UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 1998
Commission File Number: 0-17007
Republic First Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2486815
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
(Address of principal executive offices) (Zip code)
215-735-4422
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
Issuer's classes of common stock, as of the latest practicable date.
5,515,517 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of April 30, 1998
Page 1 of 33
Exhibit index appears on page 31
<PAGE>
TABLE OF CONTENTS
Page
Part I: Financial Information
Item 1: Financial Statements 3
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II: Other Information
Item 1: Legal Proceedings 30
Item 2: Changes in Securities 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 5: Other Information 31
Item 6: Exhibits and Reports on Form 8-K 31
2
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Page Number
(1) Consolidated Balance Sheets as of March 31, 1998 and
December 31, 1997, respectively..................................4
(2) Consolidated Statements of Operations for the three months ended
March 31, 1998 and 1997..........................................5
(3) Consolidated Statements of Cash Flows for the three months ended
March 31, 1998 and 1997..........................................6
(4) Notes to Consolidated Financial Statements........................7
3
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Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
as of March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
ASSETS: 1998 1997
(unaudited)
<S> <C> <C>
Cash and due from banks $6,780,000 $5,850,000
Interest - bearing deposits with banks 40,000 476,000
Federal funds sold 0 0
------------ ------------
Total cash and cash equivalents 6,820,000 6,326,000
Securities available for sale, at fair value 2,773,000 2,950,000
Securities held to maturity at amortized cost 205,104,000 145,030,000
(fair value of $205,360,000 and
$145,908,000,
respectively)
Loans receivable, (net of allowance for loan losses
of
$2,128,000 and $2,028,000, respectively) 221,874,000 209,999,000
Premises and equipment, net 3,062,000 2,534,000
Real estate owned, net 1,944,000 1,944,000
Accrued income and other assets 15,533,000 6,679,000
------------ ------------
Total Assets $457,110,000 $375,462,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $29,666,000 $32,885,000
Demand - interest-bearing 8,850,000 8,587,000
Money market and savings 35,265,000 26,341,000
Time 161,359,000 152,014,000
Time over $100,000 26,951,000 28,574,000
------------ ------------
Total Deposits 262,091,000 248,401,000
Other borrowed funds 149,200,000 85,912,000
Accrued expenses and other liabilities 8,817,000 6,527,000
------------ ------------
Total Liabilities 420,108,000 340,840,000
------------ ------------
Shareholders' Equity:
Common stock par value $.01 per share, 20,000,000
shares authorized; shares issued and outstanding
5,515,517 as of March 31, 1998
and December 31, 1997 55,000 55,000
Additional paid in capital 26,364,000 26,364,000
Retained earnings 10,578,000 8,198,000
Accumulated other comprehensive income 5,000 5,000
------------ ------------
Total Shareholders' Equity 37,002,000 34,622,000
------------ ------------
Total Liabilities and Shareholders' Equity $457,110,000 $375,462,000
============ ============
</TABLE>
(see notes to consolidated financial statements)
4
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Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three Months Ended March 31,
(unaudited)
1998 1997
Interest income:
Interest and fees on loans $4,796,000 $3,806,000
Interest on federal funds sold 181,000 289,000
Interest on investments 3,066,000 1,342,000
---------- ----------
Total interest income 8,043,000 5,437,000
---------- ----------
Interest expense:
Demand - interest-bearing 55,000 65,000
Money market and savings 232,000 215,000
Time 2,372,000 1,032,000
Time over $100,000 402,000 1,457,000
Other borrowed funds 1,508,000 77,000
---------- ----------
Total interestexpense 4,569,000 2,846,000
---------- ----------
Net interest income 3,474,000 2,591,000
Provision for loan losses 130,000 30,000
---------- ----------
Net interest income after provision for
loan losses 3,344,000 2,561,000
---------- ----------
Non-interest income:
Service fees 95,000 79,000
Tax Refund Program revenue 2,155,000 2,004,000
Other income 29,000 52,000
---------- ----------
2,279,000 2,135,000
---------- ----------
Non-interest expenses:
Salaries and benefits 1,188,000 945,000
Occupancy/Equipment 362,000 252,000
Other expenses 514,000 636,000
---------- ----------
2,064,000 1,833,000
---------- ----------
Income before income taxes 3,559,000 2,863,000
---------- ----------
Provision for income taxes 1,179,000 859,000
---------- ----------
Net income $2,380,000 $2,004,000
========== ==========
Net income per share:
Basic $0.43 $0.49
---------- ----------
Diluted $0.40 $0.45
---------- ----------
Average common shares and CSE
outstanding:
Basic 5,515,517 4,101,010
---------- ----------
Diluted 6,008,947 4,452,669
---------- ----------
(See notes to consolidated financial statements)
5
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Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For Three Months Ended March 31,
(unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income $2,380,000 $2,004,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 130,000 30,000
Depreciation and amortization 62,000 48,000
Increase in accrued income
and other assets (8,854,000) (10,472,000)
Increase in accrued expenses
and other liabilities 2,290,000 1,347,000
------------ ------------
Net cash used in operating activities (3,992,000) (7,043,000)
------------ ------------
Cash flows from investing activities:
Purchase of securities:
Available for Sale 0 (4,913,000)
Held to Maturity (71,522,000) 0
Proceeds from principal receipts, sales, and
maturities of securities 11,604,000 5,343,000
Net increase in loans (12,162,000) (6,375,000)
Net increase in deferred fees 156,000 77,000
Premises and equipment expenditures (568,000) (677,000)
------------ ------------
Net cash used in investing activities (72,492,000) (6,545,000)
------------ ------------
Cash flows from financing activities:
Net increase in demand, money
market, and savings deposits 5,968,000 1,328,000
Net increase in borrowed funds less than 90 days 13,288,000 8,095,000
Net increase in borrowed funds greater than 90 days 50,000,000 0
Net increase (decrease) in time deposits 7,722,000 (4,753,000)
------------ ------------
Net cash provided by financing activities 76,978,000 4,670,000
------------ ------------
Increase in cash and cash equivalents 494,000 (8,918,000)
Cash and cash equivalents, beginning of period 6,326,000 15,496,000
============ ============
Cash and cash equivalents, end of period $6,820,000 $6,578,000
============ ============
Supplemental disclosure:
Interest paid $3,556,000 $2,803,000
============ ============
Non-cash transactions:
Changes in unrealized gain on securities
available for sale $0 $3,000
============ ============
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE>
REPUBLIC FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
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 offices and branches in Philadelphia and Montgomery Counties.
