UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 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 October 31, 2001
Page 1 of 38
Exhibit index appears on page 36
1
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 14
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 24
Part II: Other Information
Item 1: Legal Proceedings 36
Item 2: Changes in Securities and Use of Proceeds 36
Item 3: Defaults Upon Senior Securities 36
Item 4: Submission of Matters to a Vote of Security Holders 36
Item 5: Other Information 36
Item 6: Exhibits and Reports on Form 8-K 36
2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Page Number
(1) Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000...................... 4
(2) Consolidated Statements of Operations for the three and nine months ended
September 30, 2001 and 2000..................................................................... 5
(3) Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and 2000..................................................................... 6
(4) Notes to Consolidated Financial Statements...................................................... 7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of September 30, 2001 and December 31, 2000
dollars in thousands, except share data
(unaudited)
ASSETS: September 30, 2001 December 31, 2000
------------------------- -------------------------
Cash and due from banks $25,557 $20,990
Interest -bearing deposits with banks 424 460
Federal funds sold 33,077 29,207
------------------------- -------------------------
Total cash and cash equivalents 59,058 50,657
Other interest-earning restricted cash 4,323 -
Securities available for sale, at fair value 125,533 152,134
Securities held to maturity at amortized cost
(fair value of $13,547 and $17,750, respectively) 13,505 17,707
Loans receivable (net of allowance for loan losses of
$5,223 and $4,072, respectively) 460,829 418,313
Premises and equipment, net 5,369 5,153
Accrued income and other assets 10,211 11,673
------------------------- -------------------------
Total Assets $678,828 $655,637
========================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $65,925 $44,281
Demand - interest-bearing 48,594 29,784
Money market and savings 114,813 76,510
Time under $100,000 161,743 175,834
Time $100,000 or more 84,823 99,142
------------------------- -------------------------
Total Deposits 475,898 425,551
Other borrowed funds 142,500 176,442
Accrued expenses and other liabilities 12,491 10,614
------------------------- -------------------------
Total Liabilities 630,889 612,607
------------------------- -------------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000
Shares authorized; shares issued
6,358,126 as of September 30, 2001 and
December 31, 2000 63 63
Additional paid in capital 32,117 32,117
Retained earnings 16,500 14,446
Treasury stock at cost (175,172 shares
At September 30, 2001 and December 31, 2000) (1,541) (1,541)
Accumulated other comprehensive income (loss) 800 (2,055)
------------------------- -------------------------
Total Shareholders' Equity 47,939 43,030
------------------------- -------------------------
Total Liabilities and Shareholders' Equity $678,828 $655,637
========================= =========================
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Nine Months Ended September 30,
dollars in thousands, except per share data
(unaudited)
Quarter to Date Year to Date
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Interest and fees on loans $9,671 $9,111 $28,294 $24,739
Interest and dividend income on
federal funds sold and other 134 231 1,190 298
interest-earning balances
Interest on investments 2,190 2,958 7,119 9,225
------------------- ----------------- ------------- ---------------
Total interest income 11,995 12,300 36,603 34,262
------------------- ----------------- ------------- ---------------
Interest expense:
Demand interest-bearing 199 189 494 387
Money market and savings 728 800 2,442 1,942
Time $100,000 or more 1,241 1,365 4,374 3,412
Time under $100,000 2,517 2,699 8,071 7,137
Other borrowed funds 2,265 2,709 7,047 8,711
------------------- ----------------- ------------- ----------------
Total interest expense 6,950 7,762 22,428 21,589
------------------- ----------------- ------------- ---------------
Net interest income 5,045 4,538 14,175 12,673
------------------- ----------------- ------------- ----------------
Provision for loan losses 570 200 1,347 600
------------------- ----------------- ------------- ---------------
Net interest income after provision
for loan losses 4,475 4,338 12,828 12,073
------------------- ----------------- ------------- ---------------
Non-interest income:
Service charges 562 413 1,608 1,048
Gains on securities sold
- - 13 -
Tax refund revenue - - 253 181
Other income 32 24 78 82
------------------- ----------------- ------------- ---------------
594 437 1,952 1,311
Non-interest expenses:
Salaries and benefits 2,081 1,855 6,120 5,034
Occupancy and equipment 586 490 1,717 1,409
Legal expenses 310 254 429 373
Other expenses 1,116 1,061 3,449 2,637
------------------- ----------------- ------------- ---------------
4,093 3,660 11,715 9,453
------------------- ----------------- ------------- ---------------
Income before income taxes 976 1,115 3,065 3,931
Provision for income taxes 322 368 1,011 1,297
------------------- ----------------- ------------- ---------------
Net income $654 $747 $2,054 $2,634
=================== ================= ============= ===============
Net income per share:
------------------- ----------------- ------------- ---------------
Basic $0.11 $0.12 $0.33 $0.43
=================== ================= ============= ===============
------------------- ----------------- ------------- ---------------
Diluted $0.10 $0.12 $0.32 $0.42
=================== ================= ============= ===============
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
Dollars in thousands
(unaudited)
2001 2000
--------------- ----------------
Cash flows from operating activities:
Net income $2,054 $2,634
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,347 600
Loss on sale of other real estate owned - 53
Depreciation and amortization 949 456
Decrease in loans held for sale - 4,857
Decrease (increase) in accrued income
and other assets (8) 489
Increase in accrued expenses
and other 1,877 1,122
liabilities
Net increase in deferred fees 54 155
--------------- ----------------
Net cash provided by operating activities 6,273 10,366
--------------- ----------------
Cash flows from investing activities:
Purchase of securities
held to maturity (3,529) (1,100)
Proceeds from principal collected on securities 24,732 17,799
Proceeds from calls of held to maturity securities 5,831 -
Proceeds from sale of available for sale securities 7,842 -
Net increase in loans (43,917) (51,420)
Increase in other interest-earning restricted cash (4,323) -
Net proceeds from sale of other real estate owned - 590
Premises and equipment expenditures (913) (466)
--------------- ----------------
Net cash (used in) investing activities (14,277) (34,597)
--------------- ----------------
Cash flows from financing activities:
Net increase in demand, money
market and savings deposits 78,757 37,264
Net decrease in borrowed funds less than 90 days (16,442) (6,600)
Repayment of borrowed funds greater than 90 days (17,500) (50,000)
Net increase (decrease) in time deposits (28,410) 68,803
--------------- ----------------
Net cash provided by financing activities 16,405 49,467
--------------- ----------------
Increase in cash and cash equivalents 8,401 25,236
Cash and cash equivalents, beginning of period 50,657 21,110
--------------- ----------------
Cash and cash equivalents, end of period $59,058 $46,346
=============== ================
Supplemental disclosure:
Interest paid $23,969 $21,375
=============== ================
Taxes paid $1,750 $ 500
=============== ================
Non-cash transactions:
Change in unrealized gain/(loss) on securities available
for sale, net of tax $ 2,855 $1,717
Change in deferred taxes due to change in unrealized
gain on securities available for sale (1,471) (884)
(See notes to consolidated financial statements)
6
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 and First Bank
of Delaware offer a variety of banking services to individuals and businesses
primarily in Greater Philadelphia, Delaware and Southern New Jersey through
their offices and branches in Philadelphia and Montgomery Counties in
Pennsylvania and New Castle County in Delaware.
