SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (fee required)
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (no fee required)
For the transition period from to
Commission file number: 0-17007
FIRST REPUBLIC BANCORP, INC.
(Name of Small Business Issuer In Its Charter)
Pennsylvania 23-2486815
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1608 Walnut Street, Suite 1000, Philadelphia, PA 19103
(Address of principal Executive offices) (Zip Code)
Issuer's telephone number, including area code: (215)735-4422
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Check whether the Issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB [_]
State the Issuer's revenues for its most recent fiscal year: $19,517,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
of the bid and asked prices of such stock, as of a specified date within the
past 60 days. $27,633,843 based on the average of the bid and asked prices on
the National Association of Securities Dealers Automated Quotation System on
January 31, 1997.
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 2,847,969 as of February 28,
1997.
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FIRST REPUBLIC BANCORP, INC.
Form l0-KSB
INDEX
PART I Page
Item 1 Description of Business............................................ 3
Item 2 Description of Properties.......................................... 5
Item 3 Legal Proceedings.................................................. 6
Item 4 Submission of Matters to a Vote of Security Holders................ 8
PART II
Item 5 Market for Common Equity and Related Stockholder Matters........... 9
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 10
Item 7 Financial Statements............................................... 27
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................. 28
PART III
Item 9 Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act................................................ 28
Item 10 Executive Compensation............................................. 30
Item 11 Security Ownership of Certain Beneficial Owners and Management..... 32
Item 12 Certain Relationships and Related Transactions..................... 33
Item 13 Exhibits and Reports on Form 8-K................................... 33
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PART I
Item 1: Description of Business
First Republic Bancorp, Inc.
First Republic Bancorp, Inc. (the "Company") is a one-bank holding
company organized and incorporated under the laws of the Commonwealth of
Pennsylvania. Its wholly-owned subsidiary, First Republic Bank (the "Bank"),
offers a variety of banking services to individuals and businesses throughout
the Greater Philadelphia and South Jersey area through its office and branches
in Philadelphia and Montgomery Counties.
On June 7, 1996 Republic Bancorporation ("Republic"), parent company
of Republic Bank, its sole subsidiary, merged with and into ExecuFirst Bancorp,
Inc. ("ExecuFirst"), parent company of First Executive Bank, its sole
subsidiary. Republic exchanged all of its common stock, for 1,604,411 shares
(approximately 56% of the combined total) of ExecuFirst's common stock.
Effective upon the merger, ExecuFirst changed its name to First Republic
Bancorp, Inc. Upon completion of the merger, Republic's shareholders owned a
majority of the outstanding shares of the consolidated Company's stock. As a
result, the transaction was accounted for as a reverse acquisition of ExecuFirst
by Republic solely for accounting and financial reporting purposes. Therefore,
the Consolidated Balance Sheets, the Consolidated Statements of Income, and
Consolidated Statements of Cash Flows for the prior year periods are those of
Republic only, and may not be comparable to the current year Consolidated
Statements. The operations of ExecuFirst have been included in the Company's
financial statements since the date of acquisition. Historical shareholders'
equity of Republic prior to the merger has been retroactively restated (a
recapitalization) for the equivalent number of shares received in the merger
after giving effect to any differences in par value of the respective stock of
each Company.
The Company provides banking services through the Bank, and does not
presently engage in any activities other than these banking activities. The
principal executive offices of the Company and the Bank are located at 1608
Walnut Street, Suite 1000, Philadelphia, PA 19103. Its telephone number is (215)
735-4422.
The Company and the Bank have a total of 68 employees.
First Republic Bank
First Republic Bank, the Company's sole subsidiary, commenced
operations on November 3, 1988 as First Executive Bank. Concurrent with the
merger on June 7, 1996, the name was changed to First Republic Bank. The Bank is
a commercial bank chartered pursuant to the laws of the Commonwealth of
Pennsylvania and is a member of the Federal Reserve System and its primary
federal regulator is the Federal Reserve Board of Governors. The deposits held
by the Bank are insured, up to applicable limits, by the Bank Insurance Fund. It
presently conducts its principal banking activities through its three
Philadelphia offices at 1601 Walnut Street, 1515 Market Street, and in the
interior lobby of Graduate Hospital, 19th and Lombard Streets. Additionally, the
Bank operates a branch at 233 East Lancaster Avenue in Ardmore, Montgomery
County, Pennsylvania.
As of December 31, 1996, the Bank had total assets of approximately
$273,795,000, total shareholders equity of approximately $18,371,000, total
deposits of approximately $250,059,000 and net loans receivable outstanding of
approximately $170,002,000. The majority of such loans were made for commercial
purposes.
The Bank offers many consumer and commercial banking services,
including credit cards, money orders, travelers' checks and access to an
automated teller network, with an emphasis on serving the needs of individuals,
small and medium-sized businesses, executives, professionals and professional
organizations in its service area.
The Bank attempts to offer a high level of personalized service to
both its commercial and consumer customers. The Bank offers both commercial and
consumer deposit accounts, including checking accounts, interest-bearing "NOW"
accounts, insured money market accounts, certificates of deposit, savings
accounts and individual retirement accounts.
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The Bank offers a broad range of loan and credit facilities to the
businesses and residents of its service area, including secured and unsecured
loans, home improvement loans, bridge loans, mortgages, home equity lines of
credit, overdraft lines of credit and loans for tuition and the purchase of
marketable securities. The Bank actively solicits non-interest and
interest-bearing deposits from its borrowers.
Management attempts to minimize the Bank's credit risk through loan
application evaluation, approval and monitoring procedures. Since its inception,
the Bank has had a senior officer monitor compliance of the Bank's loan officers
with the Bank's lending policies and procedures.
The Bank also maintains an investment securities portfolio. Investment
securities are purchased by the Bank within strict standards of the Bank's
Investment Policy, which is approved annually by the Bank's board of directors.
The Investment Policy addresses such issues as permissible investment
categories, credit quality of the investment, maturities and concentrations of
investments. At December 31, 1996 and 1995, approximately 98% of the aggregate
dollar amount of the investment securities consisted of either U.S. Government
debt securities or U.S. Government agency issued mortgage backed securities or
collateralized mortgage obligations (CMOs). Credit risk associated with these
U.S. Government debt securities and the U.S. Government Agency securities are
minimal, with risk-based capital weighting factors of 0% and 20%, respectively.
Additionally, the Bank invests in collateralized mortgage obligations (CMOs).
These are fixed rate debt securities, with average lives between one and two
years, after principal payments commence.
The Bank's regulatory authorities have required the Bank to maintain
certain liquidity ratios to insure that the Bank maintains available funds, or
can obtain available funds at reasonable rates, in order to satisfy commitments
to borrowers and the demands of depositors. In response to these requirements,
the Bank has formed a Finance Committee, comprised of certain members of the
Bank's board of directors and senior management who determines such ratios. The
purpose of the committee is, in part, to monitor the Bank's liquidity and
adherence to the ratios. The Finance Committee meets at least quarterly. The
Bank is currently in compliance with all required liquidity ratios.
The Bank's lending activities are focused on small businesses within
the professional community. Real estate mortgage and commercial loans are the
most significant categories of the Bank's lending activities, representing
approximately 72% and 26% respectively, of total loans outstanding at December
31, 1996. Repayment of these loans is in part, dependent on general economic
conditions affecting the community, and the various businesses within the
community. Although the majority of the Bank's loan portfolio is collateralized
with real estate or other collateral, a portion of the commercial portfolio is
unsecured, representing loans made to borrowers considered to be of sufficient
strength to merit unsecured financing. This portion of the portfolio represents
the greatest risk of loss to the Bank. While management continues to follow
strict underwriting policies, and monitors loans through the Bank's loan review
officer, a credit risk is still inherent in the portfolio. Management has
further mitigated the credit risk within the loan portfolio by focusing on the
origination of collateralized loans, which represent a lower credit risk to the
Bank.
In addition to traditional commercial and consumer banking services,
the Bank is engaged, through its wholly owned subsidiary, Republic Services,
Inc. ("Republic Services") in a tax refund anticipation loan program (the
"Refant" program) which was formed in August 1991. The Refant program is a joint
venture with a wholly owned subsidiary of Jackson Hewitt, Inc. ("Hewitt"), a
company which provides income tax preparation services, and enables the Bank to
make refund anticipation loans ("RALs") to consumer taxpayers for whom Hewitt
prepares and electronically files federal income tax returns. The Bank
participated in the Refant program during 1996, but did not participate during
1995. See Item 6 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations" below.
Service Area
The Bank's primary service areas are an area of about 100 square
blocks in Center City, Philadelphia, including the Logan Square and Rittenhouse
Square neighborhoods, and Montgomery County. The Bank also serves the general
Center City area and, to a lesser extent, other Philadelphia neighborhoods and
the surrounding counties of Bucks, Chester and Delaware.
During the 1980s, the Center City Philadelphia business district has
experienced substantial economic growth during transitions from an industrial to
a service-oriented base. In addition, during this same period the Center City,
Philadelphia residential areas experienced an influx of white collar, upscale
wage earners. However, during the early 1990s, Philadelphia's economy was
materially affected by the economic downturn affecting the United States
generally, which has resulted in a reduction of commercial and residential real
estate values from their highs of the late 1980s and has caused certain real
properties, particularly office buildings, to be in oversupply. Although there
have been signs of resurgence in the Philadelphia area in recent times, there
can be no assurance that economic and demographic trends in the Bank's primary
service area will improve in the future.
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Competition
There is substantial competition among financial institutions in the
Bank's service area. The Bank competes with new and established local commercial
banks, as well as numerous regionally-based commercial banks. In addition to
competing with new and well-established commercial banking institutions for both
deposits and loan customers, the Bank competes directly with savings banks,
savings and loan associations, finance companies, credit unions, factors,
mortgage brokers, insurance companies, securities brokerage firms, mutual funds,
money market funds, private lenders and other institutions for deposits,
mortgages and consumer and commercial loans, as well as other services.
Competition among financial institutions is based upon a number of factors,
including, but not limited to, the quality of services rendered, interest rates
offered on deposit accounts, interest rates charged on loans and other credits,
service charges, the convenience of banking facilities, locations and hours of
operation and, in the case of loans to larger commercial borrowers, relative
lending limits. It is the view of Management that a combination of many factors,
including, but not limited to, the level of market interest rates, has increased
competition for funds.
To maintain market share, the Bank has priced its time deposit
products within the top one-third of its competition. Similarly, loan products
have also been priced to attract new and existing borrowers, according to area
competition and credit considerations. Management has also increased its
emphasis on business development through the hiring of additional lending staff
and targeting the Bank's niche market segment of small businesses and
professionals. The Bank intends to continue its focus on professionals while
expanding its commercial real estate and small business efforts. Additionally,
in a further attempt to diversify its portfolio and increase its market
penetration, the Bank has begun to emphasize consumer lending. Media advertising
is employed to obtain deposit funding required to support the increased loan
production. All such business development plans are highly dependent upon the
strength of the economic recovery in the Bank's market area, as well as the
specific businesses on which it focuses.
Many of the banks with which the Bank competes have more established
depositor and borrower relationships and greater financial resources than the
Bank and offer a wider range of deposit and lending instruments and possess
greater depth of management than the Bank. The Bank is subject to potential
intensified competition from new branches of established banks in the area as
well as new banks which could open in its trade area. Several de novo banks with
business strategies similar to those of the Bank have opened since the Bank's
inception. There are banks and other financial institutions which serve
surrounding areas and additional out-of-state financial institutions which
currently, or in the future, may compete in the Bank's market. The Bank competes
to attract deposits and loan applications both from customers of existing
institutions and from customers new to the greater Philadelphia area. The Bank
anticipates a continued increase in competition in its market area.
Item 2: Description of Properties
The Company leases approximately 18,000 square feet on the tenth and
eleventh floors of 1608 Walnut Street, Philadelphia, Pennsylvania. The space is
occupied by both the Company and the Bank and is used as executive offices, Bank
operations and commercial lending. Management believes that its present space is
adequate, but that future staffing needs may require the Bank to secure
additional space and the Bank is presently exploring several options in this
area.
The initial term of the lease on its headquarter facilities expired on
January 31, 1997. A new lease was signed effective February 1, 1997 with a term
of 10.5 years with annual rent expense of $84,217 payable monthly.
In addition to the base rent and building operation expenses, the
Company is required to pay all real estate taxes, assessments, and sewer costs,
water charges, excess levies, license and permit fees under its lease and to
maintain insurance on the premises. Pursuant to the terms of its lease, the
Company has a right of first refusal to purchase the leased premises. The Bank
also occupies under lease approximately 3,600 square feet on the ground floor
and 2,900 square feet in the mezzanine at the northwest corner of Three Penn
Center at 1515 Market Street in Center City, Philadelphia. This space contains a
banking floor, lobby, and operations center. The initial term expires on March
30, 1998 and contains three options to renew, the first for a three-year period
and the second and third for five years each at the then prevailing market
rates. The annual adjusted base rent at such location for 1996 was $336,984
payable monthly.
The Bank leases approximately 1,743 square feet of space on the ground
floor at 1601 Walnut Street, Center City Philadelphia, PA. This space contains a
banking area and safe. The initial ten-year term of the lease expires July, 2006
and contains one renewal option of five years. The annual rent for such location
was $42,600 in 1996 payable monthly.
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The Bank leases approximately 780 square feet in the lower level of
Pepper Pavilion at Graduate Hospital, 19th and Lombard Streets, Philadelphia,
Pennsylvania. The space contains a banking area, lobby, office, and a safe. The
initial five-year term on such lease expires June 30, 1997 and contains one
renewal option of five years, which the Company has exercised during the first
quarter of 1997. The annual rental at such location for 1996 was $26,000 payable
monthly.
The Bank leases approximately 798 square feet of space on the ground
floor and 903 square feet on the 2nd floor at 233 East Lancaster Avenue,
Ardmore, PA. The space contains a banking area and business development office.
The initial five-year term of the lease expires in September 2005. The annual
rental at such location for 1996 was $38,694 payable monthly.
Item 3: Legal Proceedings
As of the date hereof, the Company is not aware of any legal actions
or proceedings presently pending against the Company or the Bank.
During their 1995 examination of First Executive Bank, the Federal
Reserve Bank of Philadelphia (the "Federal Reserve Bank") and the Pennsylvania
Department of Banking (the "Department of Banking") identified certain
deficiencies and violations relating to (1) certain policies and procedures of
the First Executive Bank with respect to documentation, review and granting of
loans; certain aspects of its loan loss reserve; and certain other internal
controls, (ii) the staff of the First Executive Bank, and (iii) certain
reporting requirements under the Currency and Foreign Transaction Reporting Act.
In order to remedy these alleged deficiencies and violations, but without
admitting such allegations, on May 24, 1996, the Company and the Bank entered
into Written Supervisory Agreements (the "Supervisory Agreements") with each of
the Federal Reserve Bank and the Department of Banking.
On June 7, 1996, the date of the merger between Republic
Bancorporation and ExecuFirst Bancorp, the Supervisory Agreements were
terminated. Neither the Company nor the Bank is currently under any Supervisory
Agreement with any regulatory agency.
Supervision and Regulation
As a state-chartered bank, First Republic Bank is subject to
regulation, supervision and regular examination by the Pennsylvania Banking
Department and is subject to the provisions of the Pennsylvania Banking Code of
1965, as amended (the "Banking Code") The Banking Code contains provisions that
(1) require the maintenance of certain reserves against deposits, (2) limit the
type and amount of loans that may be made and the interest that may be charged
thereon, (3) restrict investments and other activities, (4) limit the payment of
dividends, (5) regulate the establishment of branch offices, (6) set minimum
capital stock and surplus requirements, and (7) restrict any person from
acquiring more than 10% of any class of outstanding stock of a bank. Current law
permits banking institutions to establish branches within any county in
Pennsylvania, but forbids branching across state lines. The amount of funds that
First Republic Bank may lend to a single borrower is limited generally under
Pennsylvania law to fifteen percent of the aggregate of its capital, surplus,
undivided profits and loan loss reserves (all as defined by statute and
regulation).
Pennsylvania law also requires that a bank obtain the approval of the
Pennsylvania Banking Department prior to amending its Articles of Incorporation
or effecting any merger where the surviving bank would be a Pennsylvania-
chartered bank. In reviewing a merger application, the Pennsylvania Banking
Department considers, among other things, whether the merger would be consistent
with adequate and sound banking practices and in the public interest on the
basis of several factors, including the potential effect of the merger on
competition and the convenience and needs of the area primarily to be served by
the bank resulting from the merger.
Federal Law
As a member of the Federal Reserve System, First Republic Bank is also
subject to regulation, supervision and regular examination by the Federal
Reserve Bank (the "FRB"). The prior approval of the FRB is required for the
establishment of branch offices and the consummation of a merger involving First
Republic Bank. In addition, under the Bank Merger Act of 1956, as amended, the
approval of the appropriate federal bank regulatory agency (the FRB, the
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Comptroller of the Currency or the Federal Deposit Insurance Corporation (the
"FDIC"), depending on the resulting institution) is required before First
Republic Bank may merge or consolidate with, or acquire all or substantially all
of the assets of another bank.
The FRB has adopted a regulation pursuant to the Change in Bank
Control Act of 1978, which, subject to certain exceptions, requires persons who
intend to acquire control of a bank or bank holding company to give at least 60
days prior written notice to the FRB. Control for the purpose of this regulation
exists when the acquiring party obtains voting control of at least 25% of any
class of the bank's voting securities. Subject to rebuttal, control is presumed
to exist when the acquiring party obtains voting control of at least 10% of any
class of the Bank's voting securities if (i) securities issued by the bank are
registered pursuant to Section 12 of the Securities Exchange Act of 1934, or
(ii) following the acquisition, there would be no holder larger than the
acquiring party. The Change in Bank Control Act of 1978 and the regulations
promulgated thereunder, authorize the FRB to disapprove any such acquisition on
certain specified grounds.