In the opinion of Republic First Bancorp, Inc. (the "Company"), the
accompanying unaudited financial statements contain all adjustments (including
normal recurring accruals) necessary to present fairly the financial position as
of March 31, 1998, the results of operations for the three months ended March
31, 1998 and 1997, and the cash flows for the three months ended March 31, 1998
and 1997. The interim results of operations may not be indicative of the results
of operations for the full year. The accompanying unaudited financial statements
should be read in conjunction with the Company's audited financial statements,
and the notes thereto, included in the Company's 1997 annual report.
Note 2: Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements of the Company include the
accounts of Republic First Bancorp. Inc. and its wholly-owned subsidiary, First
Republic 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 changes in the interest
rate environment.
Additionally, the Company derives fee income from the Bank's
participation in a Tax Refund Program which indirectly funds consumer loans
collateralized by federal income tax refunds. Approximately $2.2 million and
$2.0 million in gross revenues were collected on these loans during the first
three months ended 1998 and 1997, respectively. The Company expects to
participate in the program again in 1999, 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.
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
7
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reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant estimates are made by management in determining the
allowance for loan losses 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 loan losses and carrying value of real estate
owned is dependent, to a great extent, on the general condition of the local
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 loan losses
and the carrying values of the real estate owned could differ materially in the
near term.
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 March 31, 1998 and December 31, 1997 were
$850,000 for both periods. These requirements were satisfied through the
restriction of vault cash and a balance at the Federal Reserve Bank of
Philadelphia.
Loans
Loans are stated at the principal amount outstanding, net of deferred
loan fees and costs. The amortization of deferred loan fees and costs are
accounted for by a method which approximates level yield. Any unamortized fees
or costs associated with loans which pay down in full are immediately recognized
in the Company's operations. 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 and/or interest for
a period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in accordance
with the contractual terms of 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.
8
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is established through a provision for
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 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 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 less estimated costs to sell the
property. Costs to maintain other real estate owned, or deterioration on value
of the properties are recognized as period expenses. There is no valuation
allowance associated with the Company's other real estate portfolio for those
periods presented.
Income Taxes
Deferred income taxes are established for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities at the tax rates expected to be in effect when the temporary
differences are realized or settled. 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.
Reclassifications
Certain items in the 1997 financial statements were reclassified to
conform to 1998 presentation format. These reclassifications had no impact on
net income.
9
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The Company declared two six for five stock splits effected in the form
of a 20% dividend on March 4, 1997 and February 19, 1998, respectively, for
shareholders of record on March 4, 1997 and March 2, 1998 prospetively. The
dividends were paid on April 15, 1997 and March 27, 1998, respectively. Average
common shares and common share equivalents, and all other presentations have
been retroactively restated as if the dividends were declared at the beginning
of each period.
Earnings Per Share
Earnings per common share, and common stock equivalent shares, are
based on the weighted average number of common shares and common stock
equivalent shares outstanding during the periods. Stock options are included as
common stock equivalents when dilutive. These common stock equivalents had a
dilutive effect for the three months ended March 31, 1998 and 1997.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share".
This Statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the standards for computing EPS
previously found in APB Opinion No. 15, "Earnings Per Share", and makes them
comparable to international EPS standards. It replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. This Statement requires restatement of all prior
period EPS data presented upon adoption. The Company adopted SFAS No. 128
effective December 31, 1997. All prior period earnings per share presentations
have been restated to conform to this pronouncement.
EPS consists of two separate components, basic EPS and diluted EPS.
Basic EPS is computed by dividing net income by the weighted average number of
common shares outstanding for each period presented. Diluted EPS is calculated
by dividing net income by the weighted average number of common shares
outstanding plus common stock equivalents. Common stock equivalents consist of
dilutive stock options granted through the company's stock option plan.. The
following table is a reconciliation of the numerator and denominator used in
calculating basic and diluted EPS. There are no anti-dilutive common stock
equivalents at March 31, 1998. The following table is a comparison of EPS for
the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C> <C>
Income for year ended (numerator, for
both calculations) $2,380,000 $2,004,000
Shares Per Share Shares Per Share
Weighted average shares
for period 5,515,517 4,101,010
Basic EPS $0.43 $0.49
Add common stock equivalents
representing dilutive stock options 493,430 351,659
Effect on basic EPS and CSE $(0.03) $(0.05)
Equals total weighted average
shares and CSE (diluted) 6,008,947 4,452,669
Diluted EPS $0.40 $0.45
</TABLE>
10
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Investment Securities
Debt and equity securities are classified in one of three categories,
as applicable, and are accounted for as follows: debt securities which the
Company has the 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 net unrealized
gains and losses, net of tax, reported as a separate component of shareholders'
equity. Securities are adjusted for amortization of premiums and accretion of
discounts over the life of the related security on a level yield method.
Securities available for sale 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
1998 or 1997. Additionally, neither the Bank nor the Company have any trading
securities.
Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The following table displays net income and the
components of other comprehensive income to arrive at total comprehensive
income. For the Company, the only components of other comprehensive income are
those related to SFAS No. 115 available for sale securities.
For the three months ended March 31, 1998 1997
(amount in thousands)
Net income $2,380 $2,004
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains during the period 0 3
Less: Reclassification adjustment for gains
included in net income 0 0
------ ------
Other comprehensive income 0 0
Comprehensive income $2,380 $2,004
====== ======
Note: 3 Legal Proceedings
The Bank, along with a number of other financial institutions, has been
made a party to a lawsuit brought by a New Jersey bank claiming damages of
approximately $200,000 arising out of a series of mortgage loans made to a
borrower who apparently procured one or more of these loans fraudulently. The
Bank believes that it has a valid defense to this claim. In addition, one of
these loans in the amount of $612,000, was sold by the Bank to a mortgage banker
who is now alleging that the Bank breached its warranty obligations when it sold
this loan to the mortgage banker because the lien of the loan is possibly
inferior to other mortgages. The Bank believes its actions were proper, that the
lien is enforceable as a first lien, and it intends to vigorously defend these
claims and, to the extent necessary, seek recourse from other parties who may
have participated in this allegedly fraudulent scheme.