These interim financial statements have been prepared in accordance with
the 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
September 30, 2001, the results of operations for the three and nine month
periods ended September 30, 2001 and 2000, and the cash flows for the nine month
periods ended September 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 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.
7
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 possible that the estimates of the allowance for loan losses may vary
materially in the near term.
Other interest-earning restricted cash:
Other interest-earning restricted cash represents cash to fund an offsite
ATM network. 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 other intangible
assets should be accounted for after they have been initially recognized in the
financial statements.
8
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 non-amortization 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 significant impact on earnings, financial condition, or equity upon
adoption of Statement No. 142.
Asset Retirement Obligations
In June 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and (or) the normal operation of a
long-lived asset, except for certain obligations of lessees. As used in this
Statement, a legal obligation is an obligation that a party is required to
settle as a result of an existing or enacted law, statute, ordinance, or written
or oral contract or by legal construction of a contract under the doctrine of
promissory estoppel. This Statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.
This Statement amends FASB Statement No. 19, Financial Accounting and
Reporting by Oil and Gas Producing Companies, and it applies to all entities. It
is effective for financial statements issued for fiscal years beginning after
June 15, 2002. Earlier application is encouraged. The Company does not expect
the adoption of the Statement to have an impact on it's earnings, financial
condition, or equity.
Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. However, the Statement retains the
fundamental provisions of Statement 121 for (a) recognition and measurement of
the impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale.
This Statement supersedes the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a business.
However, this Statement retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
by abandonment, or in distribution to owners) or is classified as held for sale.
This Statement also amends ARB No. 51, Consolidated Financial Statements, to
eliminate the exception to consolidation for a temporarily controlled
subsidiary.
The provisions of this Statement are effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those fiscal years, with earlier application encouraged. The provisions of this
9
Statement generally are to be applied prospectively. The Company does not expect
the adoption of the Statement to have an impact on it's earnings, financial
condition, or equity.
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 four reportable segments: two community
banking segments, tax refund products and short-term consumer loans. The
community banking segments are primarily comprised of the results of operations
and financial condition of the Banks. Tax refund products are comprised of
accelerated check refunds ("ACRs") and refund anticipation loan ("RALs") offered
on a national basis to customers of Liberty Tax Services, a national tax
preparation firm. Short-term consumer loans are loans made to customers which
have principal amounts of $1,000 or less and terms of approximately two weeks.
These loans typically are made in states outside of the Company's Pennsylvania,
New Jersey and Delaware markets and involve rates and fees significantly
different than other loan products offered by the Banks.
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 products and short-term consumer loans are
evaluated based upon income before provision for income taxes.
Tax refund products and short-term consumer loans are provided to satisfy
consumer demands while diversifying the Company's earnings stream.
10
As of and for the nine months ended September 30,
(dollars in thousands)
2001 2000
----------- ------------
First Short- First Short-
Republic Delaware Tax term Republic Delaware Tax term
Bank Bank Refunds loans Total Bank Bank Refunds loans Total
----------------------------------------------- --------------------------------------------------------------
External customer
revenues
Interest income $33,321 $1,694 $ - $1,588 $36,603 $ 33,314 $ 948 $ - $ - $ 34,262
Other income 1,317 325 253 57 1,952 1,038 92 181 - 1,311
------- ------ ---- ------- -------- -------- ----- ---- ---- --------
Total external
customer revenues 34,638 2,019 253 1,645 38,555 34,352 1,040 181 - 35,573
------- ------ ---- ------- -------- -------- ----- ---- ---- --------
Intersegment
revenues:
Interest income - - - - - - - - - -
Other income 57 - - - 57 57 - - - 57
------- ------ ---- ------- -------- -------- ----- ---- ---- --------
Total intersegment
revenues 57 - - - 57 57 - - - 57
------- ------ ---- ------- -------- -------- ----- ---- ---- --------
Total revenues 34,695 2,019 253 1,645 38,612 34,409 1,040 181 - 35,630
------- ------ ---- ------- -------- -------- ----- ---- ---- --------
Depreciation and
amortization 851 98 - - 949 384 72 - - 456
Other external
operating expenses 30,731 2,320 174 1,316 34,541 29,749 1,437 - - 31,186
Intersegment
expense:
Other operating
expense - 57 - - 57 - 57 - - 57
Interest expense - - - - - - - - - -
------- ------ ---- ------- -------- -------- ----- ---- ---- --------
Segment expenses 31,582 2,475 174 1,316 35,547 30,133 1,566 - - 31,699
------- ------ ---- ------- -------- -------- ----- ---- ---- --------
Segment income
(loss) before
taxes $ 3,113 $ (456) $79 $ 329 $ 3,065 $ 4,276 $(526) $ 181 $ - $ 3,931
======= ====== ==== ======= ======== ======== ===== ===== ==== ========
Segment assets 626,945 43,383 - 8,500 678,828 613,425 28,024 - - 641,449
Capital
expenditures 739 139 25 10 913 401 65 - - 466
11
As of and for the three months ended September 30,
(dollars in thousands)
2001 2000
----------- ------------
First Short- First Short-
Republic Delaware Tax term Republic Delaware Tax term
Bank Bank Refunds loans Total Bank Bank Refunds loans Total
------------------------------------------------------------ -----------------------------------------------------
External customer
revenues:
Interest income $10,376 $ 550 $ - $ 1,069 $ 11,995 $ 11,853 $ 447 $ - $ - $ 12,300
Other income 489 105 - - 594 411 26 - - 437
--------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------
Total external
customer revenues 10,865 655 - 1,069 12,589 12,264 473 - - 12,737
--------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------
Intersegment
revenues:
Interest income - - - - - - - - - -
Other income 19 - - - 19 19 - - - 19
--------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------
Total intersegment
revenues 19 - - - 19 19 - - - 19
--------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------
Total revenues 10,884 655 - 1,069 12,608 12,283 473 - - 12,756
--------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------
Depreciation and
amortization 465 31 5 - 501 145 26 - - 171
Other external
operating expenses 9,622 773 - 717 11,112 10,811 640 - - 11,451
Intersegment
expense:
Other operating
expense - 19 - - 19 - 19 - - 19
Interest expense - - - - - - - - - -
--------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------
Segment expenses 10,087 823 5 717 11,632 10,956 685 - - 11,641
--------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------
Segment income
(loss) before
taxes $ 797 $ (168) $ (5) $ 352 $ 976 $ 1,327 $ (212) $ - $ - $ 1,115
========= ========= ========== ========== ============ ============== ============ ======== ====== ============
Segment assets 626,945 43,383 - 8,500 678,828 613,425 28,024 - - 641,449
Capital
expenditures 319 79 25 10 433 250 28 - - 278
12
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. 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 September 30, 2001 and 2000, respectively, 113,440 and 275,310
of CSEs were not dilutive, but may be dilutive in the future.