The FRB has issued regulations that require state member banks, such
as First Republic Bank, to maintain minimum levels of capital. The FDIC has also
issued regulations requiring maintenance of the same minimum levels of capital
by all FDIC-insured banks. In general, the regulations require a leveraged ratio
of 5.0% which has been found by the FRB to be fundamentally sound and
well-managed and which have been found to have no material financial weaknesses.
For banks found to have greater financial weaknesses or risk, the FRB and/or the
FDIC may require higher levels of minimum capital. First Republic Bank has been
found to be sound and well managed, by the FRB.
First Republic Bank is also required to comply with certain additional
"risk-based" capital adequacy guidelines issued by the FRB and the FDIC. These
guidelines assign varying risk weights to the individual assets held by a bank.
The guidelines also assign weights to the "credit-equivalent" amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts. Under these guidelines, banks are expected to meet a
minimum target ratio for "qualifying total capital" to weighted-risk assets of
8% at least one-half of which is required to be in the form of "tier 1 capital".
Qualifying total capital is divided into two separate categories or "tiers".
"Tier l capital" includes common stockholders' equity, certain qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill. "Tier 2 capital" components (limited
in the average to one-half of total qualifying capital) include allowances for
credit losses (within limits), certain excess levels of perpetual preferred
stock and certain types of "hybrid" capital instruments, subordinated debt and
other preferred stock. For additional information regarding First Republic
Bank's compliance with these "risk-based" capital adequacy guidelines, see
Management's Discussions and Analysis of Financial Conditions and Results of
Operations - Capital Resources.
Although the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 ("FIRREA") pertains primarily to thrift depository institutions
(such as savings and loan associations), certain FIRREA's provisions may now, or
in the future, affect First Republic Bank. In particular, if the Bank in the
future sought to acquire and own a single thrift institution, FIRREA would
permit such acquisition free from interstate banking laws. In addition, under
FIRREA all commonly controlled insured depository institutions are liable to the
FDIC for any loss the FDIC incurs in connection with defaults of or assistance
granted to their affiliated depository institutions. Under such
"cross-guarantee" arrangement, each depository institution could be subject to
claims for amounts the FDIC actually loses in connection with the operation of
or assistance granted to an affiliated institution in the event the affiliated
institution were ultimately to be taken over by the FDIC.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became law. Under FDICIA, financial
institutions are subject to increased regulatory scrutiny and must comply with
certain operations, managerial and compensation standards to be developed by
FDIC regulations. Under FDICIA, institutions must be classified in one of five
defined categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized). In the event
an institution's capital deteriorates to the "undercapitalized" category or
below, FDICIA prescribes an increasing amount of regulatory intervention,
including the institution by a bank of a capital restoration plan, a guarantee
of the plan by a parent institution and the placement of a hold on increases in
assets, number of branches or lines of business. If capital has reached the
significantly or critically undercapitalized levels, further material
restrictions can be imposed, including restrictions on interest payable on
accounts, dismissal of management and (in critically undercapitalized
situations) appointment of a receiver. Critically undercapitalized institutions
may not, beginning 60 days after becoming critically undercapitalized, make any
payment of principal or interest on their subordinated debt. For well
capitalized institutions, FDICIA provides authority for regulatory intervention
where the institution is deemed to be engaging in unsafe or unsound practices or
receives a less than satisfactory examination report rating for asset quality,
management, earnings or liquidity. All but well capitalized
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institutions are prohibited from accepting brokered deposits without prior
regulatory approval. Under such guidelines, First Republic Bank is considered
well capitalized.
FDICIA also requires the regulators to issue new rules establishing
certain minimum standards to which an institution must adhere including
standards requiring a minimum ratio of market value to book value. Additional
regulations are required to be developed relating to internal controls, loan
documentation, credit underwriting, interest rate exposure, asset growth and
excessive compensation, annual audits and in certain cases establish an
independent audit committee comprised entirely of outside directors. In
addition, FDICIA mandates that each institution undergo an annual on-site
regulatory examination. Examinations of institutions with total assets of $100
million or less that are well capitalized and well managed may be conducted at
18-month intervals.
First Republic Bank is also subject to numerous federal, state and
local laws and regulations which set forth specific restrictions and procedural
requirements with respect to the extension of credit practices, the disclosure
of credit terms and discrimination in credit transactions.
In accordance with federal law providing for deregulation of interest
on all deposits, banks and thrift organizations are now unrestricted by law or
regulation from paying interest at any rate on most time deposits. Commercial
banks have experienced an overall increase in their cost of funds over the past
few years as a result of this deregulation. It is not clear whether deregulation
and other changes in aspect of the banking industry will result in further
increases in the cost of funds in relation to prevailing lending rates.
Compliance with the extensive federal and state regulation of
commercial banking activities in the United States may substantially increase
the investment risks associated with the common stock, may be a greater burden
on First Republic Bank than on its larger competitors and may materially
increase the Bank's cost of doing business.
From time to time proposals are made in the United States Congress and
the Pennsylvania Legislature and before bank regulatory authorities which would
alter the powers of, and place restrictions on, different types of banking
organizations. Among legislative proposals of significance to First Republic
Bank are the relaxation of the restrictions on the acquisitions of out-of-state
banks by bank holding companies, the expansion of the powers of banks and thrift
institutions and the relaxation of the restrictions upon the activities in which
bank holding companies may engage. It is impossible to predict the impact of
these proposals, if enacted, on the future business of the Company or the Bank.
Profitability, Monetary Policy and Economic Conditions
Bank profitability is principally dependent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and other borrowings and the interest received by a bank on loans
and securities held in its investment portfolio comprise the major portion of a
bank's earnings. Thus, the earnings and growth of First Republic Bank will be
subject to the influence of economic conditions, both domestic and foreign, on
the levels of and changes in interest rates. In addition to being affected by
general economic conditions, the earnings and growth of First Republic Bank will
be affected by the policies of regulatory authorities, including the
Pennsylvania Banking Department, the FRB and the FDIC. An important function of
the FRB is to regulate the supply of money and other credit conditions in order
to manage interest rates. The monetary policies and regulations of the FRB have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and growth of First Republic Bank
cannot be determined. See "Management's Discussion and Analysis of Financial
Condition" and "Results of Operations."
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5: Market for Common Equity and Related Stockholder Matters
The common stock of the Company is listed for trading on the National
Association of Securities Dealers Automated Quotation System Smallcap Market
under the symbol "FRBK." Effective December 4, 1996, the Company's stock has
been trading on the NASDAQ National Market. As of January 31, 1997, there were
approximately 393 holders of record of the Company's common stock. The high and
low closing bid prices for the Company's common stock during each fiscal quarter
of 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
<S> <C> <C> <C> <C>
High Bid 6.500 7.375 8.375 10.675
Low Bid 4.500 5.625 5.594 7.500
1995
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
High Bid 3.875 4.250 5.500 6.500
Low Bid 3.000 3.500 3.500 4.250
</TABLE>
Market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
As of December 31, 1996, the Company had not paid any cash or stock
dividends.
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Item 6: Management's Discussion and Analysis of Financial Condition and
Results of Operations
1996 Compared to 1995
Results of Operations
For the year ended December 31, 1996 the Company reported net income
of $2,713,000 or $1.10 primary earnings per share compared with net income of
$603,000 or $0.38 primary earnings per share for the year ended December 31,
1995. The increase in the Company's results during 1996 was primarily the result
of the merger with ExecuFirst Bancorp, Inc., in addition to the Bank's
participation in the Refant tax anticipation program (the "Refant program"),
which generated approximately $2.1 million in revenues during 1996. The Bank did
not participate in the program during 1995. Net interest income increased to
$7,188,000 for the year ended December 31, 1996 from $4,011,000 for the year
ended December 31, 1995. This increase was primarily due to the increase in
interest earning assets, partially offset by interest-bearing liabilities, as a
result of the merger with ExecuFirst.
The Company's total assets increased approximately $142.7 million to
approximately $273.8 million at December 31, 1996 from approximately $131.1
million at December 31, 1995. This was primarily due to the merger with
ExecuFirst, however, the Company's asset mix remained relatively stable with
respect to total assets. Net loans receivable increased approximately $84.8
million to approximately $170.0 million at December 31, 1996 from approximately
$85.2 million at year end 1995. Net loans represented 62% and 65% of total
assets at December 31, 1996 and 1995, respectively. Total investment securities
increased approximately $42.6 million to approximately $81.0 million at December
31, 1996, from approximately $38.4 million at December 31, 1995. Investment
securities represented 30% and 29% of total assets at December 31, 1996 and
1995, respectively. Total deposits increased approximately $133.6 million during
the year to approximately $250.1 million from approximately $116.4 million at
December 31, 1995. Loans receivable generally represent the highest earning
assets of a bank's portfolio. The ratio of loans receivable to total deposits at
December 31, 1996 was approximately 68% compared to 73% at December 31, 1995.
The following tables set forth certain information relating to the Company's
average consolidated statements of financial condition and reflects the weighted
average yield on its assets and weighted average cost of its liabilities for the
periods ended December 31, 1996 and 1995. Such yields and costs are derived by
dividing actual income or expense by the daily average balance of assets or
liabilities, respectively, for the respective period. Non-accrual loans are
included in average loans receivable.
10
<PAGE>
<TABLE>
<CAPTION>
Average Balance Sheet
1996 1995
------------------------------------ -----------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest Earning Assets:
Loans Receivable $132,294,000 $11,798,000 8.92% $78,489,000 $7,710,000 9.82%
Deposits With Banks 404,000 20,000 4.95% 0 0 0.00%
Investments 59,985,000 3,739,000 6.23% 34,687,000 2,016,000 5.81%
Federal Funds Sold 26,488,000 1,346,000 5.08% 2,953,000 176,000 5.96%
------------------------------------ -----------------------------------
Total-Interest Earning
Assets 219,171,000 16,903,000 7.71% 116,129,000 9,902,000 8.53%
Non-Interest Earning
Assets 3,029,000 4,139,000
------------------------------------ -----------------------------------
Total Assets $222,200,000 $16,903,000 $120,268,000 $9,902,000
==================================== ===================================
Liabilities and
Shareholders' Equity
Interest Bearing
Liabilities:
Demand Non-interest Bearing $23,909,000 $8,939,000
Demand-Interest Bearing 5,623,000 $140,000 2.49% 1,320,000 $33,000 2.50%
Money Market & Savings 21,594,000 674,000 3.12% 14,063,000 516,000 3.67%
Other Time Deposits 148,834,000 8,663,000 5.82% 81,404,000 5,004,000 6.15%
Other debt 2,920,000 238,000 8.15% 4,431,000 338,000 7.63%
------------------------------------ -----------------------------------
Total Interest-Bearing
Liabilities 202,880,000 9,715,000 4.79% 110,157,000 5,891,000 5.35%
Non-Interest Bearing
Liabilities 4,124,000 1,844,000
------------- -------------
Total Liabilities 207,004,000 112,001,000
Shareholders' Equity 15,196,000 8,267,000
------------- -------------
Total Liabilities and
Shareholders' Equity $222,200,000 $9,715,000 $120,268,000 $5,891,000
==================================== ===================================
Net Interest Income/Rate
Spread $7,188,000 2.92% $4,011,000 3.18%
====================== =====================
Net Interest-Earning
Assets/Net Yield on
Interest Earning Assets $219,171,000 $7,188,000 3.28% $116,129,000 $4,011,000 3.45%
==================================== ===================================
Interest-Earning Assets
as a Percent of Interest-
Bearing Liabilities 108% 105%
======= =======
</TABLE>
11
<PAGE>
The Company's total interest income for fiscal year 1996 was
approximately $16,903,000 compared to $9,902,000 for fiscal year 1995, an
increase of approximately $7,001,000. Total interest expense for fiscal year
1996 was approximately $9,715,000 compared to $5,891,000 for the same period in
1995, an increase of approximately $3,824,000. As described in the Rate and
Volume Variance table below, the increase in interest income and interest
expense was principally the result of a higher volume of interest earning assets
and interest-bearing liabilities in 1996 as a result of the merger with
ExecuFirst Bancorp, Inc. The ratio of interest expense to interest income for
1996 was approximately 57.5% compared to a ratio of 59.5% in 1995.
The following table analyzes the rate and volume variances between the
Bank's interest-earning assets and interest-bearing liabilities for the years
ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Rate Volume Analysis
Total Caused By
Variance Rate Volume
<S> <C> <C> <C>
Interest Income
Loans Receivable $4,088,000 $(777,000) $4,865,000
Deposits With Banks 20,000 0 20,000
Investment Securities 1,723,000 158,000 1,565,000
Federal Funds Sold 1,170,000 (30,000) 1,200,000
---------------- ---------------- ----------------
Total-Interest Earning Assets $7,001,000 $(649,000) $7,650,000
================ ================ ================
Interest Expense
Demand-Interest-bearing $107,000 $0 $107,000
Money Market & Savings 158,000 (87,000) 245,000
Other Time Deposits 3,659,000 (283,000) 3,942,000
Subordinated debt and other borrowings (100,000) 0 (100,000)
---------------- ---------------- ----------------
Total Interest-Bearing Liabilities $3,824,000 $(370,000) $4,194,000
================ ================ ================
Net Interest Income $3,177,000 $(279,000) $3,456,000
================ ================ ================
</TABLE>
Interest on federal funds sold represented approximately 8.0% of the
Bank's gross interest income for the year ended December 31, 1996 compared to
1.8% for the year ended December 31, 1995. Interest on investments as a
percentage of total interest income was approximately 22.1% for the year ended
December 31, 1996 compared to 20.4% for the year ended December 31, 1995.
Interest on loans outstanding represented 69.8% of gross interest income during
1996 compared to 77.9% during 1995. Management believes that in the future,
interest on loans will continue to provide the largest percentage of its gross
interest income. Non-interest income totaled approximately $2,614,000. This is
an increase of $2,459,000 over the other non-interest income reported for the
year ended December 31, 1995 of $155,000. Non-interest income as a percentage of
gross revenues for the year ended December 31, 1996 and 1995 were 13.4% and
1.5%, respectively. This increase during 1996 was due to the Bank's
participation in the Refant program. The Bank did not participate in the Refant
program during 1995.
Salaries and employee benefits of approximately $2,872,000 for the
year ended December 31, 1996 represented approximately 51.5% of total
non-interest expenses for the year, as compared to 52.2% or $1,592,000 for the
year ended December 31 1995. This dollar increase was the result of additions in
staffing due to the merger.
Occupancy and equipment expenses totaled approximately $901,000 for
the year ended December 31, 1996 represented 16.1% of total expenses, compared
to $564,000 or 18.5% for the same period in 1995. These expenses were
12
<PAGE>
comprised mainly of rental, equipment and maintenance expense. Professional fees
declined to $282,000 from $327,000 as the result of management's efforts to
reduce the use of outside consultants.
Other expenses totaled approximately $1,526,000, or 27.3% of total
expenses, during the year ended December 31, 1996, compared to approximately
$566,000, or 18.6% of total expenses, during the year ended December 31, 1995.
Major components of this category included advertising, insurance other than
premises, and general/administrative expenses. The year-to-year increase of
$960,000 is attributable to increased operating costs, resulting from the merger
and increased size of the Company.
Management believes that continued profitable operations will be
contingent on several factors, both external and internal. Examples of internal
factors include Management's ability (i) to attract additional deposits to allow
further expansion of the Bank's loan and investment programs; (ii) to make
accurate credit analyses upon origination of loans; (iii) to deal expeditiously
and efficiently with non-performing assets; and (iv) to control or reduce
non-interest expenses through monitoring these costs; (v) and maximizing the
cost synergies afforded to the Company as a result of the merger. In response to
such external factors, the Company has aggressively pursued legal avenues with
respect to collection efforts of non-performing assets, has intensified its
marketing program, expanded the types of loans offered and increased the
internal loan review function. External factors over which the Company has
little or no control include the interest rate environment and the strength, or
weakness, of the economy in the Company's market area. Management believes that
the general economy in its market area will not experience a decline to any
material extent in the near term.
Financial Condition
Investment Securities
The Company's investments of approximately $81.0 million at December
31, 1996 consisted primarily of obligations of United States government agencies
with maturities of from one to five years. Approximately $75.1 million of
investment securities are intended to be held to maturity and approximately $6
million are classified as available for sale. Of the Held to Maturity Portfolio,
securities with an amortized cost of $23,682,000 consist of CMOs, backed by
securities of U.S. Government agencies. The Available For Sale portfolio
consists primarily of Small Business Association pooled loans and U.S.
Treasuries securities. At December 31, 1996 approximately $5.1 million of
securities were pledged to secure public deposits.
The Company's investment activities include managing an investment
securities portfolio valued at approximately $81 million on December 31, 1996.
Of this, approximately $23.7 million or 29% were collateralized mortgage
obligations. At December 31, 1996 and 1995, Collateralized Mortgage Obligations
totaled $23,682,000 and $25,215,000, respectively. These CMO debt securities are
fixed rate REMICs and have average lives of between one and two years, after
principal payments commence. The principal payments have commenced during 1996
and are expected to continue through August 1998. The timing and speed of the
principal paydowns of CMOs are heavily dependent on the prepayments of the
underlying collateral. If the underlying collateral prepays according to its
expected schedule, the cash flows and yields from the CMOs will be predictable.
However, if the prepayments of the underlying collateral is faster than
anticipated, the CMO will pay down at a more rapid rate, and the average life of
the CMO bond will be shortened. This would reduce the yield to maturity if the
CMO bonds were purchased at a premium, and increase the yield to maturity if the
CMO bonds were purchased at a discount. Conversely, if the underlying collateral
pays at a slower rate than expected, the CMO bond will have a longer average
life. This would increase the yield to maturity if the CMO bonds were purchased
at premium and reduce yield to maturity if the CMO bonds were purchased at a
discount. With respect to CMOs, the strategy is to invest in securities with
shorter rather than longer lives in order to minimize risk. All CMOs are backed
by securities of U.S. government agencies.