11
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The Company and the Bank are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Bank, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Bank.
12
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended March 31, 1998 Compared to March 31, 1997
Results of Operations:
Overview
The Company's net income increased $376,000, or 18.8%, to $2.4 million
for the quarter ended March 31, 1998, from $2.0 million for the quarter ended
March 31, 1997. The earnings increased primarily due to an increase in the
Bank's net interest income. Diluted earnings per share for the quarter ended
March 31, 1998 was $0.40 compared to $0.45, for the quarter ended March 31,
1997, due to the increase in net income, offset by the effect of the stock
offering during the fourth quarter of 1997, by which 1,150,000 additional shares
were issued resulting in a materially larger number of average shares
outstanding for the quarter ended March 31, 1998.
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily upon the
Bank's net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is affected by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
The Bank's net interest income increased $883,000, or 34.1%, to $3.5
million for the quarter ended March 31, 1998 from $2.6 million for the quarter
ended March 31, 1997. The increase in net interest income was primarily due to
an increase in average interest-earning assets due to the acquisition of
investment securities primarily funded by borrowings, and also in part to
increased business development. The Company's total interest income increased
$2.6 million, or 47.9%, to $8.0 million for the quarter ended March 31, 1998
from $5.4 million for the quarter ended March 31, 1997. Interest and fees on
loans increased $1.0 million, or 26.0%, to $4.8 million for the quarter ended
March 31, 1998 from $3.8 million for the quarter ended March 31, 1997. This
increase was due primarily to an increase in average loans outstanding for the
period of $41.8 million. Also contributing to the increase in total interest
income was an increase in interest and dividend income on securities of $1.7
million, or 128.5%, to $3.1 million for the quarter ended March 31, 1998 from
$1.3 million for the quarter ended March 31, 1997. This increase in investment
income was the result of an increase in the average balance of securities owned
of $95.0 million, or 117.1%, to $176.1 million for the quarter ended March 31,
1998 from $81.1 million for the quarter ended March 31, 1997.
The increase in the average balance of securities is the result of
leveraged funding programs employed by the Bank that use Federal Home Loan Bank
("FHLB") advances to fund securities purchases. The purpose of these programs is
to target growth in net interest income while managing liquidity, credit, market
and interest rate risk. From time to time, a specific leveraged funding program
may attempt to achieve current earnings benefits by funding security portfolio
increases partially with short-term FHLB advances with the expectation that
future growth in deposits will replace the FHLB advances at maturity.
The increase in average yield on interest-earning assets from 7.83% for
the three months ended March 31, 1997 to 7.92% for the same period in 1998, was
largely the result of the Bank's strategy to reduce its investment in
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<PAGE>
overnight funds, better utilize its borrowing capacity with FHLB advances, and
minimize lower yield assets needed for short-term liquidity needs.
The Bank's total interest expense increased $1.7 million, or 60.5%, to
$4.6 million for the quarter ended March 31, 1998 from $2.8 million for the
quarter ended March 31, 1997. This increase was due to an increase in the volume
of average interest-bearing liabilities of $116.8 million, or 53.4%, to $335.4
million for the quarter ended March 31, 1998 from $218.6 million for the quarter
ended March 31, 1997. The average rate paid on interest-bearing liabilities
increased 24 basis points to 5.52% for the quarter ended March 31, 1998 from
5.28% for the quarter ended March 31, 1997 due primarily to the increase in
average FHLB advances of $108.8 million which were borrowed at higher
incremental rate than the Bank's existing interest-bearing liability base.
Interest expense on time deposits increased $285,000, or 11.5%, to $2.8
million for the quarter ended March 31, 1998 from $2.5 million for the quarter
ended March 31, 1997. This increase was primarily due to an increase in the
average volume of certificates of deposit in the amount of $7.5 million, or
4.2%, to $184.1 million for the quarter ended March 31, 1998 from $176.6 million
for the quarter ended March 31, 1997.
Interest expense on FHLB advances was $1.5 million for the quarter
ended March 31, 1998. At March 31, 1998, FHLB advances funded purchases of
securities and origination of loans as part of an ongoing leveraged funding
program designed to increase earnings while also managing interest rate risk and
liquidity. Additionally, the Bank utilized FHLB borrowings to fund the Tax
Refund Program during the first quarter in 1998.
Provision for Loan Losses
The provision for loan losses is charged to operations to bring the
total allowance for loan losses to a level considered appropriate by management.
The level of the allowance for loan losses is determined by management based
upon its evaluation of the known as well as inherent risks within the Bank's
loan portfolio. Management's periodic evaluation is based upon an examination of
the portfolio, past loss experience, current economic conditions, the results of
the most recent regulatory examinations and other relevant factors. The
provision for loan losses increased $100,000, to $130,000 for the quarter ended
March 31, 1998 from $30,000 for the quarter ended March 31, 1997 due to an
increase in average loans outstanding of $41.8 million from March 31, 1997 to
March 31, 1998.
Non-Interest Income
Total non-interest income increased $144,000, or 6.74%, to $2.3 million
for the quarter ended March 31, 1998 from $2.1 million for the quarter ended
March 31, 1997. The increase was due primarily to a $151,000 increase in Tax
Refund Program income associated with an increase in Tax Refund Product sales in
1998. Additionally, there was an increase in service fees of $16,000 to $95,000
for the quarter ended March 31, 1998 from $79,000 for the quarter ended March
31, 1997.
Non-Interest Expenses
Total non-interest expenses increased $231,000, to $2,064,000 for the
quarter ended March 31, 1998 from $1,833,000 for the quarter ended March 31,
1997. Salaries and benefits increased $243,000, or 25.7%, to $1.2 million for
the quarter ended March 31, 1998 from $945,000 for the quarter ended March 31,
1997. The increase
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<PAGE>
was due primarily to an increase in staff as a result of the expansion of the
branches and business development staff.