The following table is a comparison of EPS for the three and nine months
ended September 30, 2001 and 2000.
Quarter to Date Year to Date
2001 2000 2001 2000
Net income $654,000 $747,000 $2,054,000 $2,634,000
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 $0.11 $0.12 $0.33 $0.43
Add common stock equivalents
188,372 70,127 174,997 110,760
------- ------ ------- -------
representing dilutive stock options
Effect of dilutive CSE $(0.01) $0.00 $(0.01) $(0.01)
----- -------
Equals total weighted average
shares and CSE (diluted) 6,371,326 6,238,856 6,357,951 6,279,489
========= ========= ========= =========
Diluted EPS $0.10 $0.12 $0.32 $0.42
----- ===== ----- =====
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 Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- ---------------
Net income $654 $747 $2,054 $ 2,634
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains during the period
2,280 2,149 2,864 1,717
Less: Reclassification adjustment for gains
included in net income
- - (9) -
--------------- ---------------- --------------- ---------------
Comprehensive income $2,934 $2,896 $4,909 $4,351
=============== ================ =============== ===============
13
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 and applicable rules of the Securities
and Exchange Commission. Such statements typically 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:
September 30, 2001 Compared to December 31, 2000
Total assets increased $23.2 million to $678.8 million at September 30,
2001 versus $655.6 million at December 31, 2000. This increase was driven
principally by a $42.5 million increase in net loans, which were funded by
deposit growth.
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 $42.5 million, or 10.2%, to
$460.8 million at September 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 an appraised loan to value ratio 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 completion of
construction, residential construction loans are repaid by borrowers with the
proceeds of permanent first mortgage loans. Consistent with the Company's
long-term strategy of increasing the ratio of variable rate loans, rates on most
loan originations in the year 2001 were tied to the prime rate of interest. That
strategy reflects the repricing characteristics of the majority of the Banks'
funding sources which are also variable. At September 30, 2001, the Bank had
approximately $5.8 million of short-term consumer loans outstanding. These loans
were first offered in the second quarter of 2001 and represent a new business
14
segment. These loans have principal amounts of less than $1,000, and terms of
approximately two weeks. These loans are made in states outside of the Company's
Pennsylvania, New Jersey and Delaware markets.
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 $26.6 million, or 17.5%, to $125.5 million at September 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 $4.3 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 $4.2 million, or 23.7% to $13.5 million at September 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 represent
the Company's most liquid assets. The aggregate amount in these three categories
increased $8.4 million to $59.1 million at September 30, 2001 from $50.7 million
at December 31, 2000, reflecting increases in federal funds sold and due from
banks related to the timing of overnight cash letters.
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. At September 30, 2001,
the balance was $4.3 million versus $0 at December 31, 2000.
Deposits:
Deposits, which include non-interest-bearing demand deposits and
interest-bearing time, money market 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 $50.3 million, or 11.8%, to $475.9 million at September 30,
2001 from $425.6 million at December 31, 2000. The aggregate of transaction
accounts, which include demand, money market and savings accounts, increased
$78.8 million, or 52.3%, to $229.3 million at September 30, 2001 from $150.6
million at December 31, 2000. Certificates of deposit decreased by $28.4
million, or 10.3%, to $246.6 million at September 30, 2001 from $275.0 million
at December 31, 2000. The Company is emphasizing core deposit growth in 2001 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 replace them with core deposits.
15
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 September 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 September 30, 2001 and
December 31, 2000 was $47.9 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 $7.75 as of September 30, 2001. This increase was mainly attributable to
retained earnings and the $2.9 million increase in market value of the available
for sale securities portfolio, net of deferred taxes.
Results of Operations:
Three Months Ended September 30, 2001 Compared to September 30, 2000
Overview
The Company's net income decreased $93,000 to $654,000 for the three
months ended September 30, 2001, from $747,000 for the three months ended
September 30, 2000. Net interest income in those respective periods increased
$507,000, reflecting a 16.6% increase in combined average commercial loans and
residential construction loans and a 41.3% increase in average lower costing
core deposits and increased short-term loan income. However, significant amounts
of the resulting increase in margin were offset by margin contractions resulting
from the impact of the 75 basis point drop in the prime rate during the quarter,
as a result of Federal Reserve Board rate reductions. That drop compounded the
residual effect of comparable rate reductions of 275 basis points in the first
two quarters of the year. Specifically, loans tied to the prime rate of interest
were adjusted lower immediately, while the reductions in interest expense were
significantly dependent upon maturity and repricing of certificates of deposit.