13
<PAGE>
The table below represents the Bank's investment securities held-to-maturity and
available for sale at December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO HISTORY
December 31, 1996 1995 1994
<S> <C> <C> <C>
Investment Securities Available-for-Sale:
U.S. Treasuries $1,001,000 $0 $0
U.S. Government agencies 4,131,000 4,348,000 0
CMOs 768,000 0 0
------------ ------------ ------------
Total investment securities available-for-sale $5,900,000 $4,348,000 $0
------------ ------------ ------------
Investment Securities Held-to-Maturity:
U.S. Treasuries $0 $1,002,000 $2,016,000
U.S. Government agencies 49,214,000 7,002,000 0
CMOs 23,682,000 25,215,000 25,402,000
Other securities 2,158,000 785,000 791,000
------------ ------------ ------------
Total investment securities held-to-maturity $ 75,054,000 $ 34,004,000 $ 28,209,000
------------ ------------ ------------
Total investment securities $ 80,954,000 $ 38,352,000 $ 28,209,000
============ ============ ============
</TABLE>
The following table represents the contractual maturity and prospective yields
of the Bank's investment securities portfolio as of December 31, 1996. Such
yields may not be representative of the actual yields due to prepayments and
sales of certain investment securities.
<TABLE>
<CAPTION>
INVESTMENT PORTFOLIO WEIGHTED AVERAGE YIELDS
Under 1-5 5-10 Over 10
December 31, 1996 1 Year Years Years Years Total
<S> <C> <C> <C> <C> <C>
Investment Securities Available-for-Sale
U.S. Treasuries fair value $1,001,000 $0 $0 $0 $1,001,000
U.S. Government agencies fair value 500,000 0 2,570,000 1,061,000 4,131,000
CMOs fair value 0 0 0 768,000 768,000
Other securities fair value 0 0 0 0 0
---------- ----------- ----------- ----------- -----------
Total investment $1,501,000 $0 $2,570,000 $1,829,000 $5,900,000
securities
Available for sale
Weighted average yield 5.43% 0.00% 7.15% 6.44% 6.49%
---------- ----------- ----------- ----------- -----------
Investment Securities Held-to-Maturity
U.S. Treasuries amortized cost $0 $0 $0 $0 $0
U.S. Government agencies amortized cost 0 15,986,000 33,228,000 0 49,214,000
CMOs amortized cost 0 0 0 23,682,000 23,682,000
Other securities amortized cost 2,158,000 2,158,000
---------- ----------- ----------- ----------- -----------
Total investment $0 $15,986,000 $33,228,000 $25,840,000 $75,054,000
securities
Held to maturity
Weighted average yield 0.00% 6.68% 7.35% 6.03% 6.75%
---------- ----------- ----------- ----------- -----------
</TABLE>
At December 31, 1996, the investment securities available for sale portfolio had
approximately $4,000 in gross unrealized gains.
14
<PAGE>
Of the approximately $172.1 million in total loans outstanding as of December
31, 1996, approximately $28.2 million were due in one year or less;
approximately $98.4 million were due in one-to-five years and approximately
$45.5 million were due after five years.
Listed below is a comparative schedule of gross loans receivable at
each of the five years ended December 31. The loans are categorized based on
bank regulatory requirements, which categorizations are not necessarily
indicative of the actual type or purpose of the loans.
<TABLE>
<CAPTION>
LOAN PORTFOLIO
December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial and industrial $ 45,007,000 $ 23,183,000 $ 27,429,000 $ 29,653,000 $ 33,669,000
Real estate-commercial 62,016,000 34,353,000 22,979,000 16,160,000 12,623,000
Real estate-residential 61,240,000 26,781,000 20,493,000 16,279,000 12,502,000
Consumer and other 3,831,000 1,546,000 1,182,000 829,000 994,000
------------ ------------ ------------ ------------ ------------
Total loans 172,094,000 85,863,000 72,083,000 62,921,000 59,788,000
Less: Allowance for loan losses (2,092,000) (680,000) (650,000) (460,000) (340,000)
------------ ------------ ------------ ------------ ------------
Total loans, net $170,002,000 $ 85,183,000 $ 71,433,000 $ 62,461,000 $ 59,448,000
============ ============ ============ ============ ============
</TABLE>
Listed below is a comparable schedule of non-performing assets at each of the
five years ended December 31,
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Loans past due 90 days or more and still accruing:
Commercial and industrial $0 $0 $9,000 $61,000 $173,000
Real estate-commercial 0 0 0 0 0
Real estate-residential 27,000 0 158,000 187,000 242,000
Consumer and other 0 11,000 29,000 8,000 26,000
---------- -------- -------- -------- --------
Total loans past due 90 days or more and still
accruing 27,000 11,000 196,000 256,000 441,000
Loans accounted for on a nonaccrual basis:
Commercial and industrial 107,000 526,000 878,000 274,000 0
Real estate-commercial 1,614,000 0 0 0 0
Real estate-residential 142,000 0 0 0 0
Consumer and other 29,000 0 0 0 0
---------- -------- -------- -------- --------
Total nonaccrual loans 1,892,000 526,000 878,000 274,000 0
Other real estate owned 295,000 295,000 0 0 0
---------- -------- -------- -------- --------
Total nonperforming assets * $2,187,000 $821,000 $878,000 $274,000 $0
========== ======== ======== ======== ========
Total as a percentage of total assets * 0.80% 0.63% 0.83% 0.27% 0.00%
*Excludes loan past due 90 days or more.
</TABLE>
The Bank believes its underwriting standards are consistent with the banking
industry. These standards are reviewed at least annually by the Bank's board of
directors, and modified as deemed appropriate. The Bank believes that its past
due loan ratios are also within industry standards. Management continually
strives to keep loan delinquencies at a minimum. Although the majority of the
Bank's loan portfolio is secured with real estate or other collateral, a portion
of the commercial portfolio, in the amount of approximately $7.2 million is
unsecured, representing the greatest credit risk to the Bank. The following show
the contractual maturity of the Bank's loan as of December 31, 1996.
15
<PAGE>
<TABLE>
<CAPTION>
LOAN MATURITIES AND INTEREST SENSITIVITY
Under 1-5 Over
1 Year Years 5 Years Total
<S> <C> <C> <C> <C>
Commercial and industrial $14,485,000 $22,553,000 $7,969,000 $45,007,000
Real estate-commercial 5,543,000 39,701,000 16,772,000 62,016,000
Real estate-residential 7,562,000 34,179,000 19,499,000 61,240,000
Consumer and other 607,000 1,946,000 1,278,000 3,831,0000
----------- ----------- ----------- ------------
Total $28,197,000 $98,379,000 $45,518,000 $172,094,000
----------- ----------- ----------- ------------
</TABLE>
Demand loans, loans having no stated schedule of repayment and no stated
maturity, are included in under one year.
The following shows the amount of loans due after one year that have fixed,
variable or adjustable interest rates at December 31, 1996:
Loans with fixed predetermined interest rates $80,018,000
Loans with variable or adjustable interest rates: $63,879,000
Of the total daily average deposits of approximately $202.9 million
held by the Bank during 1996, approximately $23.9 million, or 11.8%, represented
non-interest bearing deposits, compared to approximately $8.9 million, or 8.1%,
of approximately $110.2 million total daily average deposits during 1995. Total
1996 year end deposits consisted of approximately $32.6 million in
non-interest-bearing demand deposits, approximately $10.2 million in
interest-bearing demand deposits, approximately $27.2 million in savings
deposits and money market accounts, approximately $150.8 million in time
deposits under $100,000, and approximately $29.2 million in time deposits
greater than $100,000. In general, the Bank pays higher interest rates on time
deposits over $100,000 in principal amount. Due to the nature of time deposits
and changes in the interest rate market generally, it should be expected that
the Bank's deposit liabilities may fluctuate from period-to-period. The
following table represents the contractual maturity of time deposits greater
than $100,000 at December 31, 1996.
<TABLE>
<CAPTION>
TIME DEPOSITS GREATER THAN $100,000
Contractual Maturity 1-90 days 91-365 days 1-5 years Over 5 years Totals
<S> <C> <C> <C> <C> <C>
Amount $10,654,000 $10,501,000 $8,072,000 $0 $29,227,000
</TABLE>
Loan Loss Reserve
As of December 31, 1996, the Bank's allowance for loan losses equaled
approximately 1.23% of outstanding loans receivable, including non-accrual
loans, as compared to approximately .79% at year end 1995. During 1996,
additions made to the loan loss reserve resulted in a charge to earnings of
approximately $155,000 compared to a charge of $223,000 for the year ended
December 31, 1995. The Company's aggregate reserve for loan losses was
approximately $2,092,000 as of December 31, 1996 compared to $680,000 as of
December 31, 1995. Of such reserve for loan losses, management has allocated
approximately $252,000 for commercial purpose loans, and approximately
$1,342,000 for loans collateralized by real estate, and approximately $90,000
for consumer and other loans. The balance of $408,000 is unallocated.
The chart below shows an analysis of the Allowance for Loan Losses for
the five years ended December 31, 1996. During 1996, the Bank recognized
charge-offs against its allowance for loan losses in the aggregate amount of
approximately $391,000. Substantially all of such charged-off amounts related to
loans which had previously been classified as non-accrual loans. The ratio of
gross charge-offs to average loans outstanding during 1996 was 0.30%.
16
<PAGE>
<TABLE>
<CAPTION>
ALLOWANCE FOR POSSIBLE LOAN LOSSES
Year Ended December 31, 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Allowance for possible loan losses:
Balance, January 1 $ 680,000 $ 650,000 $ 460,000 $ 340,000 $ 355,000
Charge-offs:
Commercial and industrial 293,000 162,000 136,000 64,000 75,000
Real estate-commercial 0 0 0 0 0
Real estate-residential 0 50,000 0 0 0
Consumer and other 98,000 0 8,000 23,000 2,000
------------- ------------- ------------- ------------- -------------
Total charge-offs 391,000 212,000 144,000 87,000 77,000
Recoveries:
Commercial and industrial 101,000 16,000 6,000 0 0
Real estate-commercial 0 0 0 0 0
Real estate-residential 0 2,000 0 0 0
Consumer and other 19,000 1,000 5,000 0 0
------------- ------------- ------------- ------------- -------------
Total recoveries 120,000 19,000 11,000 0 0
Net charge-offs (271,000) (193,000) (133,000) (87,000) (77,000)
Acquisition of ExecuFirst Bancorp, Inc. 1,528,000 0 0 0 0
Provision for possible loan losses 155,000 223,000 323,000 207,000 62,000
------------- ------------- ------------- ------------- -------------
Balance, December 31 $ 2,092,000 $ 680,000 $ 650,000 $ 460,000 $ 340,000
============= ============= ============= ============= =============
Total loans:
Average $ 132,284,000 $ 78,489,000 $ 69,838,000 $ 62,489,000 $ 58,173,000
Year-end 172,094,000 85,863,000 72,083,000 62,921,000 59,788,000
Ratios:
Net charge-offs to:
Total average loans 0.20% 0.25% 0.19% 0.14% 0.13%
Total loans at year-end 0.16% 0.22% 0.18% 0.14% 0.13%
Allowance for possible loan losses 12.95% 28.38% 20.46% 18.91% 22.65%
Provision for possible loan losses 174.84% 86.55% 41.18% 42.03% 124.19%
Allowance for possible loan losses to:
Total average loans 1.58% 0.87% 0.93% 0.74% 0.58%
Total loans at year-end 1.22% 0.79% 0.90% 0.73% 0.57%
</TABLE>
The Company's Board of Directors periodically reviews the status of all
non-accrual and impaired loans, loans criticized by the Bank's regulators and
internal loan review officer, who reviews both the loan portfolio as well as the
overall adequacy of the loan loss reserve. During the review of the loan loss
reserve, the Board of Directors considers specific loans, pools of similar
loans, historical charge-off activity, and a supplemental reserve allocation as
a measure of conservatism for any unforeseen loan loss reserve requirements. The
sum of these components is compared to the loan loss reserve balance. Any
additions deemed necessary to the loan loss reserve balance are charged to
operating expenses.
17
<PAGE>
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") on January 1,
1995. SFAS 114 requires an adjustment to the carrying value of a loan through
the provision for possible credit losses when it is "probable" that a creditor
will be unable to collect all amounts due according to the contractual terms of
the loan. An insignificant delay, those less than 90 days, or insignificant
shortfall in amount of payments does not necessarily result in the loan being
identified as impaired. SFAS 114 was subsequently amended by Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure" ("SFAS 118") to allow a creditor
to use existing methods for recognizing interest income on an impaired loan. The
adoption of SFAS 114 did not have a material impact on financial position or the
results of operations, for the years ended December 31, 1996 or 1995.
<TABLE>
<CAPTION>
ALLOWANCE FOR POSSIBLE LOAN LOSS ALLOCATION
December 31, 1996 1995 1994 1993 1992
Percent Percent Percent Percent Percent
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and $ 252,000 0.15% $ 121,000 0.14% $ 104,000 0.14% $107,000 0.17% $ 6,000 0.01%
industrial
Real estate-commercial 1,321,000 0.77% 40,000 0.05% 42,000 0.06% 96,000 0.15% 70,000 0.12%
Real estate-residential 21,000 0.01% 40,000 0.05% 44,000 0.06% 103,000 0.16% 90,000 0.15%
Consumer and other 90,000 0.05% 9,000 0.01% 8,000 0.01% 0 0.00% 0 0.00%
Unallocated 408,000 0.24% 470,000 0.55% 452,000 0.63% 154,000 0.24% 174,000 0.29%
---------- ---- --------- ---- --------- ---- -------- ---- -------- ----
Total $2,092,000 1.22% $ 680,000 0.79% $ 650,000 0.90% $460,000 0.73% $340,000 0.57%
========== ==== ========= ==== ========= ==== ======== ==== ======== ====
</TABLE>
Percentage total loan lists the percentage of each loan type to total loans.
As of December 31, 1996 and 1995, the Bank had loans outstanding,
totaling approximately $1,892,000 and $526,000 respectively, which were
classified as non-accrual. At December 31, 1996 and 1995, these loans had
approximately $630,000 and $390,000 of Loan Loss Reserves allocated to them
respectively. During 1996, there were $391,000 in charge-offs related to
non-accrual loans, and $212,000 for the same period in 1995. However, management
is actively pursuing collection of such loans through the legal process. While
it is expected that a sizable portion of such loans may be uncollectible, it is
uncertain as to the amount of any actual loss that may be incurred in connection
with these loans. Had these loans been performing throughout fiscal year 1996 an
additional $135,000 in interest income would have been accrued. Interest income
on non-accrual loans included in income during 1996 was $60,000. The Company has
a policy of classifying as non-accrual, any loan for which payment of either
principal or interest, on a contractual basis, is not received for a period of
90 days, or any loan classified by the Bank or regulators such that full
repayment of principal or interest is considered doubtful. In addition to the
non-accrual and charged-off loans described above, as of December 31, 1996 and
1995, the Bank's delinquency list of loans (i) 30 to 59 days past due, consisted
of commercial and consumer loans respectively in the aggregate principal amount
of $2,016,000 and $1,001,000 respectively, which were contractually overdue in
the aggregate amount of approximately $69,000 and $67,000 respectively; and (ii)
60 to 89 days past due, consisted of commercial and consumer loan in the
aggregate principal amount of $1,053,000 and $487,000 respectively, which were
contractually overdue in the amount of approximately $60,000 and $29,000
respectively. In addition, the Bank has classified certain loans as substandard
and doubtful. At December 31, 1996 and 1995, substandard loans totaled
approximately $1,514,000 and $617,000 respectively; and doubtful loans totaled
approximately $207,000 and $237,000 respectively.
The Company continued a loan review program which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
and is reported quarterly to the Board of Directors. The Bank's Board of
Directors reviews the findings of the loan review program on a monthly basis.
Based on the recommendations of this program, past performance of the Bank's
loan portfolio and general economic conditions, management believes that the
reserve for loan losses is reasonable and would be adequate to absorb potential
losses related to problem assets.
18
<PAGE>
The following table is an analysis of the change in Other Real Estate Owned for
the years ended December 31, 1996 and 1995.
1996 1995
Balance at January 1, $295,000 $ 0
Additions 0 295,000
Charge-offs 0 0
-------- --------
Balance at December 31, $295,000 $295,000
======== ========
Commitments
In the normal course of its business, the Bank makes commitments to
extend credit and issues standby letters of credit. Generally, such commitments
are provided as a service to its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirement. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The type and amount of collateral obtained, if deemed
necessary upon extension of credit, are based on management's credit evaluation
of the borrower. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers and are based on management's
evaluation of the creditworthiness of the borrower and the quality of the
collateral. At December 31, 1996, 1995 and 1994, firm loan commitments
approximated $28,500,000, $15,741,000 and $7,423,000 respectively and
commitments of standby letters of credit approximated $1,129,000, $419,000 and
$602,000 respectively.
Capital Resources
The shareholders' equity of the Company as of December 31, 1996
totaled approximately $18,371,000 compared to approximately $8,622,000 as of
December 31, 1995. This increase was attributable to net income for the year of
approximately $2,713,000 and the equity associated with the merger of ExecuFirst
Bancorp.
Book value per share of the Company's common stock increased from
$5.37 as of December 31, 1995 to $6.45 as of December 31, 1996. The increase was
primarily attributable to net primary earnings per common share of $1.10 per
share partially offset by a decrease in fair value on securities
available-for-sale net of deferred income taxes of $0.01 per common primary
share for the year ended December 31, 1996.
The Company is required to comply with certain "risk-based" capital
adequacy guidelines issued by the FRB and the FDIC. The risk-based capital
guidelines assign varying risk weights to the individual assets held by a bank.
The guidelines also assign weights to the "credit-equivalent" amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts. Under these guidelines, banks are expected to meet a
minimum target ratio for "qualifying total capital" to weighted risk assets of
8%, at least one-half of which is to be in the form of "tier 1 capital".
Qualifying total capital is divided into two separate categories or "tiers".