Occupancy and equipment expenses increased $110,000, or 43.7%, to
$362,000 for the quarter ended March 31, 1998 from $252,000 for the quarter
ended March 31, 1997 as a result of opening three additional branch offices.
Provision for Income Taxes
The provision for income taxes increased $320,000, or 37.3%, to $1.2
million for the quarter ended March 31, 1998 from $859,000 for the quarter ended
March 31, 1997. This increase is mainly the result of the increase in pre-tax
income from 1997 to 1998. The effective tax rate in 1998 increased to 33.1% from
30.0% in 1997 primarily due to certain tax benefits recorded in 1996, and
recognized in 1997, as a result of the merger with ExecuFirst in June of 1996.
Financial Condition:
March 31, 1998 Compared to December 31, 1997
Total assets increased $81.6 million, or 21.7%, to $457.1 million at
March 31, 1998 from $375.5 million at December 31, 1997. The increase in assets
was the result of higher levels of loans and securities, which were funded by
the public offering of stock, and a net increase in borrowings. Net loans
increased $11.9 million, or 5.7%, to $221.9 million at March 31, 1998 from
$210.0 million at December 31, 1997. Investment securities increased $59.9
million, or 40.5%, to $207.9 million at March 31, 1997 from $148.0 million at
December 31, 1997. The increase was due primarily to the purchase of $60.0
million in securities from funds generated from the public offering, and other
borrowings as part of the Company's leveraged funding strategy which is intended
to increase earnings.
Cash and due from banks, interest-bearing deposits, which are held at
the Federal Home Loan Bank of Pittsburgh, and federal funds sold are all liquid
funds. The aggregate amount in these three categories increased by $494,000, or
7.8%, to $6.8 million at March 31, 1998 from $6.3 million at December 31, 1997.
Premises and equipment, net of accumulated depreciation, increased
$528,000 to $3.1 million at March 31, 1998 from $2.5 million at December 31,
1997. The increase was attributable mainly to the renovations of the second
floor at 1608 Walnut Street for the Bank's Operations Department, in addition to
renovations to the 1601 Market Street Branch which replaced the 1515 Market
Street Branch.
Total liabilities increased $79.3 million, or 23.3%, to $420.1 million
at March 31, 1998 from $340.8 million at December 31, 1997. Deposits, the
Company's primary source of funds, increased $13.7 million, or 5.5%, to $262.1
million at March 31, 1998 from $248.4 million at December 31, 1997. The
aggregate of transaction accounts, which include demand, money market and
savings accounts, increased $6.0 million, or 8.8%, to $73.8 million at March 31,
1998 from $67.8 million at December 31, 1997. Certificates of deposit increased
by $7.7 million, or 4.3%, to $188.3 million at March 31, 1998 from $180.6
million at December 31, 1997.
15
<PAGE>
Other borrowed funds were $149.2 million at March 31, 1998 as compared
to $85.9 million at December 31, 1997. The increase was primarily the result of
the Company's leveraged funding strategy of utilizing short-term and long-term
FHLB advances to purchase investment securities and to fund new loan
originations.
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Bank typically defines interest-sensitive assets and interest-sensitive
liabilities as those that reprice within one year or less. Maintaining an
appropriate match is a method of avoiding wide fluctuations in net interest
margin during periods of changing interest rates.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods, and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP ratio suggests that a financial institution
may be better positioned to take advantage of declining interest rates rather
than increasing interest rates, and a positive GAP ratio suggests the converse.
Static gap analysis describes interest rate sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not impact all categories
of assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also involves assumptions on certain categories of assets and deposits.
For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at 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 or a negative gap results when the
amount of interest rate sensitive assets exceeds or lags, respectively, interest
rate sensitive liabilities.
Shortcomings are inherent in a simplified and static GAP analysis that
may result in an institution with a negative GAP having interest rate behavior
associated with an asset-sensitive balance sheet. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Furthermore,
repricing characteristics of certain assets and liabilities may vary
substantially within a given time period. In the event of a change in interest
rates, prepayment and early withdrawal levels could also deviate significantly
from those assumed in calculating GAP in the manner presented in the table
below.
The Bank attempts to manage its assets and liabilities in a manner that
stabilizes net interest income under a broad range of interest rate
environments. Adjustments to the mix of assets and liabilities are made
periodically in an effort to provide dependable and steady growth in net
interest income regardless of the behavior of interest rates.
16
<PAGE>
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.
Since the assets and liabilities of the Bank 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. The Bank's finance committee acts as its asset/liability company.
The following table presents a summary of the Bank's interest rate
sensitivity GAP at March 31, 1998. For purposes of these tables, the Bank has
used assumptions based on industry data and historical experience to calculate
the expected maturity of loans because, statistically, certain categories of
loans are prepaid before their maturity date, even without regard to interest
rate fluctuations. Additionally certain prepayment assumptions were made with
regard to investment securities based upon the expected prepayment of the
underlying collateral of the mortgage-backed securities.
17
<PAGE>
Republic First Bancorp
Interest Sensitivity Gap
March 31, 1998
<TABLE>
<CAPTION>
0 - 90 91 - 180 181 - 365 1 - 5 5 YRS &
Days Days Days Years Over Total
----------------------------------------------------------------------------------------
Interest Sensitive Assets:
<S> <C> <C> <C> <C> <C> <C>
Interest Bearing Balances
Due From Banks $40 $0 $0 $0 $0 $40
Federal Funds Sold -- -- -- -- -- --
Investment Securities 29,154 11,732 39,704 20,998 106,289 207,877
Loans 88,361 7,932 13,932 73,301 40,476 224,002
-----------------------------------------------------------------------------------
Totals 117,555 19,664 53,636 94,299 146,765 431,919
===================================================================================
Cumulative Totals $117,555 $137,219 $190,855 $285,154 $431,919
===================================================================================
Interest Sensitive Liabilities:
Demand Interest Bearing $4,425 $ -- $ -- $2,213 $2,212 $8,850
Savings Accounts 1,200 -- -- 1,200 2,400
Money Market Accounts 16,433 -- -- 8,216 8,216 32,865
FHLB Borrowings 50,475 16,325 1,800 80,600 -- 149,200
Time Deposits 34,184 48,820 48,819 56,487 -- 188,310
-----------------------------------------------------------------------------------
Totals $106,717 $65,145 $50,619 $147,516 $11,628 $381,625
Cumulative Totals $106,717 $177,379 $222,481 $369,997 $381,625
===================================================================================
GAP $10,839 $(45,481) $3,017 $(53,217) $135,137 $50,294
Cumulative GAP $10,839 $(34,643) $(31,626) $(84,843) $50,294 $ --
.........................................................................................................................