The decrease in income also reflected increased operating expenses and a higher
provision for loan losses during the quarter resulting from short-term consumer
loans and the classification of approximately $5.4 million in loans to one
borrower as non-accrual which necessitated the reversal of $342,000 in accrued
interest income. Diluted earnings per share for the three months ended September
30, 2001 were $0.10 compared to $0.12 for the prior year period due to the
decrease in net income. Return on average assets and equity were 0.41% and 5.57%
respectively, compared to 0.48% and 6.78%, 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 3.31% for the three months ended September 30, 2001
compared to 3.03% for the three months ended September 30, 2000. This increase
reflected the 16.6% loan growth, the 41.3% core deposit growth and an increase
in short-term consumer loan fees as these fees contributed $1.1 million in
interest income and resulted in a 70 basis point increase in margin. Overall,
the Company was negatively impacted by the 75 basis point decline in the prime
rate of interest during the quarter and the continuing net effect of the 275
basis point decline in the first two quarters of the year. In addition, the
margin was negatively impacted 22 basis points resulting from the reversal of
16
$342,000 in interest income as a loan to one borrower was placed on non-accrual
status in the third quarter of 2001.
Net interest income increased $507,000, or 11.2%, to $5.0 million for
the three months ended September 30, 2001 from $4.5 million for the three months
ended September 30, 2000. This increase resulted from growth in commercial and
residential construction loans, core deposit growth and the addition of the
short-term consumer loans as noted above. These benefits were partially offset
by the impact of a decline in rates on loans tied to the prime rate of interest
and the effect of the interest reversal for the non-accrual loan. As shown in
the following Rate Volume table, the increase in net interest income was due to
the positive effect of volume changes totaling $1.9 million partially offset by
the negative impact of rate changes of $1.4 million. The positive impact from
volume changes was attributable to an increase in average interest-earning
assets, which increased $9.4 million (on average) to $608.7 million during the
quarter ended September 30, 2001, from $599.9 million for the prior comparable
period. The negative effect of the rate changes was driven by the decline in the
prime commercial loan rate resulting from Federal Reserve Board rate cuts, as
previously noted.
The Company's total interest income decreased $305,000 or 2.5%, to
$12.0 million for the three months ended September 30, 2001 from $12.3 million
for the three months ended September 30, 2000, reflecting the lower rate
environment.
Interest and fees on loans increased $560,000, or 6.2%, to $9.7 million
for the three months ended September 30, 2001 from $9.1 million for the prior
comparable period. This increase was driven by the 16.6% commercial and
residential construction loan growth and the addition of $1.1 million in
short-term loan fees which were not present in the prior comparable period.
Average loans increased $49.8 million, or 12.4% to $451.2 million. This was
partially offset by a decline in the rates earned on commercial loans tied to
the prime rate of interest resulting from Federal Reserve Board rate cuts and
the reversal of accrued interest on the non-accrual loans. Interest and dividend
income on securities decreased $768,000, or 26.0%, to $2.2 million for the three
months ended September 30, 2001 from $3.0 million for the prior comparable
period reflecting a decrease in the gross average balance of securities owned of
$41.8 million, or 22.7%, to $142.3 million for the three months ended September
30, 2001 from $184.1 million for the prior comparable period. This decline
reflects the Company's continuing strategy to reduce securities and redeploy the
proceeds into higher yielding assets. In addition to the reduced average
outstandings, the yield earned on these securities decreased 27 basis points to
6.16% due to the amortization, maturity and sale of higher yielding securities.
Federal funds sold and other interest earning balances income decreased due to
the lower interest rate environment.
Interest expense decreased $812,000 or 10.5%, to $6.9 million for the
three months ended September 30, 2001 from $7.8 million for the prior comparable
period. Interest-bearing liabilities averaged $528.0 million, a decrease of $8.4
million, or 1.6%, from $536.4 million for the prior year comparable period. The
net decline in interest-bearing liabilities contributed $409,000 to the decrease
in expense while the 52 basis point decline in rates paid on interest-bearing
liabilities contributed the remaining $403,000 of the decrease. The decline in
interest-bearing liabilities reflected the repayment of other borrowed funds
which was funded with $41.3 million growth in average deposits. The average rate
paid on interest-bearing liabilities decreased to 5.22% for the three months
ended September 30, 2001 from 5.74% for the prior comparable period, reflecting
the lower interest rate environment resulting from the Federal Reserve Board
rate cuts. Certificates of deposit (time deposit) interest expense decreased
$306,000 or 7.5%. This decrease was primarily due to a decline in the average
volume of certificates of deposit of $12.1 million, or 4.7%, to $243.3 million
for the three months ended September 30, 2001 from $256.3 million for the three
months ended September 30, 2000. That decline resulted in $205,000 of the
decrease. The decrease in average rate of interest paid on time deposits
contributed the remaining $101,000 of the decrease in interest expense. This
decline reflected the lower interest rate environment as mentioned previously.
17
Interest expense on FHLB advances and overnight federal funds purchased
was $2.3 million for the three months ended September 30, 2001 compared to $2.7
million for the prior comparable period, a decline of $444,000, or 16.4%. This
decrease reflected a decrease in the average volume of other borrowed funds of
$39.0 million, or 21.0% to $147.0 million for the three months ended September
30, 2001 from $186.0 million for the prior comparable period as borrowings were
replaced with core deposits. The decline in volume more than offset the 33 basis
point increase in average rate paid for borrowed funds, which rose from 5.78% at
September 30, 2000 to 6.11% at September 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.
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the period. Changes that are not due to volume or rate variances have been
allocated proportionally to both, based on their relative absolute values.
Rate/Volume Table
Three months ended September 30,
2001 versus 2000
(dollars in thousands)
Due to change in:
Volume Rate Total
------------ ------------ ------------
Interest earned on:
Federal funds sold $ 20 $ (117) $ (97)
Securities (648) (120) (768)
Loans 2,124 (1,564) 560
- ---------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,496 (1,801) (305)
Interest Expense of
Deposits
Interest-bearing demand deposits (108) 98 (10)
Money market and savings (283) 355 72
Time deposits 205 101 306
- ---------------------------------------------------------------------------------------------------------
Total deposit interest expense (186) 554 368
Other borrowed funds 595 (151) 444
- ---------------------------------------------------------------------------------------------------------
Total interest expense 409 403 812
- ---------------------------------------------------------------------------------------------------------
Net interest income $ 1,905 $(1,398) $ 507
- ---------------------------------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
known and estimated inherent losses in the portfolio. 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 $570,000 and $200,000 for the three months ended September 30, 2001
and 2000, respectively. Approximately $355,000 of the provision reflected the
impact of the short-term consumer loan program. As of September 30, 2001 and
2000, the ratio of the allowance for loan losses to total loans, net of deferred
loan fees was 1.12% and 0.93%, respectively.