"Tier 1 capital" includes common stockholders' equity, certain qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited
in the aggregate to one-half of total qualifying capital) includes allowances
for credit losses (within limits), certain excess levels of perpetual preferred
stock and certain types of "hybrid" capital instruments, subordinated debt and
other preferred stock. The outstanding subordinated Debentures qualify as "tier
2 capital" for purposes of the federal capital adequacy guidelines, although the
Debentures are treated as debt rather than capital under Pennsylvania banking
law. Applying the federal guidelines, the ratio of qualifying total capital to
weighted-risk assets, was 11.25% and 12.38% at December 31, 1996 and 1995,
respectively, and as required by the guidelines, at least one-half of the
qualifying total capital consisted of tier l capital elements. Tier l risk-based
capital ratios on December 31, 1996 and 1995 were 10.08% and 8.40%,
respectively. At December 31, 1995, the Company exceeded the requirements for
risk-based capital adequacy.
19
<PAGE>
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 December
31, 1996 and 1995, the leverage ratio was 6.65% and 6.58%, respectively.
Accordingly, at December 31, 1996 and 1995, the Company was considered "well
capitalized" under FRB and FDIC regulations.
Regulatory Capital Requirements
The following table presents the Bank's capital regulatory ratios at
December 31, 1996:
Tier I Capital $ 18,034,000
Tier II Capital 2,092,000
---------------
Total Capital $ 20,126,000
Total Average Quarterly Assets $ 271,009,000
Total Risk-Weighted Assets(1) $ 178,834,000
Tier I Risk-Based Capital Ratio(2) 10.08%
Required Tier I Risk-Based Capital Ratio 4.00%
---------------
Excess Tier I Risk-Based Capital Ratio 6.08%
Total Risk Based Capital Ratio(3) 11.25%
Required Total Risk Based Capital Ratio 8.00%
---------------
Excess Total Risk Based Capital Ratio 3.25%
Tier I Leverage Ratio(4) 6.65%
Required Tier I Leverage Ratio 5.00%
---------------
Excess Tier I Leverage Ratio 1.65%
(1) Includes off-balance sheet items at credit-equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital
to Total Risk-weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier
II Capital to Total Risk-weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Total
Average Quarterly Assets.
The Bank's ability to maintain the required levels of capital is
substantially dependent upon the success of the Bank's capital and business
plans, the impact of future economic events on the Bank's loan customers, the
Bank`s ability to manage its interest rate risk and control its growth and other
operating expenses.
In addition to the above minimum capital requirements, the Federal
Reserve Bank approved a rule that became effective on December 19, 1992
implementing a statutory requirement that federal banking regulators take
specified "prompt corrective action" when an insured institution's capital level
falls below certain levels. The rule defines five capital categories based on
several of the above capital ratios. The Bank currently exceeds the levels
required for a bank to be classified as "well capitalized". However, the Federal
Reserve Bank may consider other criteria when determining such classifications
which consideration could result in a downgrading in such classifications.
The Company's capital-to-assets ratio increased from 6.58% as of
December 31, 1995 to 6.71% as of December 31, 1996. The Company's daily average
capital-to-assets ratio for calendar year 1996 was 6.84% compared to 6.87% for
the same period in 1995. Management anticipates that its capital-to-assets ratio
will be maintained at approximately the current level. The Company's daily
average return on equity for 1996, 1995 and 1994 was 17.9%, 7.3% and 10.6%,
respectively; and its daily average return on assets for 1996, 1995 and 1994 was
1.22%, 0.50% and 0.75% respectively.
20
<PAGE>
Liquidity
The Bank's target and actual liquidity levels are determined and
managed based on Management's comparison of the maturities and marketability of
the Bank's interest-earning assets with its projected future maturities of
deposits and other liabilities. Management currently believes that floating rate
commercial loans, short-term market instruments, such as 2-year United States
Treasury Notes, adjustable rate mortgage-backed securities issued by government
agencies, and federal funds, are the most appropriate approach to satisfy the
Bank's liquidity needs. The Bank has established collateralized lines of credit
from correspondents to assist in managing the Bank's liquidity position. Said
lines of credit total $7 million in the aggregate. Additionally, the Bank has
established a line of credit with the Federal Home Loan Bank of Pittsburgh with
a maximum borrowing capacity of approximately $92.0 million. No amount was
outstanding on any of the aforementioned lines of credit at December 31, 1996.
The Company's Board of Directors has appointed a Finance Committee to assist
Management in establishing parameters for investments.
Cash flows from operations have consistently provided a source of
liquidity to the Bank for the last three years. Operating cash flows are
primarily derived from cash provided from net income during the year. Cash used
in investment activities for the years ended December 31, 1996, 1995, and 1994
were primarily due to the investing of excess funds into investment securities,
as deposits have increased during 1996, 1995, and 1994. Cash provided by
financing activities have increased during 1996 and 1995, as the Bank had grown
its deposit base to fund anticipated loan growth.
The Bank's Finance Committee also acts as an Asset/Liability Management
Committee which is responsible for managing the liquidity position and interest
sensitivity of the Bank. Such committee's primary objective is to maximize net
interest margin in an ever changing rate environment, while balancing the Bank's
interest-sensitive assets and liabilities and providing adequate liquidity for
projected needs.
Management presently believes that the effect on the Bank of any future
rise in interest rates, reflected in higher cost of funds, would be beneficial
since the Bank has the ability to quickly increase yield on its interest earning
assets, primarily federal funds and floating rate commercial loans. However, a
decrease in interest rates generally could have a negative effect on the Bank,
due to the timing difference between repricing the Bank's liabilities, primarily
certificates of deposit, and the largely automatic repricing of its existing
interest-earning assets. As of December 31, 1996, 31.7% of the Bank's
interest-bearing deposits were to mature, and be repriceable, within three
months, and an additional 19.4% were to mature, and be repriceable, within three
to six months. Therefore, management believes that such an effect would be
minimal.
Since the assets and liabilities of the Company have diverse repricing
characteristics that influence net interest income, management analyzes interest
sensitivity through the use of gap analysis and simulation models. Interest rate
sensitivity management seeks to minimize the effect of interest rate changes on
net interest margins and interest rate spreads, and to provide growth in net
interest income through periods of changing interest rates. The Asset/Liability
Management Committee (ALCO) is responsible for managing interest rate risk and
for evaluating the impact of changing interest rate conditions on net interest
income.
Gap analysis measures the difference between volumes of rate-sensitive assets
and liabilities and quantifies these repricing differences for various time
intervals. Static gap analysis describes interest rate sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not impact all categories
of assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also involves assumptions on certain categories of assets and deposits.
For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at either their contractual maturity, estimated likely call date, or
earliest repricing opportunity. Mortgage-backed securities and amortizing loans
are scheduled based on their anticipated cash flow which also considers
prepayments based on historical data and current market trends. Savings
accounts, including passbook, statement savings, money market, and NOW accounts,
do not have a stated maturity or repricing term and can be withdrawn or repriced
at any time. This may impact the Company's margin if more expensive alternative
sources of deposits are required to fund loans or deposit runoff. Management
projects the repricing characteristics of these accounts based on historical
performance and assumptions that it believes reflect their rate sensitivity.
Therefore, for purposes of the gap analysis, these deposits are not considered
to reprice simultaneously. Accordingly, a portion of the deposits are moved into
time brackets exceeding one year. A positive gap results when the amount of
interest rate sensitive assets exceeds interest rate sensitive liabilities. A
negative gap results when the amount of interest rate sensitive liabilities
exceeds the interest rate sensitive assets.
21
<PAGE>
The Company primarily focuses on the management of the one year
interest rate sensitivity gap. At December 31, 1996, interest earnings assets
scheduled to mature, or likely to be called, repriced or repaid in one year were
approximately $145.4 million. Interest sensitive liabilities scheduled to mature
or reprice within one year were approximately $170.1 million. The one year
cumulative gap, which reflects the Company's interest sensitivity over a period
of time, was a negative $24.6 million at December 31, 1996. The cumulative
one-year gap equals (9.4) percent of total earnings assets. This negative or
liability sensitive gap will generally harm the Company in a declining interest
rate environment, while rising interest rates will positively impact the
Company.
<TABLE>
<CAPTION>
Interest Sensitive Gap
December 31, 1996
Dollar amounts in thousands
0 - 30 91 - 180 181 - 365 1 - 5 5 YRS &
Days Days Days Years Over Total
<S> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets:
Interest bearing deposits
with banks $ 170 $ 495 $ 0 $ 0 $ 0 $ 665
Federal funds sold 7,115 0 0 0 0 7,115
Investment securities 3,501 16,521 13,001 33,996 13,935 80,954
Total loans 90,843 4,512 9,284 53,174 14,281 172,094
--------- --------- --------- --------- --------- ---------
Totals 101,629 21,528 22,285 87,170 28,216 260,828
========= ========= ========= ========= ========= =========
Cumulative totals $ 101,629 $ 123,157 $ 145,442 $ 232,612 $ 260,828
========= ========= ========= ========= =========
Interest Sensitive Liabilities:
Demand interest bearing $ 5,090 $ 0 $ 0 $ 2,545 $ 2,546 $ 10,181
Savings accounts 1,270 0 0 -- 1,269 2,539
Money market accounts 12,313 0 0 6,157 6,231 24,701
Time deposits 50,254 42,204 58,945 28,624 0 180,027
--------- --------- --------- --------- ---------
Totals $ 68,927 $ 42,204 $ 58,945 $ 37,326 $ 10,046 $ 217,448
Cumulative totals $ 68,927 $ 111,131 $ 170,076 $ 207,402 $ 217,448
========= ========= ========= ========= =========
GAP $ 32,702 $ (20,676) $ (36,660) $ 49,844 $ 18,170 $ 43,380
Cumulative GAP $ 32,702 $ 12,026 $ (24,634) $ 25,210 $ 43,380
Interest Sensitive Assets/
Interest Sensitive Liabilities 1.5 1.1 0.9 1.1 1.2
Cumulative GAP/
Total Earning Assets 12.5% 4.6% -9.4% 9.7% 16.6%
Total Earning Assets $ 260,828
</TABLE>
22
<PAGE>
1995 Compared to 1994
For the fiscal year ended December 31, 1995, the Company reported net
income of $603,000, or $0.38 per share, as compared to net income of $807,000,
or $0.50 per share, for 1994, reflecting a decrease of $204,000 or 25%. The
decrease in net income was due primarily to the suspension of the Refant Program
for 1995 tax season compared to the prior year's tax season. This decrease in
income was partially offset by a 27% increase in net interest income after
provision for loan losses to $3,788,000 in 1995, compared to $2,974,000 in 1994.
At December 31, 1995, Republic had total assets of $131 million,
representing an increase of nearly $25 million, or 23%, over December 31, 1994.
The increase was concentrated in a $10 million increase in the investment
portfolio and a $14 million increase in its loan portfolio. Deposits increased
$28.4 million, or 32% from $88 million at December 31, 1994 to $116.4 million at
December 31, 1995. Management believes that the deposit growth was a result, in
part, of the continuing effort to attract customer deposits by offering rates at
the higher end of the range of market rates of interest. Management expects this
practice to decrease in the future, since the opening of the new branch in
suburban Philadelphia will enable Republic to gather more core deposits
(money-market accounts, savings accounts, demand deposits and lower-yielding
certificates of deposit) in its immediate service area. Further expansion of
additional branches will accelerate this trend.
Republic's net loans totaled $85 million at December 31, 1995,
representing 65% of total assets, an increase of $14 million or 19% from 1994.
The majority of the loan portfolio consists of loans secured by commercial and
residential real estate. Republic increased its allowance for loan losses to
$680,000 at December 31, 1995, as compared to $650,000 at December 31, 1994. The
loan loss allowance represented approximately 0.8% of total loans at December
31, 1995 down slightly from 0.9% at December 31, 1994. Republic believed that
the December 31, 1995 allowance for loan losses is sufficient to cover
reasonably expected losses in the loan portfolio.
The following table presents average balance sheets for the years
ending December 31, 1995 and 1994, and reflects the average yield on Republic's
assets and weighted average cost of its liabilities for the periods presented.
Such yields and costs are derived by dividing actual income or expense by the
daily average balance of assets or liabilities, respectively, for the respective
periods. Non-accrual loans are included in average loans receivable.
23
<PAGE>
<TABLE>
<CAPTION>
Average Balance Sheet
1995 1994
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest Earning Assets:
Loans Receivable $ 78,489,000 $ 7,710,000 9.82% $ 69,838,000 $ 5,521,000 7.91%
Deposits With Banks 0 0 0.00% 0 0 0.00%
Other Investments 34,687,000 2,016,000 5.81% 26,263,000 1,442,000 5.49%
Federal Funds Sold 2,953,000 176,000 5.96% 7,465,000 278,000 3.72%
------------ ------------ ---- ------------ ------------ ----
Total-Interest Earning
Assets 116,129,000 9,902,000 8.53% 103,566,000 7,241,000 6.99%
Non-Interest Earning
Assets 4,139,000 3,335,000
------------ ------------ ---- ------------ ------------ ----
Total Assets $120,268,000 $ 9,902,000 $106,901,000 $ 7,241,000
============ ============ ==== ============ ============ ====
Liabilities and
Shareholders' Equity
Interest Bearing Liabilities:
Demand Non-interest Bear $ 8,939,000 $ 5,837,000
Demand-Interest Bearing 1,320,000 $ 33,000 2.50% 1,423,000 $ 34,000 2.39%
Money Market & Savings 14,063,000 516,000 3.67% 18,856,000 627,000 3.33%
Other Time Deposits 81,404,000 5,004,000 6.15 68,152,000 3,003,000 4.41%
Other debt 4,431,000 338,000 7.63% 3,691,000 280,000 7.60%
------------ ------------ ---- ------------ ------------ ----
Total Interest-Bearing
Liabilities 110,157,000 5,891,000 5.35% 97,959,000 3,944,000 4.03%
Non-Interest Bearing
Liabilities 1,844,000 1,298,000
------------ ------------
Total Liabilities 112,001,000 99,257,000
Shareholders' Equity 8,267,000 7,642,000
------------ ------------
Total Liabilities and
Shareholders' Equity $120,268,000 $ 5,891,000 $106,899,000 $ 3,944,000
============ ============ ==== ============ ============ ====
Net Interest Income/Rate
Spread $ 4,011,000 3.18% $ 3,297,000 2.96%
============ ==== ============ ====
Net Interest-Earning
Assets/Net Yield on
Interest Earning Assets $116,129,000 $ 4,011,000 3.45% $103,566,000 $ 3,297,000 3.18%
============ ============ ==== ============ ============ ====
Interest-Earning Assets
as a Percent of Interest-
Bearing Liabilities 105% 105%
=== ===
</TABLE>
24
<PAGE>
Net Interest Income
Net interest income, which constitutes a significant source of income
for Republic, is the amount by which interest earned on assets exceeds the
interest paid on interest-bearing liabilities. The principal interest-earning
assets are loans made to businesses and individuals. Interest-bearing
liabilities primarily consist of time deposits, money market accounts, NOW
accounts and savings deposits. Time deposits comprise the largest portion of
interest-bearing liabilities and represents Republic's highest cost of funds.
For 1995, the average cost of interest-bearing liabilities was 5.35%, compared
to 4.03% in 1994. Yields on interest-earning assets were 8.53% for 1995 and ,
6.99% for 1994. Net interest income was positively impacted in 1995 and 1994 by
the lower interest rate environment.
Provision for Loan Losses
In the past, Republic has experienced a low level of loan losses, due
in part to its conservative loan policy. The amounts added to the provision for
loan losses were $223,000, and $323,000 for the years ended December 31, 1995
and 1994, respectively. Net loan charge-offs for the years ended December 31,
1995 and 1994, were $193,000 and $133,000, respectively. The ratio of the
allowance for loan losses to nonperforming loans (nonaccrual loans and loans
past due 90 days or more) was 121% at December 31, 1995 and 61% at December 31,
1994. Management believes that the then current ratio is a prudent ratio to
maintain and is in keeping with standards used by banking regulatory authorities
in evaluating the adequacy of such provision. Net charge-offs as a percentage of
net loans were .24% in 1995 and .19% in 1994.
Non-interest Income
Total non-interest income for 1995 was $155,000, compared with
$1,096,000 for 1994 primarily as a result of the suspension of the Refant
program.
Non-Interest Expense
Non-interest expense for 1995 increased 8%, to $3,049,000 from
$2,833,000 for 1994. These increases were the result of increased salary,
occupancy and FDIC expenses due to continued growth of Republic.
Salaries and employee benefits, which represented the largest component
of non-interest expense, totaled $1,592,000 in 1995, as compared with $1,284,000
in 1994. This increase reflects increased staffing levels due to an expending
customer base. Occupancy expense totaled $470,000 in 1995 as compared with
$425,000 in 1994. The increase in occupancy expense was a result of annual
increases in rental payments required to be made by Republic under the terms of
the lease for office space.
Although non-interest expense increased in each of the preceding three
years, the ratio of total non-interest expense to average assets for 1995 and
1994 was 2.5% and 2.6%, respectively. The consistency in the efficiency ratio
from year to year was attributable to management's continuing efforts to
maintain the growth of non-interest expenses at a level equal to or less than
the growth in average assets.
Management has sought to maintain a balanced interest rate risk
position to protect its net interest margin from market fluctuations. The
principal interest earnings assets are loans made to businesses and individuals.
Interest-bearing liabilities primarily consist of time deposits, money market
accounts, NOW accounts and savings deposits. Time deposits comprise the largest
portion of interest-bearing liabilities and represent the highest cost of funds.
For 1995, the average cost of interest-bearing liabilities was 5.35%, compared
to 4.03% in 1994. Yields on interest-earning assets were 8.53 for 1995 and 6.99
for 1994. Net interest income was positively impacted in 1995 by the lower
interest rate environment.
Investment Securities
Republic's investments of approximately $38 million at December 31,
1995 consisted primarily of obligations of United States government agencies
with maturities of from one to five years. Of this total, $34 million of
investment securities are intended to be held to maturity, with the balance of
$4 million held as available for sale. Of the Held to Maturity Portfolio,
securities with an amortized cost of $25,215,000 consist of Collateralized
Mortgage Obligations (CMOs), backed by securities of U.S. Government agencies.
