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, 1997
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
REPUBLIC FIRST BANCORP, INC.
(Name of Small Business Issuer In Its Charter)
PENNSYLVANIA 23-2486815
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
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: $26,158,000
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. $51,137,757 based on the average of the bid and asked prices on
the National Association of Securities Dealers Automated Quotation System ON
FEBRUARY 28, 1998.
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date. 4,596,309 AS OF FEBRUARY 28,
1998.
1
<PAGE>
REPUBLIC FIRST BANCORP, INC.
FORM 10-KSB
INDEX
PART I PAGE
Item 1 Description of Business.................................. 3
Item 2 Description of Properties................................ 7
Item 3 Legal Proceedings........................................ 7
Item 4 Submission of Matters to a Vote of Security Holders...... 10
PART II
Item 5 Market for Common Equity and Related Stockholder Matters. 11
Item 6 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 12
Item 7 Financial Statements..................................... 31
Item 8 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 31
PART III
Item 9 Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act...................................................... 32
Item 10 Executive Compensation................................... 32
Item 11 Security Ownership of Certain Beneficial Owners and
Management .............................................. 34
Item 12 Certain Relationships and Related Transactions........... 34
Item 13 Exhibits and Reports on Form 8-K......................... 34
2
<PAGE>
PART I
ITEM 1: DESCRIPTION OF BUSINESS
REPUBLIC FIRST BANCORP, INC.
Republic First Bancorp, Inc. (the "Company") is a Pennsylvania
corporation headquartered in Philadelphia, Pennsylvania and is a registered bank
holding company for its wholly-owned subsidiary, First Republic Bank (the
"Bank"). The Bank offers a variety of banking services to individuals and
businesses throughout the Greater Philadelphia and South Jersey area through its
seven branches in Philadelphia and Montgomery Counties.
On June 7, 1996 Republic Bancorporation ("Republic"), parent company of
Republic Bank, merged with and into ExecuFirst Bancorp, Inc. ("ExecuFirst"),
parent company of First Executive Bank (the "Merger"). 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. In July 1997, the Company changed its name
to Republic First Bancorp, Inc. to avoid possible confusion with First Republic
Bancorp, Inc. of California. 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, