6.00%
Republic First Bancorp, Inc. 46,235 11.61% 15,932 4.00% 23,898 6.00%
Tier 1 leveraged capital
First Republic Bank 39,879 6.46% 30,846 5.00% 30,846 5.00%
First Bank of DE 4,564 14.30% 1,595 5.00% 1,595 5.00%
Republic First Bancorp, Inc. 46,235 7.13% 32,422 5.00% 32,422 5.00%
Actual For Capital To be well
Adequacy purposes capitalized under FRB
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 1 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 1 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%
26
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 $43.9 million at June 30, 2001 compared
to $50.7 million at December 31, 2000 as the Company used some of these funds to
pay down other borrowed funds.
Liquidity needs have historically been satisfied by generating core
deposits and certificates of deposit with competitive rates, buying federal
funds or utilizing the facilities of the Federal Home Loan Bank System. At June
30, 2001, the Bank had $173.5 million in unused lines of credit available to it,
substantially all of which was with the Federal Home Loan Bank, 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 June 30, 2001, the Company had outstanding commitments (including unused
lines of credit and letters of credit) of $53.0 million. Certificates of deposit
which are scheduled to mature within one year totaled $225.0 million at June 30,
2001, and other borrowed funds are scheduled to mature within the same period
amounted to $17.5 million. The Company anticipates that it will have sufficient
funds available to meet its current commitments.
The Banks' target liquidity levels are determined by comparisons of the
estimated repayment and marketability of the Banks' interest-earning assets,
with their projected future outflows of deposits and other liabilities.
Management currently believes that federal funds sold and securities 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 June 30, 2001 and
December 31, 2000, the Company had borrowed $142.5 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. The Committee's primary objective is to
optimize net interest margins, while managing the Banks' interest sensitivity at
prudent levels 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
27
margins and interest rate spreads, provide growth in net interest margins and
interest rate spreads and provide growth in net interest income through periods
of changing interest rates.
Securities Portfolio
At June 30, 2001, the Company had identified certain investment securities
that are being held for indefinite periods of time, including securities that
may 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 other
factors. Available for sale securities consist of US Government Agency
securities and other investments. The book and market values of securities
available for sale were $131.7 million and $129.5 million as of June 30, 2001,
respectively. The net unrealized loss on securities available for sale, as of
that date, was $2.2 million.
The following table represents the carrying and estimated fair values of
Investment Securities at June 30, 2001.
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized
Available-for-Sale Cost Gain Loss Fair Value
-------------------------------------------------
Mortgage-backed $ 130,678 $ 28 $ (2,282) $ 128,424
U.S. Government Agencies 1,060 12 - 1,072
-------------------------------------------------
Total Available-for-Sale $ 131,738 $ 40 $ (2,282) $ 129,496
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Cost Gain Loss Fair Value
-------------------------------------------------
Mortgage-backed $ 1,645 $ 13 $ - $ 1,658
US Government Agencies 3,349 5 (1) 3,353
Other 9,026 6 - 9,032
-------------------------------------------------
Total Held-to-Maturity $ 14,020 $ 24 $(1) $ 14,043
-------------------------------------------------
28
Loan Portfolio
The Company's loan portfolio includes commercial and industrial loans,
commercial and residential construction real estate loans, commercial loans
secured by one-to-four family residential property as well as residential
property, home equity loans, consumer loans, short-term 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 Banks' had a combined
legal lending limit of approximately $7.0 million at June 30, 2001.
The Company's net loans increased $19.7 million, or 4.7%, to $438.0 million
at June 30, 2001 from $418.3 million at December 31, 2000.
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
(dollars in thousands) As of June 30, As of December 31,
2001 2000
---------------------------------------------------
Balance % of Total Balance % of Total
---------------------------------------------------
Commercial:
Real estate secured $ 208,967 47.2 $ 181,607 43.0
Non real estate secured 44,440 10.0 39,016 9.2
Unsecured 8,289 1.9 10,543 2.5
---------------------------------------------------
261,696 59.1 231,166 54.7
Residential Real Estate 175,158 39.6 188,432 44.6
Consumer & Other 5,931 1.3 2,787 0.7
---------------------------------------------------
Total Loans 442,785 100.0% 422,385 100.0%
Less allowance for loan
losses (4,758) (4,072)
------------ ----------
Net loans $ 438,027 $ 418,313
============ ==========
Credit Quality
The Company's written lending policies require underwriting, documentation
and credit analysis standards to be met prior to funding. The Board of Directors
reviews selected loans monthly to monitor underwriting standards.
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
29
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.
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
June 30, December 31,
2001 2000
------------------------------
(dollars in thousands)
Loans accruing, but past due
90 days or more $5,571 $91
Non-accrual loans 2,896 1,350
Restructured loans - 1,982
------------------------------
Total non-performing loans (1) 8,467 3,423
Foreclosed real estate - -
------------------------------
Total non-performing assets (2) $8,467 $3,423
==============================
Non-performing loans as a percentage
of total loans net of unearned
Income 1.91% 0.81%
Non-performing assets as a percentage
of total assets 1.30% 0.52%
(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).