Of this amount, $15,881,000 are CMOs backed by FHLMC securities and $9,006,000
are backed by FNMA securities. The Available For Sale portfolio consists
entirely of Small
25
<PAGE>
Business Association pooled loans. At December 31, 1995 and 1994, respectively,
no securities were pledged to secure public deposits and securities sold under
agreements to repurchase or for other purposes required or permitted by law.
Republic's investment activities include managing an investment
securities portfolio valued at approximately $38 million on December 31, 1995.
Of this, approximately $25 million or 66% were collateralized mortgage
obligations. At December 31, 1995 and 1994, CMOs totaled $25,215,000 and
$25,402,000, respectively. These CMO debt securities are fixed rate REMICs and
have average lives of between one and two years, after principal payments
commence. The principal payments are expected to begin at various times during
the period from February 1996 to August 1998. The timing and speed of the
principal paydowns of CMOs are heavily dependent on the prepayments of the
underlying collateral. If the underlying collateral prepays according to its
expected schedule, the cash flows and yields from the CMOs will be predictable.
However, if the prepayments of the underlying collateral is faster than
anticipated, the CMO will pay down at a more rapid rate, and the average life of
the CMO bond will be shortened. This would reduce the yield to maturity if the
CMO bonds were purchased at a premium, and increase the yield to maturity if the
CMO bonds were purchased at a discount. Conversely, if the underlying collateral
pays at a slower rate than expected, the CMO bond will have a longer average
life. This would increase the yield to maturity if the CMO bonds were purchased
at premium and reduce yield to maturity if the CMO bonds were purchased at a
discount. With respect to CMOs, the strategy is to invest in securities with
shorter rather than longer lives in order to minimize risk. All CMOs are backed
by securities by U.S. government agencies.
The following table analysis the maturity distribution and weighted
average yield of investment securities at December 31, 1995.
INVESTMENT SECURITIES MATURITY DISTRIBUTION
DECEMBER 31, 1995
<TABLE>
<CAPTION>
U.S. Government and Agencies Available for Sale
In One Year 1 - 5 Years Over 5 Years Total
<S> <C> <C> <C> <C>
Amortized Cost $ 0 $ 0 $4,320,000 $4,320,000
Market Value 4,348,000 4,348,000
Unrealized Gain/(Loss) 0 0 28,000 28,000
Weighted Average Yield 0.00% 0.00% 7.35% 7.35%
U.S. Government and Agencies Held to Maturity
In One Year 1 - 5 Years Over 5 Years Total
Amortized Cost $ 8,332,000 $ 0 $ 25,672,000 $ 34,004,000
Market Value 8,367,000 0 25,479,000 33,846,000
Unrealized Gain/(Loss) 37,000 0 (195,000) (158,000)
Weighted Average Yield 7.32% 0.00% 6.45% 6.67%
</TABLE>
Loan Portfolio
The primary source of income for Republic is the interest and fees
earned on loans. At December 31, 1995, total assets were $131 million, as
compared to $106 million at December 31, 1994. At December 31, 1995 and 1994,
Republic had net loans of $85.2 million and $71.4 million respectively,
representing 65% and 67% respectively, of total assets of $131 million and $106
million, respectively. Management believes that the increase in net loans during
the past three years is primarily attributable to increase loan demand resulting
from greater market acceptance in Republic's service area, as well as the
efforts of executive officers and directors in generating loan activity.
Non-Performing Loans
Generally, interest on loans is accrued and credited to income based
upon the principal balance outstanding. Loans are considered to be
non-performing if (a) they are on a non-accrual basis, (b) they are on an
accrual basis, but are contractually past due 90 days or more as to interest or
principal or (c) terms have been renegotiated because of a
26
<PAGE>
weakening in the position of the borrower to provide a reduction or deferral of
interest or principal. It is management's policy to discontinue the accrual of
interest income and classify a loan as non-accrual when management believes,
after considering economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection of interest is
doubtful. On December 31, 1995, an aggregate of $536,000 in loans were
classified as non-accrual and $28,000 in loans were classified as past due and
accruing, compared with $878,000 and $190,000 on December 31, 1994,
respectively.
Allowance for Loan Losses
Management continues to actively monitor asset quality and to charge
off loans against the allowance for loan losses when appropriate or to provide
specific loss allowances when necessary. At December 31, 1995, the amount of the
allowance for loan losses was approximately 0.8% of total net loans outstanding.
Although management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic conditions differ from the economic conditions in
the assumptions used in making the initial determinations. During 1995, Republic
recognized charge-offs in the amount of $212,000. The ratio of gross charge-offs
to average loans outstanding in 1995 was 0.25%. The same number for 1994 was
0.19%. In 1994, approximately $144,000 in loans were charged off.
Deposits
Deposits are the major source of Republic's funds for lending and other
investment purposes. Deposit inflows were significantly influenced by general
interest rate and market conditions. Republic used borrowings on a short-term
basis if necessary to compensate for reductions in the availability of other
sources of funds. Maturity terms, service fees and withdrawal penalties for
deposit activity are established periodically on the basis of funds acquisition
and liquidity requirements, market rates and federal regulations. At December
31, 1995, deposits totaled $116.4 million, an increase of $28.4 million or 32%
over 1994. At December 31, 1994, deposits totaled $88 million. The increase in
deposits was in part attributable to the interest rates at the higher end of
market rates offered, particularly money market accounts and retail time
deposits, which comprise a major portion of the core deposit base.
One of the primary components of sound growth and profitability is core
deposit accumulation and retention. Core deposits consist of all deposits,
including demand, interest-bearing, non-interest bearing and money market , and
certificates of deposit of $100,000 or less. At December 31, 1995, core deposits
as defined above represented 93% of total deposits and 93% of total assets.
Volatile liabilities consist of certificates of deposit in excess of $100,000
and brokered deposits. At December 31, 1995, volatile liabilities represented
6.9% to total deposits and 6.2% of total assets. It is Republic's policy to
limit net loans and leases to 75% of total deposits. At December 31, 1995, net
loans and leases constituted 73.7% of total deposits.
In order to fund the Refant Program, Republic generally relied on some
brokered deposits, for which it paid higher interest rate than for its retail
deposits. As discussed below, Federal law restricts the ability of financial
institutions to accept, renew or roll-over brokered deposits. These restrictions
currently do not apply to Republic; however, it does not renew or roll-over
brokered deposits. Republic sought seek to expend its deposit base thereby
reducing its need to obtain brokered deposits as a source of funding, by
expanding its customer base through the proposed merger and opening new
branches.
Regulations promulgated by the FDIC pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1993 ("FDICIA"), place limitations on
the ability of insured depository institutions to accept, renew, or roll-over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other institutions having
the same type of charter in such depository institution's normal market area.
Under these regulations, "well capitalized" depository institutions may accept,
renew, or roll-over such deposits without restriction, "adequately capitalized"
depository institutions may accept , renew, or roll-over such deposits with a
waiver from the FDIC (subject to certain restrictions on payments of rates), and
"undercapitalized" depository institutions may not accept, renew or roll-over
such deposits. For the purposes of these regulations, Republic was a
"well-capitalized" depository institution at December 31, 1995.
Item 7: Financial Statements
The financial statements of the Company begin in Exhibit A on page 36.
27
<PAGE>
Item 8: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 9: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from
the definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1997 annual meeting of shareholders scheduled for
April 29, 1997.
Set forth below is certain information with respect to each of the
nominees for election to the Board of Directors, as well as to each of the other
continuing directors of the Corporation, including name, age, current class, the
period during which such person has served as a Director of the Corporation, if
any, such person's principal occupation and employment during the past five
years and the amount and percentage of the Corporation's Common Stock (based
upon 3,417,562 shares of Common Stock issued and outstanding as of March 14,
1997) beneficially owned (as determined in accordance with Rule 13d-3 of the
1934 Act) by such person as of March 14, 1997. It is the intention of the
persons named in the accompanying form of proxy to vote for all those nominees
listed above.
<TABLE>
<CAPTION>
Corporation's Common Stock
Position With the Beneficially Owned,
Current Corporation/Principal Occupation Director Directly or Indirectly, on
Name Class Age During the Past Five Years Since March 14, 1997
Amount Outstanding
<S> <C> <C> <C> <C> <C> <C>
Harry D. Madonna, Esq. * III 54 Chairman of the Board of the 1988 196,410 6.92%
Corporation; Partner, Blank, Rome,
Comisky & McCauley, 1977 to
present.
Michael J. Bradley III 51 Vice Chairman of the Board of the 1988 40,000 1.41%
Corporation and the Bank; Executive
Vice President, Acute and
Ambulatory Services, Mercy Health
Corporation of Southeastern
Pennsylvania; Principal, Paragon
Management Group, Inc. (management
consulting), 1991 to present.
Kenneth Adelberg * I 45 Director of the Corporation and the 1988 67,222 2.37%
Bank; President of The Hifi House
Group of Companies
(telecommunications equipment),
1976 to present
William Batoff * I 62 Director of the Corporation and the 1988 37,989 1.34%
Bank; President, Pioneer of
Philadelphia Title Insurance
Company, 1973 to 1993; Senior
Consultant, Cassidy & Associates
(government relations consulting
firm), 1992 to present
Daniel S. Berman * II 36 Director of the Corporation and the 1988 24,908 .88%
(Nominee) Bank; President, Berman Development
Corporation (real estate
development), 1990 to present
John F. D'Aprix II 53 Director of the Corporation and the 1991 8,000 .28%
(Nominee) Bank; President, Pennsylvania
College of Podiatric Medicine,
March 1995 to present; Chairman and
CEO of HouseCare America, Inc.
(Managed home healthcare), 1993 to
present; Chairman Artran Scanning
Technology (Imaging services),
12/91 to 12/92
Sheldon E. Goldberg I 64 Director of the Corporation and the 1989 45,750 1.61%
Bank; General Partner, Cumberland
Advisors, Vineland, NJ (investment
advisers), 1973 to present
28
<PAGE>
Corporation's Common Stock
Position With the Beneficially Owned,
Current Corporation/Principal Occupation Director Directly or Indirectly, on
Name Class Age During the Past Five Years Since March 14, 1997
Amount Outstanding
<S> <C> <C> <C> <C> <C> <C>
Gerald Levinson III 64 Director of the Corporation and the 1989 6,252 .22%
Bank; Independent Financial
Consultant, July 1985 to present;
Director; The Lannett Company
(public pharmaceutical company),
1979 to present.
Eustace W. Mita * II 45 Director of the Corporation and the 1988 48,928 1.72%
(Nominee) Bank; Chief Operating Officer ,
HAC Group, Inc. (training
consulting), 1989 to present.
Neal I. Rodin * III 58 Director of the Corporation and the 1988 79,526 2.80%
Bank; President, The Rodin Group
(real estate investment), 1975 to
present.
James E. Schleif II 54 Director of the Corporation and the 1993 16,000 .56%
(Nominee) Bank; Executive Vice President,
Administration and Finance, Mercy
Health Corporation of Southeastern
Pennsylvania (Chief Financial
Officer) 1978 to present.
Zeev Shenkman I 45 Executive Vice President and Chief -- 120,000 4.21%
(Nominee) Financial Officer of Global Sports,
Inc. 1996 to present. Executive
Vice President and Chief Financial
Officer of Today's Man, Inc. 1984
to 1995. Former director of
ExecuFirst Bancorp, parent company
of First Executive Bank.
Steven J. Shotz * III 51 Director of the Corporation and the 1988 119,529 4.21%
Bank; President of Quantum Group,
Inc. (Venture capital group), 1995
to present; President and Chief
Executive Officer, Shotz, Miller,
Glusman, Footer & Magarick, P.C.,
(Accounting firm), 1980 to 1994.
Rolf A. Stensrud * I 58 Director and Chief Operating 1988 58,339 2.06%
Officer of the Corporation;
President and Chief Executive
Officer of the Bank; former
President and Chief Executive
Officer Republic Bankcorporation
and Republic Bank.
Harris Wildstein, Esq. * II 51 Director of the Corporation and the 1988 138,756 4.89%
(Nominee) Bank; President of R&S Imports,
Ltd. and Vice President of HVW,
Inc. (Auto dealerships), 1978 to
present
All continuing 949,271 27.85%
directors and
nominees as a group
(15 persons)
- ---------------------------------
<FN>
* Previously a member of the Board of Directors of Republic.
</FN>
</TABLE>
29
<PAGE>
Item 10: Executive Compensation
The following table shows the annul compensation of the Chief Executive
Officer of the Company and the Bank and the Bank's most highly compensated
executive officers for the fiscal years 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Other All Other
Annual Annual
Name & Principal Position Year Salary Bonus Comp Options Comp
<S> <C> <C> <C> <C> <C> <C>
Zvi H. Muscal 1996 $220,000 $0 $9,000 $16,036
President of the Corporation 1995 220,000 0 15,000 16,036
Chairman of the Bank 1994 220,000 35,000 15,000 $12,000 16,036
Rolf A. Stensrud 1996 175,000 50,000
Executive Vice President and 1995 165,000 50,000
Chief Operating Officer of the 1994 155,000 0 17,615 23,827
Corporation; President of the
Bank
Kevin J. Gallagher 1996 105,000 31,069 5,000
Executive Vice President and 1995 95,000
Chief Lending Officer of the 1994 85,000
Bank
Jerome D. McTiernan 1996 95,000 10,000
Executive Vice President 1995 90,000
of the Bank 1994 85,000
George S. Rapp 1996 105,000 15,000 5,000
Executive Vice President and 1995 105,000
Chief Financial Officer of the
Corporation; Executive Vice
President and Chief Operating
Officer of the Bank
</TABLE>
Employment Agreements
Zvi H. Muscal
Mr. Muscal was employed by the Corporation pursuant to an employment
agreement the term of which shall continue until the expiration of four (4)
years from the date a notice of termination of the employment agreement is given
by either party, unless Mr. Muscal's 65th birthday shall occur during such
period, in which case the termination shall be deemed effective as of such
birthday (the "Employment Agreement"). Under the Employment Agreement, Mr.
Muscal presently receives an annual base salary of $220,000 per year. The base
salary payable to Mr. Muscal may be increased, based upon a review of his
performance. Mr. Muscal may also receive bonuses at the discretion of the Board.
Mr. Muscal's salary will continue to be paid for six months following his death,
if he dies during the term of the Employment Agreement. If Mr. Muscal's
employment is terminated for other than "good cause", as defined in the
Employment Agreement, or disability, Mr. Muscal will be entitled to receive all
of his salary and benefits for the remaining term of the Employment Agreement.
If Mr. Muscal terminates his employment prior to June 30, 1999, he will forfeit
certain of his existing stock options in accordance with a schedule established
in the Employment Agreement (1).
30
<PAGE>
Pursuant to the terms of the Employment Agreement, Mr. Muscal is
eligible to (i) receive options to purchase shares of Common Stock, in the
discretion of the Compensation Committee; and (ii) participate in any short and
long-term incentive compensation plans established by the Corporation. Mr.
Muscal is also provided with a car (at a monthly expense to the Corporation of
approximately $1,000, including insurance, car phone and parking) and a term
life insurance policy in principal amount equal to three (3) times his annual
salary. The Corporation also reimburses Mr. Muscal for certain travel and
entertainment expenses incurred in connection with his duties, including, but
not limited to, membership fees in certain private clubs. The Corporation has
established a supplemental retirement plan in which Mr. Muscal participates,
pursuant to which the Corporation makes contributions to fund future benefits at
a rate not greater than 15% of annual cash compensation.
The Bank also is required to provide Mr. Muscal with disability
insurance pursuant to the terms of the Employment Agreement. If Mr. Muscal is
unable to perform his duties due to a disability (as defined in the Employment
Agreement), he is entitled to receive his full salary and other benefits until
such time as the Bank terminates the Employment Agreement. The Bank may exercise
its termination right if Mr. Muscal is disabled for six consecutive months or
for eight months out of any twelve month period. If Mr. Muscal resumes his
duties within thirty days of such a notice and thereafter continues to work for
a period of six months, the termination notice will have no effect. If the Bank
does not terminate and the disability continues for more than six months, Mr.
Muscal shall only be eligible to receive total salary and benefits equaling two
thirds of his then current salary, including disability insurance and social
security benefits.
The Employment Agreement prohibits Mr. Muscal, during the term thereof
and for two years thereafter, from associating in any capacity (other than as a
less than 5% shareholder or as a customer) with any company or bank which
competes with the Corporation and/or with the Bank in the counties of
Philadelphia, Montgomery, Bucks, Delaware or Chester in Pennsylvania or in the
counties of Burlington, Camden and Gloucester in New Jersey or the county of
Wilmington in Delaware ("Competing Entities"). The Employment Agreement provides
for the non-disclosure by Mr. Muscal of confidential information acquired by him
in the context of his employment.
The Employment Agreement provides that, unless he otherwise consents in
writing, Mr. Muscal shall, during the term of the Employment Agreement, serve as
the President of the Corporation and Chairman of the Bank, but that in the event
of a "change in control", as defined in the Employment Agreement, of the Bank or
the Corporation, wherein the Corporation or the Bank is acquired by a financial
institution with a significantly greater net worth than the Corporation and the
Bank, if requested to do so, Mr. Muscal will step down from his positions, so
long as his continuing duties are consistent with those of a senior executive
officer; only one person is senior to him in such continuing entity; and his
duties are to be performed primarily in the Philadelphia area.
(1) Effective February 28, 1997 Mr. Muscal resigned as officer and director of
the Bank, terminated the employment agreement and executed a consulting
agreement with the Bank.