Interest Sensitive Assets/
Interest Sensitive Liabilities 1.1 0.8 0.9 0.8 1.1
.........................................................................................................................
Cumulative GAP/
Total Earning Assets 2.5% -8.0% -7.3% -19.6% 11.6%
Total Earning Assets $431,919
</TABLE>
18
<PAGE>
Capital Resources
The Bank is required to comply with certain "risk-based" capital
adequacy guidelines issued by the Federal Reserve Bank (the "FRB") and the
Federal Deposit Insurance Corporation (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. Applying the federal guidelines, the ratio of qualifying
total capital to weighted-risk assets was 12.22% and 12.56% at March 31, 1998
and December 31, 1997, 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 March 31, 1998 and December 31, 1997 were
11.37% and 11.65%, respectively. At March 31, 1998, and December 31, 1997, the
Bank exceeded the requirements for risk-based capital adequacy under both
federal and Pennsylvania guidelines.
Under FRB and FDIC regulations, a bank is deemed to be "well
capitalized" when it has a "leverage ratio" ("Tier l capital to total quarterly
average assets") of at least 5%, a Tier l capital to risk-weighted assets ratio
of at least 4%, and a total capital to weighted-risk assets ratio of at least
8%. At March 31, 1998 and December 31, 1997, the Bank's leverage ratio was 6.33%
and 7.86% respectively. Accordingly, at March 31, 1998 and December 31, 1997,
the Bank was considered "well capitalized" under FRB and FDIC regulations.
Shareholders' equity in the Company as of March 31, 1998 totaled
approximately $37,002,000 compared to approximately $34,622,000 as of December
31, 1997. This increase was attributable to net income for the quarter of
approximately $2,380,000.
Book value per share of the Company's common stock increased from $6.28
as of December 31, 1997 to $6.71 as of March 31, 1998. The increase was
attributable to earnings for the three months ended March 31, 1998 of
$2,380,000.
Regulatory Capital Requirements
Federal banking agencies impose three minimum capital requirements on
the Bank's risk-based capital ratios based on total capital, Tier 1 capital, and
a leverage capital ratio. The risk-based capital ratios measure the adequacy of
a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level of
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
19
<PAGE>
The following table presents the Bank's capital regulatory ratios at March 31,
1998 and December 31, 1997:
<TABLE>
<CAPTION>
To be well
capitalized under
For capital FRB capital
Actual adequacy purposes guidelines
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
As of March 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total risk based capital $30,395 12.22% $19,983 8.00% $24,866 10.00%
Tier I capital 28,267 11.37% 9,947 4.00% 14,920 6.00%
Tier I (leveraged) capital 28,267 6.33% 22,334 5.00% 22,334 5.00%
As of December 31, 1997:
Total risk based capital $28,003 12.56% $17,831 8.00% $22,289 10.00%
Tier I capital 25,975 11.65% 8,916 4.00% 13,374 6.00%
Tier I (leveraged) capital 25,975 7.86% 16,525 5.00% 16,525 5.00%
</TABLE>
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 FRB 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.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, take advantage of market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. Sources of asset
liquidity are provided by cash and amounts due from banks, interest-bearing
deposits with banks, and federal funds sold. The Bank's liquid assets totaled
$6.8 million at March 31, 1998 compared to $6.3 million at December 31, 1997.
Maturing and repaying loans are another source of asset liquidity.
Liability liquidity can be met by attracting deposits with competitive
rates, buying federal funds or utilizing the facilities of the Federal Reserve
System or the Federal Home Loan Bank System. The Bank utilizes a variety of
these methods of liability liquidity. At March 31, 1998, the Bank had $94.8
million in unused lines of credit available to it under arrangements with
correspondent banks compared to $50.1 million at December 31, 1997. These lines
of credit enable the Bank to purchase funds for short-term needs at current
market rates.
20
<PAGE>
At March 31, 1998, the Bank had outstanding commitments (including
unused lines of credit and letters of credit) of $18.1 million. Certificates of
deposit which are scheduled to mature within one year totaled $131.8 million at
March 31, 1998, and other borrowed funds that are scheduled to mature within the
same period amounted to $68.6 million. The Bank anticipates that it will have
sufficient funds available to meet its current commitments.
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. These
lines of credit total $10 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 $234.0 million. An aggregate of
$149.2 million was outstanding on the aforementioned lines of credit at March
31, 1998. 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 fiscal 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 March 31, 1998 and December 31,
1997 were primarily due to the investing of excess and borrowed funds into
investment securities. Cash was provided by financing activities during 1998 and
1997, as the Bank has grown its deposit base and increased its borrowings 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.
Securities Portfolio
The Company classifies its securities under one of these categories:
"held-to-maturity" which is accounted for at historical cost, adjusted for
accretion of discounts and amortization of premiums; "available-for-sale" which
is accounted for at fair market value, with unrealized gains and losses reported
as a separate component of shareholders' equity; or "trading" which is accounted
for at fair market value, with unrealized gains and losses reported as a
component of net income. The Bank does not hold "trading" securities.
At March 31, 1998, the Bank had identified certain investment
securities that are being held for indefinite periods of time, including
securities that will be used as part of the Bank's asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments and similar factors. These securities are classified as
available-for-sale and are intended to increase the flexibility of the Bank's
asset/liability management. Available-for-sale securities consist of US
Government Agency securities and other investments. The book and market values
of securities available-for-sale was $2,766,000 and $2,773,000 as of March 31,
1998. The net unrealized gain on securities available-for-sale, as of this date,
was $7,000.