18
Non-Interest Income
Total non-interest income increased $157,000 to $594,000 for the three
months ended September 30, 2001 from $437,000 for the prior comparable period.
This increase reflects increased loan advisory fees and increased service
charges on deposit accounts resulting from higher service charge rates and
growth in the number of core deposit accounts.
Non-Interest Expenses
Total non-interest expenses increased $433,000 or 11.8% to $4.1 million
for the three months ended September 30, 2001 as compared to the prior year
comparable period. Salaries and benefits increased $226,000 or 12.2% to $2.1
million for the three months ended September 30, 2001 from $1.9 million for the
comparable prior year period. Higher health insurance costs of $63,000 related
to a change on benefit plans, a decline of $50,000 in loan cost deferrals,
normal merit increases and expansion of the commercial loan department
contributed to the increase.
Occupancy and equipment expenses increased $96,000, or 19.6%, to
$586,000 for the three months ended September 30, 2001 from $491,000 for the
comparable prior year period. The increase resulted primarily from increased
depreciation expense associated with the Company's internal computer network and
other technology expenditures.
Other non-interest expenses including legal increased $111,000, or
8.5%, to $1.4 million for the three months ended September 30, 2001 from $1.3
million for the comparable prior year period in 2000. This increase reflected
increased legal fees, primarily related to loan collections.
Provision for Income Taxes
The provision for income taxes decreased $46,000, or 12.5%, to $322,000
for the three months ended September 30, 2001 from $368,000 for the comparable
prior year period. This decrease is 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%.
19
Nine Months Ended September 30, 2001 Compared to September 30, 2000
Overview
The Company's net income decreased $580,000 to $2.1 million for the
nine months ended September 30, 2001 from $2.6 million for the nine months ended
September 30, 2000. Net interest income for those respective periods increased
$1.5 million, reflecting a 20.5% increase in combined average commercial and
residential construction loans, the addition of higher yielding consumer loans,
and a 48.0% increase in average lower costing core deposits. However,
significant amounts of the resulting increase in margin were offset by margin
contractions resulting from the impact of the 350 basis point drop in the prime
rate of interest during the first nine months of the year, resulting from
Federal Reserve Board rate reductions. Specifically, loans tied to the prime
rate of interest were adjusted lower immediately, while the reductions in
interest expense were significantly dependent upon maturity and repricing of
certificates of deposit. The decrease in earnings also reflected increased
operating expenses as a result of continued expansion of the commercial banking
group and operational support for expanded product offerings. Earnings were
also negatively impacted by higher provisions for loan losses during the year
relating to short-term consumer loans. Finally, the classification of $5.4
million in loans to one borrower as non-accrual necessitated a $342,000 reversal
of previously accrued interest income, as well as an additional provision for
loan loss. Diluted earnings per share for the nine months ended September 30,
2001 were $0.32 compared to $0.42 for the nine months ended September 30, 2000,
due primarily to the decrease in net income. Return on average assets and
average equity were 0.42% and 6.00% respectively, compared to 0.59% and 8.25%
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 3.03% for the nine months ended September 30, 2001
versus 2.94% for the comparable prior year. This increase resulted from 20.5%
average growth in commercial and residential construction loans, the 48.0%
increase in average lower costing core deposits and the addition of the
short-term consumer loans as noted above. The modest increase in net interest
margin reflected the positive impact of fees on short-term consumer loans in the
second and third quarter of 2001 which offset the negative influence of the
lower interest rate environment. These fees totaled $1.6 million and contributed
approximately 34 basis points to the margin in 2001. The Company was negatively
impacted by the 350 basis point decline in the prime rate in the year 2001 which
immediately impacted the yield on interest-earning assets, especially in loans
tied to the prime rate of interest, in advance of repricing certificates of
deposit as well as the reversal of $342,000 in interest income for a loan placed
on non-accrual status during the third quarter of 2001.
The Company's net interest income increased $1.5 million, or 11.9%, to
$14.2 million for the nine months ended September 30, 2001 from $12.7 million
for the comparable prior year period. This increase resulted from the above
mentioned growth in commercial and residential construction loans, core deposit
growth and the addition of the short-term consumer loans as noted above. These
increases offset the reduction in interest income earned on securities. 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 $4.1 million partially
offset by the effect of lower interest rates which totaled $2.6 million. The
positive impact of volume changes was attributable to a $48.2 million increase
in average interest earning assets of 8.4%, to $623.8 million for the nine
months ended September 30, 2001, from $575.6 million for the comparable prior
year period.
The Company's total interest income increased $2.3 million, or 6.8%, to
$36.6 million for the nine months ended September 30, 2001 from $34.3 million
for the prior comparable period. This increase reflected loan growth as
20
described previously. The impact of the loan growth was partially offset by the
reduction in the prime interest rate of 350 basis points and lower income from
securities resulting from lower average balances outstanding.
Interest and fees on loans increased $3.6 million, or 14.4%, to $28.3
million for the nine months ended September 30, 2001 from $24.7 million for the
comparable prior year period. This increase reflected an increase in average
loans of $59.1 million, or 15.6%, to $438.5 million and the addition of the
short-term consumer loan product, which was partially offset by the impact of
the lower prime rate of interest. Interest and dividend income on securities
decreased $2.1 million, or 22.8%, to $7.1 million for the nine months ended
September 30, 2001 from $9.2 million for the comparable prior year period. This
decline was due to the $37.1 million, or 19.5% decrease in volume to an average
of $153.0 million and a decline in rate of 27 basis points to 6.20%. 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 $892,000 to $1.2 million.
Cash inflows from deposit generation and securities reductions exceeding loan
growth and repayments of borrowed funds were invested as federal funds.
The Company's total interest expense increased $839,000 or 3.9%, to
$22.4 million for the nine months ended September 30, 2001 from $21.6 million
for the prior comparable period. Interest-bearing liabilities averaged $543.6
million, an increase of $27.7 million, or 5.4%, from $515.5 million for the
comparable prior year period. Total interest-bearing deposits on average
increased $75.8 million or 24.2% to $389.8 million due to the success of the
Company's deposit generation strategies. A portion of these funds was used to
pay down other borrowed funds which declined $48.2 million on average.