Rolf A. Stensrud
As of June 6, 1996, Mr. Stensrud became Executive Vice President and
Chief Operating Officer of the Corporation and President and co-Chief Executive
Officer of the Bank, pursuant to the terms and conditions of an employment
agreement with the Corporation and the Bank (the "Stensrud Agreement"). The
Stensrud Agreement provides for an initial term of three years which will
automatically renew for successive one-year terms until terminated by the
parties. Under the Stensrud Agreement, Mr. Stensrud will receive an annual base
salary of $175,000 per year. In addition, Mr. Stensrud is entitled to: (i)
reimbursement for entertainment and travel expenses in connection with his
duties, including expenses for one lunch club and annual dues for one golf club;
(ii) participate in any bonus stock purchase or grant, stock option, deferred
compensation or other compensation plans maintained by First Republic Bank or
the Corporation for its senior executives; (iii) receive such basic medical,
hospitalization and major medical insurance coverage for himself and his
dependents as the Bank or the Company maintains for its executives; and (iv) use
a car to be provided by First Republic Bank. If Mr. Stensrud's employment is
terminated for reasons other than for engaging in conduct detrimental to the
Bank, Mr. Stensrud will be entitled to receive his salary and benefits for
certain specified periods of time. The Stensrud Agreement provides for the
non-disclosure by Mr. Stensrud of confidential information acquired by him in
the context of his employment.
31
<PAGE>
George S. Rapp
As of June 6, 1996, the Corporation and the Bank entered into an
employment agreement with Mr. Rapp. Pursuant to the Agreement, Mr. Rapp is
employed as Executive Vice President and Chief Operating Officer of the
Corporation and the Bank for a one-year term at an annual base salary of
$105,000. The term of the Agreement will be automatically extended for
successive one-year periods unless terminated by either party upon 90 days
written notice prior to the end of any such year. Mr. Rapp is also eligible to
receive an annual bonus at the discretion of the Board of Directors and to
participate in the Corporation's Stock Option Plan and all other employee
benefit plans. The Corporation maintains a life insurance policy for the benefit
of Mr. Rapp's designated beneficiaries and provides him with use of an
automobile and the reimbursement of certain expenses related to the use of such
automobile and to his employment.
Kevin J. Gallagher
As of June 6, 1996, the Corporation and the Bank entered into an
employment agreement with Mr. Gallagher. Pursuant to the Agreement, Mr.
Gallagher is employed as Executive Vice President and Chief Lending Officer of
the Company and the Bank for a one-year term at an annual base salary of
$105,000. The term of the Agreement will be automatically extended for
successive one-year periods unless terminated by either party upon 90 days
written notice prior to the end of any such year. Mr. Gallagher is also eligible
to receive an annual bonus at the discretion of the Board of Directors and to
participate in the Corporation's Stock Option Plan and all other employee
benefit plans. The Corporation maintains a life insurance policy for the benefit
of Mr. Gallagher's designated beneficiaries and provides him with use of an
automobile and the reimbursement of certain expenses related to the use of such
automobile and to his employment.
Item 11: Security Ownership of Certain Beneficial Owners and Management
<TABLE>
<CAPTION>
OPTIONS GRANTS IN LAST FISCAL YEAR
(Individual Grants)
(c) % Total Option (d) Exercise or
(b) Options Granted to Employees/ Base Price Expiration
(a) Name Granted Directors In Fiscal Year ($/Sh) Date
<S> <C> <C> <C> <C>
Harry D. Madonna 85,019 46.6% 6.36 06/2006
Michael J. Bradley 15,000 8.2% 7.69 10/2006
Kenneth Adelberg 1,000 .5% 7.69 10/2006
Daniel S. Berman 1,000 .5% 7.69 10/2006
Sheldon E. Goldberg 15,000 8.2% 7.69 10/2006
Allen L. Kramer 1,000 .5% 7.69 10/2006
Steven J. Shotz 40,000 21.9% 7.69 10/2006
Harris Wildstein 15,000 8.2% 7.69 10/2006
George S. Rapp 5,000 2.7% 7.69 10/2006
Kevin J. Gallagher 5,000 2.7% 7.69 10/2006
--------------------
183,019
--------------------
</TABLE>
32
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
(d) # of Securities
Underlying Unexercised
(b) Shares Acquired (c) Value Options at FYI-End (#)
(a) Name on Exercise (#) Realized ($) Exercisable/Unexercisable
None None None None
REPORT ON REPRICING OF OPTIONS
In the past, certain officers and Directors of the Corporation had been
periodically granted options under the Corporation's Stock Option Plan at
varying exercise prices. The exercise prices for all such options are currently
below the fair market value of the Corporation's Common Stock. The stated
purpose of the Corporation's Stock Option Plan is to compensate executive
officers and directors for their individual efforts on behalf of the Corporation
and the Bank by tying a portion of such executive officer's compensation to the
performance of the Corporation's common stock. The Option Committee believes,
however, that in certain circumstances where the exercise price of all stock
options granted to an executive officer exceeds the market price of the Common
Stock, an adjustment in the exercise price may be required in order to
accomplish the purposes of the stock option plan and to fairly compensate such
executive officers. After a review of all the relevant factors, the Option
Committee determined in May 1995 that 12,000 options previously granted to Mr.
Muscal, with an exercise price of $8.50 per share, should be repriced at the
then current market price of $4.98 per share but that no additional options
would be granted in 1995. The number of options repriced represents the number
of options which have historically been granted to Mr. Muscal on an annual
basis. The Compensation Committee believes that this strikes the appropriate
compensation balance by setting realistic and attainable performance goals while
maintaining the aggregate total of options granted under the stock option plan.
The Corporation's director compensation plan throughout 1996 provided
that each director would receive $500 for each Board meeting and $250 for each
Committee meeting attended. Pursuant to such plan, a total of $92,950 in
director fees was accrued and a total of $83,200 was paid for services rendered
during 1996; no director received more than $12,400.
Item 12: Certain Relationships and Related Transactions
Certain of the directors of the Corporation and/or their affiliates
have loans outstanding from the Bank. All such loans were made in the ordinary
course of the Bank's business; were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons; and, in the opinion of
management, do not involve more than the normal risk of collectibility or
present other unfavorable features..
Item 13: Exhibits and Reports on Form 8-K
A. Financial Statements.................................... Page 36
(1) Report of Independent Accountants
(2) Consolidated Balance Sheets dated respectively, December 31,
1996 and December 31, 1995.
(3) Consolidated Statements of Income for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994.
(4) Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, December 31, 1995 and
December 31, 1994.
(5) Consolidated Statements of Cash Flows for the years ended
December 31, 1996, December 31, 1995 and December 31, 1994.
(6) Notes to Consolidated Financial Statements.
33
<PAGE>
B. Exhibits
The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of
Regulation S-B for an annual report on Form 10-KSB)
Exhibit No.
3(a) Amended and Restated Articles of Incorporation of the
Company, as amended.*
3(b) Amended and Restated Bylaws of the Company.*
4(b)(i) Amended and Restated Articles of Incorporation of the
Company, as amended.*
4(b)(ii) Amended and Restated Bylaws of the Company.*
10 Amended and Restated Material Contracts.- None
10(a) Amended and Restated Employment Agreement between the
Company and Zvi H. Muscal.*
10(b) Agreement and Plan of Merger by and between the Company and
Republic Bancorporation, Inc. dated November 17, 1995.*
11 Computation of Per Share Earnings
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
<S> <C> <C> <C>
Net income $2,713,000 $ 603,000 $ 807,000
Primary earnings per common share $ 1.10 $ 0.38 $ 0.50
Fully diluted earnings per common share $ 1.06 $ 0.38 $ 0.50
Primary weighted average common shares and common stock equivalents 2,467,094 1,604,411 1,604,411
Fully diluted weighted average common shares and common stock equivalents 2,568,520 1,604,411 1,604,411
</TABLE>
21 Subsidiaries of the Company.
First Republic Bank (the "Bank"), the Company's sole
subsidiary, commenced operations on November 3, 1988. The Bank is
a commercial bank chartered pursuant to the laws of the
Commonwealth of Pennsylvania and is a member of the Federal
Reserve System and its primary federal regulator is the Federal
Reserve Board of Governors.
27 Financial Data Schedule.
All other schedules and exhibits are omitted because they
are not applicable or because the required information is set out
in the financial statements or the notes thereto.
* Incorporated by reference from the Registration Statement on Form S-4 of
the Company, as amended, Registration No. 333-673 filed April 29, 1996.
Reports on Form 8-K
The Company filed Form 8-K on March 20, 1997 announcing the Company's
declaration of a 20% stock dividend with a record date of March 4, 1997 and a
payment date of April 15, 1997. Total Outstanding shares of common stock will
increase to approximately 3.4 million.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) 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, in the City of Philadelphia,
Commonwealth of Pennsylvania.
FIRST REPUBLIC BANCORP, INC.
Date March 28, 1997 By: /s/Rolf Stensrud
Rolf Stensrud
Executive Vice President
Chief Operating Officer
Date March 28, 1997 By: /s/ George S. Rapp
George S. Rapp, Executive Vice
President and Chief Financial
Officer
In accordance with the Securities Exchange Act of 1934, this Report has
been duly signed below by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
Date March 28, 1997 /s/Gerald Levinson /s/ Harry D. Madonna, Esq.
Gerald Levinson, Director Chairman of the Board
/s/ Eustace W. Mita /s/Kenneth Adelberg
Eustace W. Mita, Director Kenneth Adelberg, Director
/s/ John M. O'Donnell, Ph.D. /s/William Batoff
John M. O'Donnell, Director William Batoff, Director
/s/ Neal I. Rodin /s/Daniel S. Berman
Neal I. Rodin, Director Daniel S. Berman, Director
/s/James E. Schleif /s/ Michael J. Bradley
James E. Schleif, Director Michael J. Bradley, Director and Vice
Chairman of the Board
/s/Steven J. Shotz /s/ John F. D'Aprix
Steven J. Shotz, Director John F. D'Aprix, Director
/s/Rolf A. Stensrud /s/Sheldon E. Goldberg
Rolf A. Stensrud, Director Sheldon E. Goldberg, Director
/s/ Harris Wildstein, Esq. /s/ Allen L. Kramer
Harris Wildstein, Esq., Allen L. Kramer, Director
Director
</TABLE>
35
<PAGE>
Exhibit A. Financial Statements.
36
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
FIRST REPUBLIC BANCORP, INC.
Page
Report of Independent Accountants 38 - 39
Consolidated Balance Sheets as of December 31, 1996, and
December 31, 1995 40
Consolidated Statements of Income for the years ended
December 31, 1996 December 31, 1995 and December 31, 1994 41
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1996, December 31,
1995 and December 31, 1994 42
Consolidated Statements of Cash Flows for the years
ended December 31, 1996 December 31, 1995 and December 31,
1994 43
Notes to Consolidated Financial Statements 44 - 58
37
<PAGE>
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of First Republic Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of First Republic
Bancorp, Inc. and Subsidiary as of December 31, 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a text basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to the above
present fairly, in all materials respects, the consolidated financial position
of First Republic Bancorp, Inc. and Subsidiary as of December 31, 1996 and the
consolidated results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 30, 1997
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Republic Bancorporation, Inc.:
We Have audited the accompanying consolidated balance sheet for each of the two
years in the period ended December 31, 1995 of Republic Bancorporation, Inc. and
subsidiaries(the "Bank") as of December 31, 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the two
years in the period ended December 31, 1995. these financial statements are
the responsibility of the Bank's management. Our responsibility is to express an
opinion on these statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a text basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Bank at December 31, 1995, and
the results of their operations and their cash flows for each of the years in
the two-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
March 1, 1996
(Except Note 1 related to the merger
which is dated June 7, 1996)
39
<PAGE>
FIRST REPUBLIC BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS: 1996 1995
<S> <C> <C>
Cash and due from banks $ 7,716 $ 2,884
Interest - bearing deposits with banks 665 39
Federal funds sold 7,115 933
-------- --------
Total cash and cash equivalents 15,496 3,856
Securities available for sale, at fair value 5,900 4,348
Securities held to maturity, at amortized cost 75,054 34,004
Loans receivable, net 170,002 85,183
Premises and equipment, net 711 321
Real estate owned, net 295 295
Accrued income and other assets 6,337 3,056
-------- --------
Total Assets $273,795 $131,063
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 32,611 $ 12,570
Demand - interest-bearing 10,181 1,429
Money market and savings 27,240 11,598
Time 150,800 82,757
Time over $100,000 29,227 8,070
-------- --------
Total Deposits 250,059 116,424
Subordinated debt 0 3,400
Accrued expenses and other liabilities 5,365 2,617
-------- --------
Total Liabilities 255,424 122,441
-------- --------
Commitments and contingencies (Note 10)
Shareholders' Equity:
Common stock, par value $.01 per share; 25,000,000 shares 28 16
authorized; shares issued and outstanding 2,847,969 and
1,604,411 as of December 31, 1996 and 1995 respectively
Additional paid in capital 13,687 6,647
Retained earnings 4,653 1,940
Unrealized gain on securities available for sale, net of
deferred taxes 3 19
-------- --------
Total Shareholders' Equity 18,371 8,622
-------- --------
Total Liabilities and Shareholders' Equity $273,795 $131,063
======== ========
</TABLE>
(See notes to consolidated financial statements)
40
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1996, 1995 and 1994
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 11,798 $ 7,710 $ 5,521
Interest on federal funds sold 1,346 176 278
Interest on deposits in banks 20 0 0
Interest on investments 3,739 2,016 1,442
---------- ---------- ----------
16,903 9,902 7,241
---------- ---------- ----------
Interest expense:
Demand - interest-bearing 140 33 30
Money market and savings 674 516 637
Time 7,069 4,485 2,398
Time over $100,000 1,594 519 599
Other borrowings 0 62 25
Subordinated debt 238 276 255
---------- ---------- ----------
9,715 5,891 3,944
---------- ---------- ----------
Net interest income 7,188 4,011 3,297
Provision for possible loan losses 155 223 323
---------- ---------- ----------
Net interest income after provision for
possible loan losses 7,033 3,788 2,974
---------- ---------- ----------
Non-interest income:
Service fees 170 155 219
Refant program revenue 2,080 0 877
Other income 364 0 0
---------- ---------- ----------
2,614 155 1,096
---------- ---------- ----------
Non-interest expenses:
Salaries and employee benefits 2,872 1,592 1,284
Occupancy expenses 696 470 425
Professional fees 282 327 354
Equipment 205 94 96
Other operating expenses 1,526 566 674
---------- ---------- ----------
5,581 3,049 2,833
---------- ---------- ----------
Income before income taxes 4,066 894 1,237
Provision for income taxes 1,353 291 430
---------- ---------- ----------
Net income $ 2,713 $ 603 $ 807
========== ========== ==========
Earnings per common share:
Primary $ 1.10 $ 0.38 $ 0.50
Fully diluted $ 1.06 $ 0.38 $ 0.50
Weighted average common shares
outstanding and common stock equivalents
Primary 2,467,094 1,604,411 1,604,411
Fully diluted 2,568,520 1,604,411 1,604,411
</TABLE>
(See notes to consolidated financial statements)
41
<PAGE>
FIRST REPUBLIC BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 1996, 1995 and 1994
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,713 $ 603 $ 807
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for possible loan losses 155 223 323
Depreciation and amortization 62 89 82
Amortization of securities 131 57 28
Realized gain on sale of real estate owned (18) 0 0
Decrease (increase) in accrued income and other assets 824 (697) (349)
Increase (decrease) in accrued expenses and other
liabilities 693 1,354 (344)
--------- --------- ---------
Net cash provided by operating activities 4,560 1,629 547
--------- --------- ---------
Cash flows from investing activities:
Acquisition of ExecuFirst Bancorp, Inc. 11,952 0 0
Purchase of securities:
Available for sale (1,000) (4,022) 0
Held to maturity (24,650) (6,330) (2,141)
Proceeds from maturities and calls of securities:
Available for sale 1,500 0 0
Held to maturity 5,500 0 0
Principal collected on MBS's and CMO's:
Available for sale 691 0 0
Held to maturity 6,517 180 383
Net increase in loans (11,937) (14,043) (9,295)
Proceeds from the sale of real estate owned 86 0 0
Premises and equipment expenditures (556) (401) (73)
--------- --------- ---------
Net cash used in investing activities (11,897) (24,616) (11,126)
--------- --------- ---------
Cash flows from financing activities:
Net increase in demand and money market 7,628 5,570 2,266
Net increase (decrease) in time deposits 14,749 22,888 (3,284)
Issuance (redemption of) subordinated debt (3,400) 0 3,400
Net increase (decrease) in borrowed funds 0 (5,583) 1,583
--------- --------- ---------
Net cash provided by financing activities 18,977 22,875 3,965
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 11,640 (112) (6,614)
Cash and cash equivalents, beginning of period 3,856 3,968 10,582
--------- --------- ---------
Cash and cash equivalents, end of period $ 15,496 $ 3,856 $ 3,968
Supplemental disclosures:
Interest paid $ 8,409 $ 4,571 $ 3,890
Income taxes paid $ 1,105 $ 290 $ 443
Non-cash investing and financing activities:
Acquisition of ExecuFirst Bancorp, Inc.:
FMV of assets acquired $(108,415) $ 0 $ 0
FMV of liabilities assumed 113,315 0 0
Stock issued 7,052 0 0
--------- --------- ---------
Total cash received, net of merger related costs $ 11,952 $ 0 $ 0
--------- --------- ---------
Non-monetary transfers from loans to real estate owned $ 68 $ 70 $ 0
</TABLE>
(See notes to consolidated financial statements)
42
<PAGE>
FIRST REPUBLIC BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY For the years
ended December 31, 1996, 1995 and 1994
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Unrealized
Gain
Additional on Securities Total
Common Paid in Retained Available Shareholders'
Stock Capital Earnings for Sale Equity
<S> <C> <C> <C> <C> <C>
Balance January 1, 1994 $ 16 $ 6,647 $ 530 $ 0 $ 7,193
Net income for the year 0 0 807 0 807
------- ------- ------- ------- -------
Balance December 31, 1994 16 6,647 1,337 0 8,000
Net income for the year 0 0 603 0 603
Unrealized gain on securities
available for sale 0 0 0 19 19
------- ------- ------- ------- -------
Balance December 31, 1995 16 6,647 1,940 19 8,622
Acquisition of Execufirst 12 7,040 0 0 7,052
Bancorp, Inc.