21
<PAGE>
The following table represents the carrying and estimated fair values of
Investment Securities at March 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
Gross Gross
Amortized Unrealized Unrealized
Available-for-Sale ($000) Cost Gain Loss Fair Value
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Mortgage-backed $2,766 $9 $(2) $2,773
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
Total Available-for-Sale $2,766 $9 $(2) $2,773
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity ($000) Cost Gain Loss Fair Value
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
Mortgage-backed $142,339 $584 $(545) $142,378
US Government Agencies 53,366 270 (53) 53,583
Other 9,399 0 0 9,399
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
Total Held-to-Maturity $205,104 $854 $(598) $205,360
- --------------------------------------- ----------------- ----------------- ----------------- ----------------
</TABLE>
Loan Portfolio
The Company's loan portfolio consists of commercial loans, commercial
real estate loans, commercial loans secured by one-to-four family residential
property, as well as residential, home equity loans and consumer loans.
Commercial loans are primarily term loans made to small-to-medium-sized
businesses and professionals for working capital purposes. The majority of these
commercial loans are collateralized by real estate and further secured by other
collateral and personal guarantees. The Bank's commercial loans generally
average from $250,000 to $750,000 in amount.
The Company's net loans increased $11.9 million, or 5.7%, to $221.9
million at March 31, 1998 from $210.0 million at December 31, 1997, which were
primarily funded by an increase in borrowed funds and proceeds from the stock
offering.
The following table sets forth the Company's gross loans by major
categories for the periods indicated:
As of March 31, 1998 As of December 31, 1997
Balance % of Total Balance % of Total
Real Estate:
1-4 Family $88,300 39.4% $71,241 33.6%
Multi-Family 7,203 3.2% 7,125 3.4%
Comm RE 87,451 39.1% 87,701 41.4%
-------- ----- -------- -----
Total Real Estate 182,954 81.7% 166,067 78.4%
Commercial 38,952 17.4% 42,519 20.0%
Other 2,096 0.9% 3,441 1.6%
-------- ----- -------- -----
Total Loans $224,002 100.0% $212,027 100.0%
22
<PAGE>
Credit Quality
The Bank's written lending policies require underwriting, loan
documentation, and credit analysis standards to be met prior to funding. In
addition, a senior loan officer reviews all loan applications. The Board of
Directors reviews the status of loans monthly to ensure that proper standards
are maintained.
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal and/or interest for
a period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in accordance
with the contractual terms of the loan.
While a loan is classified as nonaccrual or as an impaired loan and the
future collectability of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectability of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case where a
nonaccrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
At March 31, 1998 and December 31, 1997
(Dollars in thousands)
March 31, December 31,
1998 1997
Loans accruing, but past due 90 days or more . $215 $113
Nonaccrual loans ............................. 1,634 1,800
------ ------
Total non-performing loans (1) ............... 1,849 1,913
Foreclosed real estate ....................... 1,944 1,944
------ ------
Total non-performing assets(2) ......... $3,793 $3,857
====== ======
Non-performing loans as a percentage of total
loans, net of unearned income .............. 0.83% 0.90%
Non-performing assets as a percentage of total
assets .................................... 0.83% 1.03%
(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual
basis, (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans.
(2) Non-performing assets are composed of non-performing loans and foreclosed
real estate (assets acquired in foreclosure).
23
<PAGE>
At March 31, 1998, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to real
estate agents and managers in the aggregate amount of $49.0 million, which
represented 22.1% of gross loans receivable. Loan concentrations are considered
to exist when there are amounts loaned to a multiple number of borrowers engaged
in similar activities that would cause them to be similarly impacted by economic
or other conditions.
Foreclosed real estate is initially recorded at fair value, net of
estimated selling costs at the date of foreclosure, thereby establishing a new
cost basis. After foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of cost or fair value, less
estimated costs to sell. Revenues and expenses from operations and changes in
the valuation allowance are included in other expenses.
Potential problem loans consist of loans that are included in
performing loans, but for which potential credit problems of the borrowers have
caused management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At March 31, 1998, all
identified potential problem loans are included in the preceding table.
The Bank had no credit exposure to "highly leveraged transactions" at
March 31, 1998, as defined by the FRB.
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for the
three months ended March 31, 1998, and 1997:
For the three months ended
March 31, 1998 and 1997
(Dollars in thousands)
1998 1997
Balance at beginning of period........ $2,028 $2,092
Charge-offs:
Commercial......................... 53 6
Real estate........................ 0 0
Consumer........................... 0 0
--------------------------------------
Total charge-offs............... 53 6
--------------------------------------
Recoveries:
Commercial......................... 10 34
Real estate........................ 0 10
Consumer........................... 13 2
--------------------------------------
Total recoveries................ 23 46
--------------------------------------
Net charge-offs....................... 30 (40)
--------------------------------------
Provision for loan losses............. 130 30
--------------------------------------
Balance at end of period........... $2,128 $2,162
Average loans outstanding(1)....... $216,420 $174,603
As a percent of average loans(1):
Net charge-offs.................... 0.02% (0.02%)
Provision for loan losses.......... 0.06% 0.02%
Allowance for loan losses.......... 0.98% 1.24%
Allowance for possible loan losses to:
Total loans, net of unearned income 0.96% 1.23%
Total non-performing loans......... 115.08% 113.01%
(1) Includes nonaccruing loans.
24
<PAGE>
Management makes a monthly determination as to an appropriate provision
from earnings necessary to maintain an allowance for loan losses that is
adequate based upon the loan portfolio composition, classified problem loans,
and general economic conditions. The Company's Board of Directors periodically
reviews the status of all nonaccrual and impaired loans and loans criticized by
the Bank's regulators and internal loan review officer. The internal loan review
officer reviews both the loan portfolio and the overall adequacy of the loan
loss reserve. During the review of the loan loss reserve, the Board of Directors
considers specific loans, pools of similar loans, historical charge-off
activity, and a 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.
The Bank has an existing loan review program which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
and is reported quarterly to the Board of Directors. The Board of Directors
reviews the finding of the loan review program on a monthly basis.