Interest expense on time deposits increased $1.9 million or 18.0% to
$12.4 million. This increase was primarily due to an increase in average
certificates of deposit of $31.7 million, or 13.7%, to $263.4 million for the
nine months ended September 30, 2001 from $231.6 million for the comparable
prior year period. The average rate of interest on time deposits increased to
6.32% at September 30, 2001 versus 6.07% at September 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 $1.7 million, or 19.1% to $7.0 million for the
nine months ended September 30, 2001 compared to $8.7 million for the comparable
prior year period. This decrease reflected a $48.2 million, or 23.9% decrease in
the average volume of other borrowed funds to $153.8 million for the nine months
ended September 30, 2001 from $201.9 million for the comparable prior year
period. This decline was partially offset by the increase in the average rate on
other borrowed funds which increased 38 basis points from 5.75% at September 30,
2000 to 6.13% at September 30, 2001. The maturity of lower cost borrowings
resulted in an increase in the average rate.
21
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the nine month period ending September 30, 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
Nine months ended September 30,
2001 versus 2000
(dollars in thousands)
Due to change in:
Volume Rate Total
------------------ ------------- -------------
Interest Income
Federal Funds $ 978 $ (86) $ 892
Securities (1,738) (368) (2,106)
Loans 5,380 (1,825) 3,555
- --------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,620 (2,279) 2,341
Interest Expense
Deposits
Interest-bearing demand deposits (299) 192 (107)
Money market and savings (971) 471 (500)
Time deposits (1,499) (397) (1,896)
- --------------------------------------------------------------------------------------------------------------
Total deposit interest expense (2,769) 266 (2,503)
Other borrowed funds 2,208 (544) 1,664
- --------------------------------------------------------------------------------------------------------------
Total interest expense (561) (278) (839)
- --------------------------------------------------------------------------------------------------------------
Net interest income $ 4,059 $ (2,557) $ 1,502
- --------------------------------------------------------------------------------------------------------------
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
known and estimated inherent losses in the portfolio. 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 $1.3 million and $600,000 for the nine months ended September 30,
2001 and 2000, respectively. The increase was impacted by the classification of
$5.4 million in loans to a single borrower as substandard. Approximately
$535,000 of the increased provision reflected the results of the short-term
consumer loan program. As of September 30, 2001 and 2000, the ratio of the
allowance for loan losses to total loans, net of deferred loan fees was 1.12%
and 0.93%, respectively.
22
Non-Interest Income
Total non-interest income increased $641,000 to $2.0 million for the
nine months ended September 30, 2001 from $1.3 million for the comparable prior
year period. This was mainly attributable to an increase in non-interest income
from loan advisory fees, increased deposit service charges and fees earned on
participated loans. The increase in service fees on deposits is the result of
increases in transaction based accounts and an increase in service charge rates.
Non-Interest Expenses
Total non-interest expenses increased $2.3 million to $11.7 million for
the nine months ended September 30, 2001 from $9.5 million for the prior year
comparable period. Salaries and benefits increased $1.1 million or 21.6%, to
$6.1 million for the nine months ended September 30, 2001 from $5.0 million for
the prior year comparable period. The increase reflected an expansion of the
commercial and residential construction loan departments and operational support
for expanded product offerings. In addition to continued loan production, the
commercial construction and residential construction loan departments generate
non-interest income by generating related fees. Higher health insurance costs of
$203,000 due to a change in benefit plans and increased costs, a decline of
$168,000 in loan cost deferrals and normal merit increases also contributed to
the rise in salaries and benefits.
Occupancy and equipment expenses increased $308,000, or 21.9%, to $1.7
million for the nine months ended September 30, 2001 from $1.4 million for the
prior year comparable period. The increase resulted primarily from increased
depreciation expense associated with the Company's internal computer network and
other technology expenditures.
Other expenses including legal increased $868,000 to $3.9 million for
the nine months ended September 30, 2001 from $3.0 million for the same period
in 2000. This increase reflected increased legal fees, primarily related to loan
collections. In addition, audit and accounting, telephone, professional fees,
correspondent service charges, FDIC assessment charges and printing and supplies
were higher due to the overall growth of the company. Also, 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 $286,000, or 22.0%, to $1.0
million for the nine months ended September 30, 2001 from $1.3 million for the
prior year comparable period. This decrease is the result of the decrease in
pre-tax income. The effective tax rate for both years was approximately 33.0%.
23
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Company typically defines interest-sensitive assets and interest-sensitive
liabilities as those that reprice within one year or less. Maintaining an
appropriate match is a method of avoiding wide fluctuations in net interest
margin during periods of changing interest rates.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP ratio suggests that a financial institution
may be better positioned to take advantage of declining interest rates rather
than increasing interest rates, and a positive GAP ratio suggests the converse.
Static GAP analysis describes interest rate sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not impact all categories
of assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also requires arbitrary 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 likely 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, some of the deposits are reclassified from time
frames of more than 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 ways 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 September 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 prepayment assumptions were
made with regard to investment securities based upon the expected prepayment of
the underlying collateral of the mortgage backed securities.