Net income for the year 0 0 2,713 0 2,713
Change in unrealized gain
on securities available
for sale 0 0 (16) (16)
------- ------- ------- ------- -------
Balance December 31, 1996 $ 28 $13,687 $ 4,653 $ 3 $18,371
======= ======= ======= ======= =======
</TABLE>
(See notes to consolidated financial statements)
43
<PAGE>
FIRST REPUBLIC BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
First Republic Bancorp, Inc. (formerly known as "Republic Bancorporation")
is a one-bank holding company organized and incorporated under the laws of
the Commonwealth of Pennsylvania. Its wholly-owned subsidiary, First
Republic Bank (the "Bank"), offers a variety of banking services to
individuals and businesses throughout the Greater Philadelphia and South
Jersey area through its offices and branches in Philadelphia and Montgomery
Counties.
On June 7, 1996 Republic Bancorporation, ("Republic") parent company of
Republic Bank, its sole subsidiary, merged with and into ExecuFirst
Bancorp, Inc., ("ExecuFirst") parent company of First Executive Bank, its
sole subsidiary. Republic exchanged all of its common stock, for
approximately 1,604,411 shares (approximately 56% of the combined total) of
ExecuFirst's common stock. Effective upon the merger, ExecuFirst changed
its name to First Republic Bancorp, Inc. (the "Company"). Upon completion
of the merger, Republic's shareholders owned a majority of the outstanding
shares of the consolidated company's stock. As a result, the transaction
was accounted for as a reverse acquisition of ExecuFirst by Republic solely
for accounting and financial reporting purposes. Therefore, the
Consolidated Balance Sheets, Consolidated Statements of Income and
Consolidated Statements of Cash Flows for the prior year periods are those
of Republic only, and may not be comparable to the current year
Consolidated Statements. The operations of ExecuFirst have been included in
the Company's financial statements since the date of acquisition.
Historical shareholders' equity and earnings per share of Republic prior to
the merger has been retroactively restated (a recapitalization) for the
equivalent number of shares received in the merger after giving effect to
any differences in par value of the respective stock of ExecuFirst and
Republic.
The December 31, 1996 Consolidated Balance Sheet reflects the effect of the
merger on a purchase accounting basis based on the fair market value of
ExecuFirst's common stock at a price of $5.75 per share, the estimated
market value of the stock for a reasonable period before and after November
17, 1995, the announcement date of the merger. The merger was accounted for
as a reverse acquisition of ExecuFirst by Republic. Solely for accounting
and financial reporting purposes, Republic is considered the acquiring
entity because Republic shareholders acquired the majority of the combined
Company's common stock, even though ExecuFirst is the surviving entity and
is the entity issuing common stock. The purchase price calculated for
accounting purposes amounted to $7,052,000, which is the result of
multiplying the $5.75 per share market value of ExecuFirst by the
outstanding shares of ExecuFirst of approximately 1,226,000 at the
announcement date of the merger, plus acquisition expenses incurred by
Republic, as a result of the merger, in the amount of $1,193,000.
The purchase price has been allocated to the respective assets acquired and
the liabilities based on their estimated fair market values, net of
applicable income tax effects. Negative goodwill in the amount of
$1,045,000 was generated for purchase accounting purposes and was applied
against (i) bank premises and equipment in the amount of $276,000, (ii)
other real estate owned in the net amount of $84,000, and (iii) the net
deferred tax asset in the amount of $685,000. No negative goodwill remains
after application to these non-current assets.
The following unaudited pro forma information presents a summary of the
consolidated results if the merger had occurred at the beginning of such
periods presented.
(Dollar amounts in thousands, except for per share data)
Year ended December 31,
1996 1995
Net interest income $9,337 $9,404
Net income $2,954 $1,454
Earnings per share $0.98 $0.51
44
<PAGE>
The pro forma results are for illustrative purposes only and do not purport
to be indicative of the actual results which would have occurred had the
transaction been consummated as of those earlier dates, nor are they
necessarily indicative of future operating results.
As a result of the merger, supervisory agreements of ExecuFirst, between
the Federal Reserve Bank and the PA Department of Banking were terminated.
The bank is subject to examination and extensive regulation by the
Pennsylvania Banking Department and the Federal Reserve Board. Its deposits
are insured by the FDIC to the individual deposit limits established by
law.
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements of the Company include the accounts
of First Republic Bancorp, Inc. and its wholly-owned subsidiary, First
Republic Bank ("the Bank"). All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Bank. The Bank is
dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as
loans and investments, and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations
of the Bank are subject to risks and uncertainties surrounding its exposure
to change in the interest rate environment.
Additionally, the Company derives fee income from the Bank's participation
in a program (the "Refant" program) which indirectly funds consumer loans
collateralized by federal income tax refunds. Approximately $2.2 million in
gross revenues were collected on these loans during 1996. The Company is
participating in the program again in 1997, however, tax code changes,
banking regulations, as well as business decisions by the parties involved
in the program may affect future participation in the program.
Significant estimates are made by management in determining the allowance
for possible loan losses and carrying values of real estate owned.
Consideration is given to a variety of factors in establishing these
estimates including current economic conditions, diversification of the
loan portfolio, delinquency statistics, results of internal loan reviews,
borrowers' perceived financial and managerial strengths, the adequacy of
underlying collateral, if collateral dependent, or present value of future
cash flows and other relevant factors. Since the allowance for possible
loan losses and carrying value of real estate owned is dependent, to a
great extent, on the general economy and other conditions that may be
beyond the Bank's control, it is at least reasonably possible that the
estimates of the allowance for possible loan losses and the carrying values
of the real estate owned could differ materially in the near term.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
cash and due from banks, interest-bearing deposits with an original
maturity of ninety days or less and federal funds sold to be cash and cash
equivalents. The Bank is required to maintain certain average reserve
balances as established by the Federal Reserve Board. The amounts of those
balances for the reserve computation periods which included December 31,
1996 and 1995 were $798,000 and $257,000, respectively. These requirements
were satisfied through the restriction of vault cash and a balance at the
Federal Reserve Bank of Philadelphia.
45
<PAGE>
Investment Securities:
The Company adopted Statement of Financial Accounting Standards No. 115,
("SFAS No. 115"), "Accounting for Certain Investments in Debt and Equity
Securities" on January 1, 1994. SFAS No. 115 requires debt and equity
securities to be classified in one of three categories, as applicable, and
to be accounted for as follows: debt securities which the Company has
positive intent and ability to hold to maturity are classified as
"securities held to maturity" and are reported at amortized cost; debt and
equity securities that are bought and sold in the near term are classified
as "trading" and are reported at fair market value with unrealized gains
and losses included in earnings; and debt and equity securities not
classified as either held to maturity and/or trading securities are
classified as "securities available for sale" and are reported at fair
market value with unrealized gains and losses reported as a separate
component of shareholders' equity.
As of December 31, 1996 and 1995, shareholders' equity was increased by
$3,000 and $19,000 , respectively as the result of unrealized gains on
securities available for sale. Shareholders' equity was unaffected by the
adoption of SFAS No. 115 at December 31, 1994.
Investment securities classified as held to maturity are carried at
amortized cost, and are adjusted for amortization of premiums and accretion
of discounts over the life of the related security on a level yield method.
Investments securities that are held for an indefinite period of time are
classified as available for sale, and are carried at fair market value.
Such items include those management intends to use as part of its
asset-liability matching strategy or that may be sold in response to
changes in interest rates or other factors. Realized gains and losses on
the sale of investment securities are recognized using the specific
identification method. The Company did not realize any gains or losses on
the sale of securities during 1996, 1995 or 1994. Additionally, the Bank
does not have any trading securities.
As permitted under SFAS No. 115, concurrent with the merger, the Company
reclassified a portion of ExecuFirst's securities available for sale with
an amortized cost of $30,259,000 to securities held to maturity, as of the
merger date of June 7, 1996. This one-time reclassification was done to
reposition the investment security portfolio to be consistent with the
Company's Asset/Liability Management policy and the anticipated future
liquidity requirements of the Company.
Loans:
Loans are stated at the principal amount outstanding, net of deferred loan
fees and costs. Income is accrued on the principal amount outstanding.
Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past
due less than 90 days may also be classified as nonaccrual if repayment in
full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections
of interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan had been partially charged off, recognition of
interest on a cash basis is limited to that which would have been
recognized on the 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.
46
<PAGE>
Allowance for Possible Loan Losses:
The allowance for possible loan losses is established through a provision
for possible loan losses charged to operations. Loans are charged against
the allowance when management believes that the collectibility of the loan
principal is unlikely. Recoveries on loans previously charged off are
credited to the allowance.
The allowance is an amount that management believes will be adequate to
absorb possible loan losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, the results of the
most recent regulatory examination, current economic conditions and trends
that may affect the borrower's ability to pay.
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114") on January
1, 1995. SFAS 114 requires an adjustment to the carrying value of a loan
through the provision for possible credit losses when it is "probable" that
a creditor will be unable to collect all amounts due according to the
contractual terms of the loan. An insignificant delay, those less than 90
days, or insignificant shortfall in amount of payments does not necessarily
result in the loan being identified as impaired. SFAS 114 was subsequently
amended by Statement of Financial Accounting Standards No. 118, "Accounting
by Creditors for Impairment of a Loan - Income Recognition and Disclosure"
("SFAS 118") to allow a creditor to use existing methods for recognizing
interest income on an impaired loan. The adoption of SFAS 114 did not have
a material impact on financial position or the results of operations, for
the years ended December 31, 1996 or 1995.
The Company considers residential mortgage loans and consumer loans,
including home equity lines of credit, to be small balance homogeneous
loans. These loan categories are collectively evaluated for impairment.
Commercial business loans and commercial real estate loans are individually
measured for impairment based on the present value of expected future cash
flows discounted at the historical effective interest rate, except that all
collateral dependent loans are measured for impairment based on the fair
market value of the collateral.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of furniture and equipment is calculated over
the estimated useful life of the asset using the straight-line method.
Leasehold improvements are amortized over the shorter of their estimated
useful lives or terms of their respective leases, using the straight-line
method.
Repairs and maintenance are charged to current operations as incurred, and
renewals and betterments are capitalized.
Real Estate Owned:
Real estate owned consists of foreclosed assets and is stated at the lower
of cost or estimated fair market value minus estimated costs to sell the
property.
Income Taxes:
Deferred income taxes are recorded for the temporary differences between
the financial reporting basis and the tax basis of the Company's assets and
liabilities. In addition, a deferred tax asset is recorded to reflect the
future benefit of net operating loss carryforwards. The deferred tax assets
may be reduced by a valuation allowance if it is probable that some portion
or all of the deferred tax assets will not be realized.
Earnings Per Common Share:
Earnings per common share is computed by using the weighted average number
of common shares outstanding and common stock equivalents during each
period presented. Common stock equivalents consist of dilutive stock
options granted through the company's stock option plan. See note 16.
47
<PAGE>
New Accounting Pronouncements:
In June 1996, the FASB No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125") which
is effective for the Company beginning January 1, 1997. SFAS No. 125, which
is to be applied prospectively, provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities based on the concept of control. It is anticipated that the
adoption of SFAS No. 125 will not have a material effect on the financial
position or results of operations of the Company.
3. Investment Securities:
Investment securities available for sale as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasuries $ 998,000 $ 3,000 $ 0 $1,001,000
U.S.Gov't Agencies 4,128,000 8,000 (5,000) 4,131,000
CMOs 770,000 0 (2,000) 768,000
---------- ---------- ---------- ----------
Total $5,896,000 $ 11,000 $ (7,000) $5,900,000
---------- ---------- ---------- ----------
</TABLE>
Investment securities held to maturity as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Gov't Agencies $49,214,000 $ 661,000 $ (293,000) $49,582,000
CMOs 23,682,000 14,000 (129,000) 23,567,000
Other Investment Securities 2,158,000 0 0 2,158,000
----------- ----------- ----------- -----------
Total $75,054,000 $ 675,000 $ (422,000) $75,307,000
----------- ----------- ----------- -----------
</TABLE>
Investment securities available for sale as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Gov't Agencies $4,320,000 $ 28,000 $ 0 $4,348,000
---------- ---------- ---------- ----------
Total $4,320,000 $ 28,000 $ 0 $4,348,000
---------- ---------- ---------- ----------
</TABLE>
Investment securities held to maturity as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized Estimated Fair
Amortized Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasuries $ 1,002,000 $ 0 $ 0 $ 1,002,000
CMOs 25,215,000 1,000 (194,000) 25,022,000
U.S.Gov't Agencies 7,002,000 35,000 0 7,037,000
Other Investment Securities 785,000 0 0 785,000
----------- ----------- ----------- -----------
Total $34,004,000 $ 36,000 $ (194,000) $33,846,000
----------- ----------- ----------- -----------
</TABLE>
48
<PAGE>
The Company held an investment in stock of the Federal Reserve Bank in
accordance with regulatory requirements, with a carrying value of $521,000
and $200,000 as of December 31, 1996 and 1995, respectively which are
included in Other Investment Securities. Also included in Other Securities
is investments in the stock of the Federal Home Loan Bank of Pittsburgh of
$318,000 and $305,000 at December 31, 1996 and 1995, respectively.
The maturity distribution of the amortized cost and estimated market value
of investment securities by contractual maturity at December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
Amortized Estimated Fair Amortized Cost Estimated Fair
Cost Value Value
<S> <C> <C> <C> <C>
Due in 1 year or less $ 0 $ 0 $ 1,500,000 $ 1,501,000
After 1 year to 5 years 15,986,000 15,943,000 0 0
After 5 years to 10 years 20,272,000 20,513,000 2,571,000 2,570,000
Mortgage-backed securities and CMOs 36,638,000 36,693,000 1,825,000 1,829,000
Other Investment Securities 2,158,000 2,158,000 0 0
----------- ----------- ----------- -----------
Total $75,054,000 $75,307,000 $ 5,896,000 $ 5,900,000
----------- ----------- ----------- -----------
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without
prepayment penalties. Mortgage-backed securities and CMOs are shown
separately due to the amortization and prepayment of principal accruing
throughout the life of these instruments.
At December 31, 1996, investment securities in the amount of approximately
$5,099,000 were pledged as collateral for public deposits and certain other
deposits as required by law.
4. Loans Receivable:
Loans receivable at December 31, consist of the following:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Commercial and industrial $ 45,007,000 $ 23,183,000
Real estate - mortgage 123,256,000 61,134,000
Consumer and other 3,831,000 1,546,000
------------- -------------
172,094,000 85,863,000
Less allowance for possible loan losses (2,092,000) (680,000)
------------- -------------
Total loans receivable, net $ 170,002,000 $ 85,183,000
------------- -------------
</TABLE>
The recorded investment in loans for which impairment has been recognized
in accordance with SFAS 114 totaled $1,892,000 million and $526,000, at
December 31, 1996 and 1995 respectively, of which $845,000 and $10,000
respectively, related to loans with no valuation allowance because the
loans have been partially written down through charge-offs. Loans with
valuation allowances at December 31, 1996 and 1995 were $1,047,000 and
$516,000, respectively. For the years ended December 31, 1996 and 1995, the
average recorded investment in impaired loans was approximately $1,573,000
and $452,000, respectively. The Bank did not recognize any interest on
impaired loans in 1996 or 1995.
As of December 31, 1996, 1995 and 1994, there were loans of approximately
$1,892,000, $526,000 and $878,000, respectively, which were nonperforming.
If these loans were performing under their original contractual rate,
49
<PAGE>
interest income on such loans would have approximated $135,000, $48,060 and
$26,000 for 1996, 1995 and 1994, respectively.
The majority of loans are with borrowers in the Company's marketplace,
Philadelphia and surrounding suburbs, including southern New Jersey. The
Company has loans to customers whose assets and businesses are concentrated
in real estate and healthcare. Repayment of these loans is in part
dependent upon general economic conditions affecting these industries. The
Company evaluates each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained is based on management's credit
evaluation of the customer. Collateral varies but primarily includes
residential and income-producing properties.
Included in loans are loans due from directors and other related parties of
$5,226,000 and $4,454,000 at December 31, 1996 and 1995, respectively. Of
loans due from directors and other related parties, approximately
$4,887,000 and $3,979,000 were collateralized at December 31, 1996 and
1995, respectively. The following presents the activity in amounts due from
directors and other related parties for the year ended December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 4,454,000 $ 2,380,000 $ 2,249,000
Additions 1,826,000 2,724,000 916,000
Repayments (1,054,000) (650,000) (785,000)
----------- ----------- -----------
Balance at end of year $ 5,226,000 $ 4,454,000 $ 2,380,000
----------- ----------- -----------
</TABLE>
5. Allowance for Possible Loan Losses:
Changes in the allowance for possible loan losses for the years ended
December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 680,000 $ 650,000 $ 460.000
Charge-offs (391,000) (212,000) (144,000)
Recoveries 120,000 19,000 11,000
Acquisition of ExecuFirst 1,528,000 0 0
Provision for possible loan losses 155,000 223,000 323,000
----------- ----------- -----------
Balance at end of year $ 2,092,000 $ 680,000 $ 650,000
----------- ----------- -----------
</TABLE>
6. Premises and Equipment:
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Furniture and equipment $1,122,000 $715,000
Leasehold improvements 404,000 255,000
---------- --------
1,526,000 970,000
Less accumulated depreciation (815,000) (649,000)
---------- --------
Net premises and equipment $711,000 $321,000
---------- --------
</TABLE>
Depreciation expense on premises and equipment amounted to $166,000,
$89,000 and $82,000 in 1996, 1995 and 1994, respectively.