Total non-performing loans increased $5.0 million at June 30, 2001 when
compared to December 31, 2000 due principally to an increase in loans past due
90 days or more. Substantially all of the increase resulted from loans to a
single borrower totaling $5.4 million which became 90 days past due. The latest
appraisals available on these loans indicate that the collateral value exceeds
principal and accrued interest as of June 30, 2001. However, there can be no
assurance that if the Bank is required to liquidate the collateral, recoveries
will not be significantly below appraisal amounts, resulting in losses.
Non-accrual loans increased $1.5 million due to the placement of loans to two
borrowers on non-accrual status. The restructured loan of $2.0 million at
December 31, 2000 has been repaid.
30
The Company had delinquent loans as of June 30, 2001 and December 31, 2000
as follows; (i) 30 to 59 days past due, consisting of commercial, and consumer
and home equity loans in the aggregate principal amount of $1.4 million and $1.5
million respectively; and (ii) 60 to 89 days past due, consisting of commercial
and consumer loans in the aggregate principal amount of $47,000 and $435,000
respectively. These loans are believed to be adequately 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 June 30, 2001 and December 31, 2000, substandard loans totaled
approximately $9.9 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 classification of the above mentioned loans to
one borrower totaling $5.4 million as substandard. The loans to this borrower
are also included in the loans past due 90 days or more category.
The recorded investment in loans for which impairment has been recognized
totaled $2.9 million and $3.3 million at June 30, 2001 and December 31, 2000
respectively, of which $2.7 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 June 30, 2001, and
December 31, 2000 were $151,000 and 175,000, respectively. There were no
commitments to extend credit to any borrowers with impaired loans as of the end
of the periods presented herein.
At June 30, 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 $79.0 million, which
represented 17.8% 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 of cost or estimated
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 June 30, 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
$1.7 million as of June 30, 2001.
The Company had no credit exposure to "highly leveraged transactions" at
June 30, 2001, as defined by the Federal Reserve Bank.
31
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the six months
ended June 30, 2001 and 2000, and the twelve months ended December 31, 2000 is
as follows:
For the six months For the twelve months For the six months
ended ended ended
(dollars in thousands) June 30, 2001 December 31, 2000 June 30, 2000
---------------------- ----------------------- -----------------------
Balance at beginning of period........... $4,072 $3,208 $3,208
Charge-offs:
Commercial............................ 7 66 34
Real estate........................... - - -
Consumer and short-term............... 111 90 2
---------------------- ----------------------- -----------------------
Total charge-offs 118 156 36
---------------------- ----------------------- -----------------------
Recoveries:
Commercial............................ 10 340 72
Real estate........................... - - -
Consumer and short-term............... 17 14 -
---------------------- ----------------------- -----------------------
Total recoveries................... 27 354 36
---------------------- ----------------------- -----------------------
Net charge-offs/(recoveries)............. 91 (198) (36)
---------------------- ----------------------- -----------------------
Provision for loan losses................ 777 666 400
---------------------- ----------------------- -----------------------
Balance at end of period.............. $4,758 $4,072 $3,644
====================== ======================= =======================
Average loans outstanding (1)......... $431,246 $389,156 368,204
====================== ======================= =======================
As a percent of average loans (1):
Net charge-offs/Recoveries............ -% (0.05)% (0.01)%
Provision for loan losses............. 0.18% 0.17% 0.11%
Allowance for loan losses............. 1.10% 1.05% 0.99%
Allowance for loan losses to:
Total loans, net of unearned income at
period end......................... 1.07% 0.96% 0.93%
Total non-performing loans at period
end................................ 56.19% 118.96% 69.58%
(1) Includes nonaccruing loans.
Management makes a quarterly 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, management
considers specific loans, pools of similar loans, historical charge-off activity
and other factors in determining the loan loss reserve requirements. 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 on quarterly to the Board of Directors. Management believes that
the reserve for loan losses is adequate to absorb known and inherent losses.
32
Significant estimates are made by management in determining the allowance
for loan losses. 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, the present
value of future cash flows and other relevant factors. Since the allowance for
loan losses is dependent to a great extent, on the general economy and other
conditions that may be beyond the Banks' control, estimates of the allowance for
loan losses may differ materially in the near term. 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 June 30, 2001 At December 31, 2000
---------------- --------------------
Percent of Percent of
Loans Loans
In Each In Each
Amount Category Amount Category
(in 000's) To Loans (in 000's) To Loans
---------- --------- ---------- ----------
Allocation of allowance for
loan losses:
Commercial $4,054 47.2% $3,055 54.7%
Residential real estate 217 51.5% 224 44.6%
Consumer and other 311 1.3% 246 0.7%
Unallocated 176 -% 547 -%
------------------------------------------------
Total $4,758 100.00% $4,072 100.00%
========== =========
The unallocated allowance decreased $371,000 to $176,000 at June 30, 2001
from $547,000 at December 31, 2000. This decline resulted from the
classification of loans to one borrower as substandard which necessitated an
increase in the amount allocated to these loans. 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 may believe the
loan to be adequately collateralized. The unallocated loan loss reserves
represent inherent losses in the portfolio based on several considerations
including general economic conditions.
33
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
requirements. 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 June 30, 2001 and December 31, 2000, firm loan commitments
approximated $49.7 million and $60.3 million respectively, and commitments for
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.
34
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 Securities 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)
35
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 Board of Governors of the Federal Reserve Board.
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
No reports on form 8-K have been filed during the quarter for which this Form
10-Q is filed.
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic First Bancorp, Inc., Registrant
/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: August 14, 2001
37