24
Republic First Bancorp
Interest Sensitivity Gap
(dollars in thousands) As of September 30, 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, interest-
bearing balances and due
from banks $ 60,618 $ 11,155 $18,204 $ 31,458 $ 22,775 $ 13,286 $7,273 $12,093 $176,862 $176,904
Average interest rate 3.93% 5.82% 5.96% 6.04% 6.03% 5.94% 5.79% 6.05%
Loans receivable 197,729 27,595 40,049 60,677 47,877 34,260 19,417 33,225 460,829 478,905
Average interest rate 6.68% 8.28% 8.15% 8.12% 7.95% 8.06% 7.70% 6.54%
Total 258,347 38,750 58,253 92,135 70,652 47,546 26,690 45,318 637,691 655,809
-------------------------------------------------------------------------------------------------------
Cumulative Totals $258,347 $297,097 $355,350 $447,485 $518,137 $565,683 $592,373 $637,691
===================================================================================
Interest Sensitive Liabilities:
Demand Interest Bearing $ 28,822 $ 933 $ 617 $ 1,234 $ 1,234 $ 1,234 $ 14,520 $ - $48,594 $48,594
Average interest rate 0.89% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.00%
Savings Accounts 3,935 127 84 169 168 168 1,982 $ - 6,633 6,633
Average interest rate 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 0.00%
Money Market Accounts 64,163 2,077 1,374 2,747 2,747 2,747 32,325 $ - 108,180 108,180
Average interest rate 2.97% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% -%
Time Deposits 85,085 55,851 73,443 18,882 4,103 8,024 1,168 10 246,566 249,390
Average interest rate 5.67% 5.78% 5.37% 4.89% 6.07% 6.89% 6.17% 4.59%
FHLB Borrowings - 12,500 5,000 - 25,000 100,000 - - 142,500 151,420
Average interest rate -% 5.39% 6.05% -% 5.83% 6.28% 0.00% 0.00%
Total 182,005 71,488 80,518 23,032 33,252 112,173 49,995 10 552,473 564,217
-------------------------------------------------------------------------------------------------------
Cumulative Totals $182,005 $253,493 $334,011 $357,043 $390,295 $502,468 $552,463 $552,473
===================================================================================
Interest Rate
Sensitivity GAP $ 76,342 $(32,739) $(22,265) $69,103 $37,400 $(64,627) $(23,305) $45,308
Cumulative GAP $ 76,342 $43,604 $21,339 $90,442 $127,842 $63,215 $39,910 $ 85,218
Interest Sensitive Assets/
Interest Sensitive
Liabilities 142% 117% 106% 125% 133% 113% 107% 115%
Cumulative GAP/
Total Earning Assets 12% 7% 3% 14% 20% 10% 6% 13%
Total Earning Assets $637,691
==========
Off balance sheet items Notional value:
Commitments to
extend credit $ 3,777 $53,394
--------------------
Average interest rate 7.00% 7.00%
25
In addition to the GAP analysis, the Company utilizes income simulation
modeling in measuring its interest rate risk and managing its interest rate
sensitivity. Income simulation considers not only the impact of changing market
interest rates on forecasted net interest income, but also other factors such as
yield curve relationships, the volume and mix of assets and liabilities and
general market conditions.
Through the use of income simulation modeling, the Company has
estimated net interest income for the year ending September 30, 2002, based upon
the assets, liabilities and off-balance sheet financial instruments in existence
at September 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
September 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 9/30/02 12/31/01
----------------------------- ------- --------
+2% 1.7% (0.3%)
+1% 1.1 0.4
-1% (1.4) (2.9)
-2% (5.0) (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.
26
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 September
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
September 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 September 30, 2001
Total risk based capital
First Republic Bank 45,318 11.64% 31,152 8.00% 38,940 10.00%
First Bank of DE 5,036 20.07% 2,007 8.00% 2,509 10.00%
Republic First Bancorp, 52,111 12.59% 33,115 8.00% 41,393 10.00%
Inc.
Tier 1 risk based capital
First Republic Bank 40,432 10.38% 15,576 4.00% 23,364 6.00%
First Bank of DE 4,722 18.82% 1,004 4.00% 1,505 6.00%
Republic First Bancorp, 46,888 11.33% 16,557 4.00% 24,836 6.00%
Inc.
Tier 1 leveraged capital
First Republic Bank 40,432 6.74% 29,999 5.00% 29.999 5.00%
First Bank of DE 4,722 12.95% 1,823 5.00% 1,823 5.00%
Republic First Bancorp, 46,888 7.40% 31,666 5.00% 31,666 5.00%
Inc.
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%
27
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 cash and cash equivalents totaled $59.1 million at
September 30, 2001 compared to $50.7 million at December 31, 2000 due to timing
issues. Additionally, the majority of its securities are also available to
satisfy liquidity requirements through pledges to the FHLB to access its line of
credit.
Funding requirements 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
September 30, 2001, the Bank had $151.3 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 and
require pledging of the securities as noted above.
At September 30, 2001, the Company had outstanding commitments
(including unused lines of credit and letters of credit) of $57.2 million.
Certificates of deposit which are scheduled to mature within one year totaled
$214.4 million at September 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 projected future outflows of deposits and other liabilities. The Bank has
established lines of credit from correspondents, in the amount of $10.0 million,
as contingent sources of liquidity. Additionally, First Republic Bank has
established a line of credit with the Federal Home Loan Bank of Pittsburgh as
noted above. As of September 30, 2001 and December 31, 2000, First Republic Bank
had borrowed $142.5 million and $176.4 million, respectively, under its lines of
credit.
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 through periods of changing
interest rates.
28
Securities Portfolio
At September 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 $124.3 million and $125.5 million as of
September 30, 2001, respectively. The net unrealized gain on securities
available for sale, as of that date, was $1.2 million.
The following table represents the carrying and estimated fair values
of Investment Securities at September 30, 2001.
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized
Available-for-Sale Cost Gain Loss Fair Value
------------------------------------------------------------------------------------------
Mortgage-backed $ 123,318 $ 1,409 $ (209) $ 124,518
U.S. Government Agencies 1,003 12 - 1,015
------------------------------------------------------------------------------------------
Total Available-for-Sale $ 124,321 $ 1,421 $ (209) $ 125,533
------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Cost Gain Loss Fair Value
------------------------------------------------------------------------------------------
Mortgage-backed $ 1,563 $ 28 $ - $ 1,591
US Government Agencies 2,732 5 (1) 2,736
Other 9,210 10 - 9,220
------------------------------------------------------------------------------------------
Total Held-to-Maturity $ 13,505 $ 43 $ (1) $ 13,547
------------------------------------------------------------------------------------------
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 and other 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 but may be secured by other collateral and
personal guarantees. The Banks' had a combined legal lending limit of
approximately $7.0 million at September 30, 2001.
The Company's net loans increased $42.5 million, or 10.2%, to $460.8
million at September 30, 2001 from $418.3 million at December 31, 2000.
29
The following table sets forth the Company's loans by major categories for the
periods indicated:
(dollars in thousands) As of September 30, 2001 As of December 31, 2000
------------------------------------------------------------------------------
Balance % of Total Balance % of Total
------------------------------------------------------------------------------
Commercial:
Real estate secured $ 203,619 43.7 $ 181,607 43.0
Non real estate secured 48,410 10.4 39,016 9.2
Unsecured 8,311 1.8 10,543 2.5
------------------------------------------------------------------------------
260,340 55.9 231,166 54.7
Residential real estate 197,246 42.3 188,432 44.6
Consumer & other 8,466 1.8 2,787 0.7
------------------------------------------------------------------------------
Total loans 466,052 100.0% 422,385 100.0%
Less: allowance for loan losses (5,223) (4,072)
---------------- -------------------
Net loans $ 460,829 $ 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 repayment
performance (generally a minimum of nine 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. For non-accrual
loans 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.