50
<PAGE>
The Company has entered into noncancelable lease agreements for its
operations center and four branch facilities, expiring through July 31,
2007. The leases are accounted for as operating leases. The minimum annual
rental payments required under these leases are as follows:
Year Ended Amount
1997 $461,000
1998 231,000
1999 363,000
2000 356,000
2001 and beyond 2,609,000
----------------
Total $4,020,000
----------------
The Company incurred rent expense of $613,000, $427,000 and $395,000 in
1996, 1995 and 1994, respectively. Such rent expense has been computed in
accordance with generally accepted accounting principles which require rent
expense to be charged to expense on a straight-line basis rather than as
paid.
7. Short-Term Borrowings:
The Company has two lines of credit totaling $7,000,000 available for the
purchase of federal funds from corresponding banks. In addition, the
Company has a collateralized line of credit with the Federal Home Loan Bank
of Pittsburgh with a maximum borrowing capacity of $92 million. This
maximum borrowing capacity is subject to change on a quarterly basis. As of
December 31, 1996 and 1995, there were no amounts outstanding on any of the
Bank's lines of credit.
8. Income Taxes:
In accordance with Statement of Financial Accounting Standards No, 109,
"Accounting for Income Taxes" (SFAS No. 109), deferred tax assets and
liabilities are established for the temporary difference between accounting
bases and tax bases of the Company's assets and liabilities at the tax
rates expected to be in effect when the temporary differences are realized
or settled. Management believes that the existing net differences which
give rise to the net deferred income tax assets are realizable on a more
likely than not basis. The approximate tax effect of each type of temporary
difference and carryforward that gives rise to net deferred tax assets
included in the accrued income and other assets in the accompanying
consolidated balance sheets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Allowance for loan losses $ 320,000 $ 178,000
Net operating loss carryforward 503,000 0
Deferred compensation 199,000 (12,000)
Depreciation 164,000 24,000
Real estate owned 46,000 0
Other 142,000 15,000
Unrealized gain on securities available for sale (1,000) (9,000)
----------- -----------
Deferred tax asset 1,373,000 196,000
Negative goodwill allocated to deferred tax asset,
net of amortization (515,000) 0
----------- -----------
Deferred tax assets, net $ 858,000 $ 196,000
----------- -----------
</TABLE>
51
<PAGE>
As discussed in Note 1 of the consolidated financial statements, the
reverse acquisition of ExecuFirst by Republic on June 7, 1996 generated
negative goodwill of $1,045,000, of which $685,000 was applied against the
deferred tax assets. During 1996, the negative goodwill allocated to the
deferred tax assets was amoritized by an amount of $170,000, thereby
resulting in a corresponding reduction to the provision for income taxes.
The amortization of negative goodwill is being recorded based upon the
estimated reversal period of the underling components of the deferred tax
assets.
At December 31, 1996, the Company has available approximately $1,479,000 of
net operating loss carryforwards available for income tax reporting
purposes which expire from 2003 through 2008.
The following represents the components of income tax expense (benefit) for
the years ended December 31, 1996, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current provision
Federal $ 950,000 $ 370,000 $ 398,000
State 163,000 0 15,000
Deferred provision - Federal 240,000 (79,000) 17,000
---------- ---------- ----------
Total provision for income taxes $1,353,000 $ 291,000 $ 430,000
---------- ---------- ----------
</TABLE>
The following table accounts for the difference between the actual tax
provision and the amount obtained by applying the statutory federal income
tax rate of 34% to income before income taxes for the years ended December
31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax provision computed at statutory rate $ 1,383,000 $ 304,000 $ 421,000
State income taxes net of federal tax benefit 108,000 0 10,000
Amortization of negative goodwill (170,000) 0 0
Other 32,000 (13,000) (1,000)
----------- ----------- -----------
Total provision for income taxes $ 1,353,000 $ 291,000 $ 430,000
----------- ----------- -----------
</TABLE>
9. Directors and Officers Annuity Plan:
The Bank has an agreement with an insurance company to provide for an
annuity payment upon the retirement or death of the Bank's Directors and
certain officers, ranging from $15,000 to $25,000 per year for ten years.
After five years of service, the Director or officer shall be 50% vested in
his accrued benefit. For each additional year of service over five years,
the Director or officer will be vested an additional 10% per year until he
is 100% vested. The accrued benefits under the plan at December 31, 1996,
1995 and 1994 totaled $224,000, $146,000 and $90,000, respectively. The
expense for the years ended December 31, 1996, 1995 and 1994 was $72,000,
$56,000 and $46,000, respectively. The Bank has elected to fund the plan
through the purchase of certain life insurance contracts. The cash
surrender value of these contracts (owned by the Bank) aggregated
$1,277,000, $1,181,000 and $1,105,000 at December 31, 1996, 1995 and 1994,
respectively, which is included in accrued interest and other assets.
10. Commitments and Contingencies:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments involve to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the financial statements.
52
<PAGE>
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same underwriting
standards and policies in making credit commitments as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit risk are
commitments to extend credit of approximately $28.5 million and $15.7 million
and standby letters of credit of approximately $1,129,000 and $419,000 at
December 31, 1996 and 1995, respectively.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and many
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate, marketable securities,
pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
The Company has entered into an employment agreement with the subsidiary bank's
CEO, which provides for the payment of base salary and certain benefits for a
period of three years after notice of termination. The aggregate commitment for
future salaries and benefits under this employment agreement at December 31,
1996 is approximately $675,000. The Company has also entered into an employment
agreement with the President, Chief Operating Officer and Chief Lending Officer
of the subsidiary Bank, which provides for the payment of base salary and
certain benefits through the year 1997. The aggregate commitment for future
salaries and benefits under these employment agreements at December 31, 1996 is
approximately $633,000.
11. Subordinated Debt:
In 1994, the Bank issued $3,400,000 of subordinated debentures due in 2001 in a
private placement with a broker. Interest on the debt accrued from their date of
issuance and was paid semiannually at the annual rate of 8.15%. During the
fourth quarter of 1996, all of the outstanding subordinated debt was redeemed at
par value.
12. Shareholders' Equity:
In accordance with the Pennsylvania Banking Code, cash dividends by the Bank may
be declared and only paid out of accumulated net earnings, as defined by the
Code. At December 31, 1996, there were no dividends declared or paid.
The Bank is subject to the Federal Reserve Board's risk-based capital leverage
ratio guidelines. These guidelines require all state-chartered member banks to
maintain total capital equal to at least 8% of risk-weighted total assets, Tier
1 capital (common stock, additional paid-in capital and retained earnings) equal
to 4% of risk-weighted total assets, and a Tier 1 leverage ratio of 5%. At
December 31, 1996, the aforementioned ratios are as follows:
53
<PAGE>
Regulatory Capital Requirements:
The following table presents the Bank's capital ratios at December 31,:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Tier I Capital $ 18,034,000 $ 8,600,000
Tier II Capital $ 2,092,000 $ 4,080,000
--------------- ---------------
Total Capital $ 20,126,000 $ 12,680,000
Total Average Quarterly Assets $ 271,009,000 $ 130,699,000
Total Risk-Weighted Assets (1) $ 178,834,000 $ 102,423,000
Tier I Risk-Based Capital Ratio (2) 10.08% 8.40%
Required Tier I Risk-Based Capital Ratio 4.00% 4.00%
--------------- ---------------
Excess Tier I Risk-Based Capital Ratio 6.08% 4.40%
Total Risk-Based Capital Ratio (3) 11.25% 12.38%
Required Total Risk-Based Capital Ratio 8.00% 8.00%
--------------- ---------------
Excess Total Risk-Based Capital Ratio 3.25% 4.38%
Tier I Leverage Ratio (4) 6.65% 6.58%
Required Tier I Leverage Ratio 5.00% 5.00%
--------------- ---------------
Excess Tier I Leverage Ratio 1.65% 1.58%
<FN>
- ---------------------------------
(1) Includes off-balance sheet items at credit-equivalent values.
(2) Tier I Risk-Based Capital Ratio is defined as the ratio of Tier I Capital
to Total Risk-Weighted Assets.
(3) Total Risk-Based Capital Ratio is defined as the ratio of Tier I and Tier
II Capital to Total Risk-Weighted Assets.
(4) Tier I Leverage Ratio is defined as the ratio of Tier I Capital to Total
Average Quarterly Assets.
</FN>
</TABLE>
13. Retirement Plan:
The Company maintains a Supplemental Retirement Plan for its Chief Executive
Officer which provides for payments of approximately $100,000 a year, commencing
for a ten-year period upon retirement or death. A life insurance contract has
been purchased to insure against all or a portion of the payments which may be
required prior to the anticipated retirement date of the officer.
The Bank has a defined contribution plan pursuant to the provision of 401(k) of
the Internal Revenue Code. The Plan covers all full-time employees who meet age
and service requirements. The plan provides for elective employee contributions
up to 6% of compensation and a 50% matching Company or Bank contribution limited
to 3%. The total expense relating to the plan was $47,000 and $33,000 in 1996
and 1995, respectively. There was no expense in 1994.
14. Fair Value of Financial Instruments:
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available, fair
values are based on assumptions including future cash flows and discount rates.
Accordingly, the fair value estimates cannot be substantiated, may not be
realized, and do not represent the underlying value of the Company.
The Company uses the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
54
<PAGE>
Cash and Cash Equivalents:
The carrying value is a reasonable estimate of fair value.
Securities Held to Maturity and Securities Available for Sale:
For investment securities with a quoted market price, fair value is equal to
quoted market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans:
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair value is the carrying value. For other categories of loans
such as commercial and industrial loans, real estate mortgage and consumer
loans, fair value is estimated based on discounting the estimated future cash
flows using the current rates at which similar loans would be made to borrowers
with similar collateral and credit ratings and for similar remaining maturities.
Deposit Liabilities:
For checking, savings and money market accounts, fair value is the amount
payable on demand at the reporting date. For time deposits, fair value is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit:
For commitments and standby letters of credit, the recorded fee amount is a
reasonable estimate of fair value because the majority of the Bank's commitments
to extend credit and standby letters of credit carry current market rates if
converted to loans.
At December 31, 1996, the carrying amount and the estimated fair value of the
Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial Assets
Cash and cash equivalents $ 15,496,000 $ 15,496,000 $ 3,856,000 $ 3,856,000
Securities available for sale 5,900,000 5,900,000 4,348,000 4,348,000
Securities held to maturity 75,054,000 75,307,000 34,004,000 3,846,000
Loans receivable, net 170,002,000 170,513,000 85,183,000 86,400,000
Financial Liabilities:
Deposits:
Demand, savings, and money market $ 70,032,000 $ 70,032,000 $ 25,597,000 $ 25,597,000
Time 180,027,000 181,167,000 90,827,000 88,982,000
Subordinated Debt 0 0 3,400,000 3,446,000
</TABLE>
15. Parent Company Financial Information
The following financial statements for First Republic Bancorp, Inc.
(formally known as Republic Bancorporation) should be read in conjunction
with the consolidated financial statements and the other notes related to
the consolidated financial statements. Republic Bancorporation was formed
on August 2, 1995, and therefore, comparative financial statements are not
presented for the year ended December 31, 1994.
55
<PAGE>
BALANCE SHEETS
December 31, 1996 and 1995
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS:
Cash $ 84 $ 0
Investment in subsidiary, at equity 18,287 8,577
Other Assets 0 45
------- -------
Total Assets $18,371 $ 8,622
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Total Liabilities $ 0 $ 0
Shareholders' Equity:
Common stock 28 16
Additional paid in capital 13,687 6,647
Retained earnings 4,653 1,940
Unrealized gain on securities available for sale, net of deferred tax 3 19
------- -------
Total Shareholders' Equity 18,371 8,622
------- -------
Total Liabilities and Shareholders' Equity $18,371 $ 8,622
======= =======
</TABLE>
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1996 and 1995
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Income $ 0 $ 0
Expenses 0 0
Equity in undistributed income of subsidiary 2,713 603
-------- --------
Net income 2,713 603
Shareholders' equity, beginning of year 8,622 8,000
Change in unrealized gain on securities available for sale (16) 19
Acquisition of ExecuFirst Bancorp, Inc. 7,052 0
-------- --------
Shareholders' equity, end of year $ 18,371 $ 8,622
-------- --------
</TABLE>
56
<PAGE>
STATEMENTS of CASH FLOWS
For the years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,713 $ 603
Adjustments to reconcile net income to
net cash provided by operating
activities:
Equity in undistributed income of subsidiary (2,713) (603)
------- -------
Net cash provided by operating activities 0 0
------- -------
Cash flows from investing activities:
Acquisition of ExecuFirst Bancorp, Inc. 84 0
------- -------
Net cash provided by investing activities 84 0
------- -------
Increase in cash 84 0
Cash, beginning of period 0 0
------- -------
Cash, end of period $ 84 $ 0
======= =======
</TABLE>
Note 16: Stock Options
The Company maintains a Stock Option Plan (the "Plan") under which the Company
grants options to its employees and directors. Under the terms of the plan,
500,000 shares of common stock are reserved for such options. The Plan provides
that the exercise price of each option granted equals the market price of the
Company's stock on the date of grant. Any option granted vests within one year
and has a maximum term of ten years. All options are granted upon approval of
the Stock Option Committee of the Board of Directors, consisting of three
disinterested members (as defined under Rule 16b-3 of the Securities Exchange
Act of 1934, as amended). Stock Options are issued to promote the interests of
the Company by providing incentives to (i) designated officers and other
employees of the Company or a Subsidiary Corporation (as defined herein), (ii)
non-employee members of the Company's Board of Directors and (iii) independent
contractors and consultants who may perform services for the Company. The
Company believes that the Plan causes participants to contribute materially to
the growth of the Company, thereby benefiting the Company's shareholders.
Prior to the merger of Republic Bancorporation and ExecuFirst Bancorp, Inc.,
various grants of stock options were issued pursuant to the then existing plans
of each Corporation.
In addition to the shares reserved under the plan, 85,019 options were granted
outside of the Plan to a director of the Company, as a result of the merger
between Republic Bancorporation and ExecuFirst Bancorp, Inc. These options have
a grant date of June 7, 1996. The options will vest within one year of the grant
date, and will expire on June 7, 2006.
57
<PAGE>
Shares outstanding under option and option price per share have been
retroactively restated (a recapitalization) for the equivalent number of shares
received in the merger after giving effect to any differences in par value of
the issuer's and acquirer's stock. Changes in total shares are as follows:
<TABLE>
<CAPTION>
December 31, 1996: Range of Weighted Average
Shares Exercise Prices Exercise Price
<S> <C> <C> <C>
Outstanding at beginning of year 312,849 $3.09 to $4.95 $ 3.77
Granted during year* 183,019 $6.36 to $7.69 7.07
Acquisition of Execufirst 66,000 $4.00 to $6.13 4.84
Bancorp, Inc.
Exercised during year 0 0
Forfeited during year 0 0
------- -------------- --------
Outstanding at end of year 561,868 $3.09 to $7.69 $ 4.97
Options exercisible at end of year 378,849 $3.09 to $6.13
</TABLE>
* Includes 85,019 options issued outside the Plan.
At December 31, 1995 and 1994, the Company had outstanding and exercisible
options of 312,849 at exercise prices per share between $3.09 and $4.95 per
share. There were no options granted or exercised during 1995 and 1994.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, ("SFAS No. 123"), "Accounting for Stock Based
Compensation", but applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees and related Interpretations in accounting for its Plan. Accordingly,
no compensation has been recognized for options granted under the Plan. If the
Company had elected to recognize compensation based on the fair value at the
grant dates for awards under its Plan, consistent with the method prescribed by
SFAS No. 123, net income and earnings per share would have been changed to the
pro forma amounts indicated below:
Year ended December 31, 1996
As Reported Pro Forma
Net income $2,713,000 $2,089,000
Primary earnings per share $1.10 $0.85
Fully diluted earnings per share $1.06 $0.81
Note: The pro forma disclosure shown above is not representative of the effects
on net income and earnings per share in future years because it includes an
incremental fair value of outstanding options that had been granted under the
previous existing plans of Republic Bancorporation and ExecuFirst Bancorp, Inc.
Excluding the impact of these options which have been converted into the
surviving plan under First Republic Bancorp, Inc., pro forma net income, primary
earnings per share and fully diluted earnings per share disclosures would have
been $2,543,000 and $ 1.03 and $ 0.99, respectively.
The fair value of each option granted (including the converted options under the
Republic Bancorporation and ExecuFirst Bancorp, Inc. plans) is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grant in 1996; dividend yield of 0%,
expected volatility of 35%, risk-free interest rate of 6.6% and an expected life
of 6.3 years. There were no options granted in 1995 under the previous existing
plans of Republic Bancorporation and ExecuFirst Bancorp, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000834285
<NAME> FIRST REPUBLIC BANCORP INC
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,716,000
<INT-BEARING-DEPOSITS> 665,000
<FED-FUNDS-SOLD> 7,115,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,900,000
<INVESTMENTS-CARRYING> 75,054,000
<INVESTMENTS-MARKET> 0
<LOANS> 172,094,000
<ALLOWANCE> 2,092,000
<TOTAL-ASSETS> 273,795,000
<DEPOSITS> 250,059,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,365,000
<LONG-TERM> 0
0
0
<COMMON> 28,000
<OTHER-SE> 18,343,000
<TOTAL-LIABILITIES-AND-EQUITY> 273,795,000
<INTEREST-LOAN> 11,798,000
<INTEREST-INVEST> 3,739,000
<INTEREST-OTHER> 1,366,000
<INTEREST-TOTAL> 16,903,000
<INTEREST-DEPOSIT> 9,477,000
<INTEREST-EXPENSE> 9,715,000
<INTEREST-INCOME-NET> 7,188,000
<LOAN-LOSSES> 155,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,581,000
<INCOME-PRETAX> 4,066,000
<INCOME-PRE-EXTRAORDINARY> 4,066,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,713,000
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 3.28
<LOANS-NON> 1,892,000
<LOANS-PAST> 3,069,000
<LOANS-TROUBLED> 1,892,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 680,000
<CHARGE-OFFS> 391,000
<RECOVERIES> 120,000
<ALLOWANCE-CLOSE> 2,092,000
<ALLOWANCE-DOMESTIC> 2,092,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 408,000
</TABLE>