Determining the appropriate level of the allowance for loan losses at
any given date is difficult, particularly in a continually changing economy.
However, there can be no assurance that, if asset quality deteriorates in future
periods, additions to the allowance for loan losses will not be required.
The Bank's management is unable to determine in what loan category
future charge-offs and recoveries may occur. The following schedule sets forth
the allocation of the allowance for loan losses among various categories. At
March 31, 1998, approximately $574,000 or 27.0% of the allowance for loan losses
is allocated to protect the Bank against potential yet undetermined losses. The
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb future loan losses in any loan category.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
At March 31, 1998 and December 31, 1997
(Dollars in thousands)
1998 1997
Amount Percent Amount Percent
Of Loans Of Loans
In Each In Each
Category Category
to Loans(1) to Loans(1)
Allocation of
allowance for loan
losses:
Commercial........... $1,554 56.50% $1,595 61.42%
Residential real
estate ............ 104 42.60% 41 36.96%
Consumer and other... 67 0.90% 58 1.62%
Unallocated.......... 403 334
--------- ---------
Total............. $2,128 $2,028
========= =========
</TABLE>
The unallocated allowance increased $69,000 to $403,000 at March 31,
1998 from $334,000 at December 31, 1997, primarily as the result of a decline in
non-performing loans.
(1) Gross loans net of unearned income and allowance for loan loss.
25
<PAGE>
The Bank had delinquent loans as of March 31, 1998 and December 31, 1997 as
follows; (i) 30 to 59 days past due, consisted of commercial and consumer loans
respectively in the aggregate principal amount of $3,144,000 and $2,694,000
respectively; and (ii) 60 to 89 days past due, consisted of commercial and
consumer loan in the aggregate principal amount of $230,000 and $340,000
respectively. In addition, the Bank has classified certain loans as substandard
and doubtful (as those terms are defined in applicable Bank regulations). At
March 31, 1998 and December 31, 1997, substandard loans totaled approximately
$1,618,000 and $2,402,000 respectively; and doubtful loans totaled approximately
$16,000 and $16,000 respectively.
Deposit Structure
Total deposits at March 31, 1997 consisted of approximately $29.7
million in non-interest-bearing demand deposits, approximately $8.9 million in
interest-bearing demand deposits, approximately $35.3 million in savings
deposits and money market accounts, approximately $161.4 million in time
deposits under $100,000, and approximately $27.0 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 is a distribution of the balances of the Bank's
average deposit balances and the average rates paid therein for the three months
ended March 31, 1998 and the year ended December 31, 1997.
<TABLE>
<CAPTION>
Average Deposit Table
For the three months ended
March 31, 1998 and the year
ended December 31, 1997
(Dollars in thousands)
<S> <C> <C> <C> <C>
Balance Rate Balance Rate
1998 1997
Non-interest-bearing balances (1) $40,361 N/A $25,551 N/A
================================================
Money market and savings deposits 33,612 2.76% 34,141 2.88%
Time deposits................ 184,106 6.03% 174,887 5.92%
Demand deposits, interest-bearing 8,922 2.46% 8,428 2.50%
------------------------------------------------
Total interest-bearing deposits $226,640 5.48% $217,456 5.31%
================================================
</TABLE>
(1) Note that approximately $17.9 million of these balances during the three
months ended March 31, 1998 are related to the Tax Refund Program and
are expected to be disbursed during the second quarter of 1998.
26
<PAGE>
The following is a breakdown, by contractual maturities, of the
Company's time certificates of deposit issued in denominations of $100,000 or
more as of March 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
<S> <C> <C>
Certificates of $100,000 or More
(In thousands)
March 31, December 31,
1998 1997
--------------------------------
Maturing in:
Three months or less................................................ $6,917 $9,896
Over three months through six months................................ 10,954 8,726
Over six months through twelve months............................... 6,068 7,233
Over twelve months.................................................. 3,012 2,719
-----------------------------
Total............................................................ $26,951 $28,574
=============================
</TABLE>
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 Bank 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 March 31, 1998 and December 31, 1997, firm loan commitments
approximated $17.7 million and $17.3 million respectively and commitments of
standby letters of credit approximated $367,000 and $453,000, respectively.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Bank's need and ability to react to
changes in interest rates. As discussed previously, management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest income
from being affected by wide interest rate fluctuations.
Year 2000 Issue
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
27
<PAGE>
corrected, many computer applications could fail or create erroneous results by
or at the year 2000. The year 2000 issue affects virtually all companies and
organizations.
In response to the year 2000 issue, the Company had adopted a
comprehensive plan to be implemented during 1997, and completed by year end
1998. This plan identifies systems which could be affected by the year 2000
issue, and either internally tests potentially affected systems, or requests
certification from the relevant software vendors to ascertain whether the system
is in compliance. The Company's plan is to resolve potential problems which are
identified, by the given target date. Although management believes that it has
addressed the major areas with respect to Year 2000 compliance, there can be no
assurances that the Company will not be impacted by Year 2000 complications. The
Company estimates that the dollar cost to the Company to be in compliance with
the year 2000 Issue will range from $175,000 to $250,000 over the next eighteen
months. These costs include new equipment and software purchases in addition to
testing applications prior to the year 2000.
Recent Accounting Pronouncements:
Earnings Per Share
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share".
This Statement establishes standards for computing and presenting EPS and
applies to entities with publicly held common stock or potential common stock.
This Statement simplifies the standards for computing EPS previously found in
APB Opinion No. 15, "Earnings Per Share", and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. This Statement requires restatement of all prior period
EPS data presented upon adoption. The Company adopted Statement No. 128
"Earnings per Share" effective December 31, 1997. All prior period earnings per
share presentations have been restated to conform to this pronouncement.
Reporting Comprehensive Income
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income". This Statement establishes standards for the reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. Statement No. 130 requires that all items
that are required to be recognized as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement does not require a specific format
for that financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. This statement has been adopted by the Company and is
presented in footnote No. 2 to the consolidated financial statements.
Operating Segment Disclosure
In June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information". Statement No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. Statement No. 131 is effective for annual periods beginning after
December 15, 1997.