30
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
September 30, 2001 December 31, 2000
---------------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $355 $91
Non-accrual loans 8,062 1,350
Restructured loans - 1,982
---------------------------------------------
Total non-performing loans (1) 8,417 3,423
Foreclosed real estate - -
---------------------------------------------
Total non-performing assets (2) $8,417 $3,423
=============================================
Non-performing loans as a percentage of total
loans net of unearned
Income 1.81% 0.81%
Non-performing assets as a percentage of total
assets 1.24% 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 increased $5.0 million at September 30, 2001
when compared to December 31, 2000 due principally to an increase in non-accrual
loans. The increase reflected $5.4 million of loans to a single borrower which
were classified as non-accrual during the third quarter. The latest appraisals
available on these loans indicate that the collateral value exceeds unpaid
principal as of September 30, 2001. However, there can be no assurance that if
the Bank is required to liquidate the collateral, recoveries will not be
significantly below appraised amounts, resulting in losses. The restructured
loan of $2.0 million at December 31, 2000 has been repaid.
The Company had delinquent loans as of September 30, 2001 and December
31, 2000 as follows: (i) 30 to 59 days past due, consisting of commercial,
consumer and home equity loans in the aggregate principal amount of $1.8 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 $1.3 million
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 September 30, 2001 and December 31, 2000,
respectively, substandard loans totaled approximately $9.9 million and $4.0
million and doubtful and loss loans totaled $119,000 and $113,000 respectively.
The increase in substandard loans was primarily the result of the classification
of the $5.4 million of loans previously noted as substandard. The loans to this
borrower are also reflected in the non-accrual category above.
31
The recorded investment in loans for which impairment has been
recognized totaled $7.9 million and $3.3 million at September 30, 2001 and
December 31, 2000, respectively, of which $7.7 million and $3.1 million
respectively, related to loans with no valuation allowance. Loans with valuation
allowances at September 30, 2001, and December 31, 2000 were $215,000 and
$175,000, respectively, with the allowances totaling $137,000 and $139,000,
respectively. There were no commitments to extend credit to any borrowers with
impaired loans as of the end of the periods presented herein.
At September 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 $89.4 million, which
represented 19.4% of gross loans receivable and loans to various non-residential
building operators totaling $69.3 million or 15.0% 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 reductions 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 September 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
$1.9 million as of September 30, 2001.
The Company had no credit exposure to "highly leveraged transactions"
at September 30, 2001, as defined by the Federal Reserve Bank.
32
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the nine
months ended September 30, 2001 and 2000, and the twelve months ended December
31, 2000 is as follows:
For the nine months For the twelve months For the nine months
ended ended ended
(dollars in thousands) September 30, 2001 December 31, 2000 September 30, 2000
---------------------- ----------------------- -----------------------
Balance at beginning of period........... $4,072 $3,208 $3,208
Charge-offs:
Commercial............................ 33 66 34
Real estate........................... - - -
Consumer and short-term............... 435 90 49
---------------------- ----------------------- -----------------------
Total charge-offs 468 156 83
---------------------- ----------------------- -----------------------
Recoveries:
Commercial............................ 255 340 77
Real estate........................... - -
Consumer and short-term............... 17 14 2
---------------------- ----------------------- -----------------------
Total recoveries................... 272 354 79
---------------------- ----------------------- -----------------------
Net charge-offs/(recoveries)............. 196 (198) 4
---------------------- ----------------------- -----------------------
Provision for loan losses................ 1,347 666 600
---------------------- ----------------------- -----------------------
Balance at end of period.............. $5,223 $4,072 $3,804
====================== ======================= =======================
Average loans outstanding (1)......... $438,464 $389,156 379,351
====================== ======================= =======================
As a percent of average loans (1):
Net charge-offs/recoveries............ 0.04% (0.05)% 0.0%
Provision for loan losses............. 0.31% 0.17% 0.16%
Allowance for loan losses............. 1.19% 1.05% 1.00%
Allowance for loan losses to:
Total loans, net of unearned income at
period end......................... 1.12% 0.96% 0.93%
Total non-performing loans at period
end................................ 62.05% 118.96% 108.23%
<FN>
(1) Includes nonaccruing loans.
</FN>
Management makes a quarterly estimate as to the provision from earnings
necessary to maintain an allowance for loan losses that is adequate based upon
its assessment of loan portfolio composition, classified problem loans, general
economic conditions and other factors. 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, to monitor the loan
portfolio on an ongoing basis. The loan review officer reports his findings
quarterly to the Board of Directors. Management believes that the reserve for
loan losses is adequate to absorb known and inherent losses.
33
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. There can be
no assurance that, if asset quality deteriorates in future periods, additions to
the allowance for loan losses will not be required.
The Company's management considers the entire allowance for loan losses
to be adequate however, to comply with regulatory reporting requirements,
management has allocated the allowance for loan losses as shown in the table
below into components by loan type at each period end. Through such allocations,
management does not intend to imply that actual future charge-offs will
necessarily follow the same pattern or that any portion of the allowance is
restricted.
At September 30, 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 $4,229 55.9% $3,055 54.7%
Residential real estate 213 42.3% 224 44.6%
Consumer and other... 366 1.8% 246 0.7%
Unallocated 415 -% 547 -%
-----------------------------------------------------------------------
Total $5,223 100.00% $4,072 100.00%
============ ===========
The unallocated allowance decreased $132,000 to $415,000 at September
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 loan categories to have specific reserves, 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.
34
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 September 30, 2001 and December 31, 2000, firm loan commitments
approximated $53.4 million and $60.3 million respectively, and commitments for
standby letters of credit approximated $3.8 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 necessity to structure the Company's
balance sheet to optimize the net interest margin.
35
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)
36
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, and 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.
37
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
Jere A. Young
President and Chief Executive Officer
Paul Frenkiel
Executive Vice President and Chief Financial Officer
Dated: November 14, 2001
38