28
<PAGE>
Employers' Disclosures about Pension and Other Postretirement Benefits
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (Statement No. 132) which
amends the disclosure requirements of Statements No. 87, "Employers' Accounting
for Pensions" (Statement No. 87), No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pensions Plans and for Termination Benefits"
(Statement No. 88), and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (Statement No. 106). Statement No. 132 is
applicable to all entities. This Statement standardizes the disclosure
requirements of Statements No. 87 and No. 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. Statement No. 132 only addresses disclosure and does
not change any of the measurement or recognition provisions provided for in
Statements No. 87, No. 88, or No. 106. The Statement is effective for fiscal
years beginning after December 15, 1997. Restatement of comparative period
disclosures is required if the information is not readily available, in which
case the notes to the financial statements shall include all available
information and a description of the information not available. The Company will
present the required disclosures in its year end 1998 financial statements.
29
<PAGE>
PART II - OTHER INFORMATION
Item 1: Legal Proceedings
The Bank, along with a number of other financial institutions, has been
made a party to a lawsuit brought by a New Jersey bank claiming damages of
approximately $200,000 arising out of a series of mortgage loans made to a
borrower who apparently procured one or more of these loans fraudulently. The
Bank believes that it has a valid defense to this claim. In addition, one of
these loans in the amount of $612,000, was sold by the Bank to a mortgage banker
who is now alleging that the Bank breached its warranty obligations when it sold
this loan to the mortgage banker because the lien of the loan is possibly
inferior to other mortgages. The Bank believes its actions were proper, that the
lien is enforceable as a first lien, and it intends to vigorously defend these
claims and, to the extent necessary, seek recourse from other parties who may
have participated in this allegedly fraudulent scheme.
The Company and the Bank are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Bank, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Bank.
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of Republic First Bancorp, Inc., to
take action upon the election and re-election of certain directors of the
Company was held on the 28th day of April, 1998 at 4:00 p.m., at the Pyramid
Club, 1735 Market Street, Philadelphia, Pennsylvania, after written notice of
said meeting, according to law, was mailed to each shareholder of record
entitled to receive notice of said meeting, 33 days prior thereto. As of the
record date for said meeting of shareholders, the number of shares then issued
and outstanding was 4,596,309 shares of common stock, of which 4,596,309 shares
were entitled to vote. A total of 3,638,477 shares were voted. No nominee
received less than 99.3% of the voted shares. Therefore, pursuant to such
approval, the following Directors were elected to the Company:
Michael Bradley Re-elected
Harry Madonna Re-elected
Neal I. Rodin Re-elected
Steven J. Shotz Re-elected
30
<PAGE>
The following directors continue to serve on the board of the Company:
Kenneth Adelberg Eustace Mita
William Batoff James Schleif
Daniel S. Berman Rolf A. Stensrud
John D'Aprix Harris Wildstein
Sheldon Goldberg
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-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, 1996.*
11 Computation of Per Share Earnings See footnote No. 2 to Notes to
Consolidated Financial Statements under Earnings per Share.
21 Subsidiaries of the Company.
31
<PAGE>
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
Incorporated by reference 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 a form 8-K was filed on January 8, 1998 announcing,
subject to regulatory approval, the intention of its operating subsidiary, First
Republic Bank, to purchase between 41% and 49% of Fidelity Bond and Mortgage
Company.
The Company filed a form 8-K was filed on February 19, 1998 announcing
a six for five stock split effected in the form of a 20% dividend, payable to
all holders of the Company's common stock on the record date of March 2, 1998,
payable March 27, 1998. Additionally, the Company and its President, Mr.
Stensrud, agreed to amend certain terms of Mr. Stensrud's employment contract,
including increasing the base salary under the agreement for 1998, setting more
favorable bonus criteria for 1998, and establishing a new expiration date as of
December 31, 1998 to coincide with the fiscal year of the Bank.
The Company filed a form 8-K was filed on May 8, 1998 to announce the
formation of a strategic alliance with Fidelity Bond and Mortgage Company
("Fidelity"), and Phoenix Mortgage Company ("Phoenix"). First Republic Bank
acquired 47% of Fidelity Common Stock, the shareholders of Phoenix acquired 33%
of Fidelity stock and the existing shareholders of Fidelity retained 20% of
Fidelity common stock.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic First Bancorp, Inc.
/Rolf Stensrud/
Rolf Stensrud
President and Chief Executive Officer
/George S. Rapp/
George S. Rapp
Executive Vice President and Chief Financial Officer
Dated: May 14, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000834285
<NAME> REPUBLIC FIRST BANCORP INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,780,000
<INT-BEARING-DEPOSITS> 40,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,773,000
<INVESTMENTS-CARRYING> 205,104,000
<INVESTMENTS-MARKET> 0
<LOANS> 224,002,000
<ALLOWANCE> 2,128,000
<TOTAL-ASSETS> 457,110,000
<DEPOSITS> 262,091,000
<SHORT-TERM> 149,200,000
<LIABILITIES-OTHER> 8,817,000
<LONG-TERM> 0
0
0
<COMMON> 55,000
<OTHER-SE> 36,947,000
<TOTAL-LIABILITIES-AND-EQUITY> 457,110,000
<INTEREST-LOAN> 4,796,000
<INTEREST-INVEST> 3,066,000
<INTEREST-OTHER> 181,000
<INTEREST-TOTAL> 8,043,000
<INTEREST-DEPOSIT> 3,061,000
<INTEREST-EXPENSE> 4,569,000
<INTEREST-INCOME-NET> 3,474,000
<LOAN-LOSSES> 130,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,064,000
<INCOME-PRETAX> 3,559,000
<INCOME-PRE-EXTRAORDINARY> 3,559,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,380,000
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 3.47
<LOANS-NON> 1,634,000
<LOANS-PAST> 3,374,000
<LOANS-TROUBLED> 1,849,000
<LOANS-PROBLEM> 1,849,000
<ALLOWANCE-OPEN> 2,028,000
<CHARGE-OFFS> 53,000
<RECOVERIES> 23,000
<ALLOWANCE-CLOSE> 2,128,000
<ALLOWANCE-DOMESTIC> 2,128,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 403,000
</TABLE>
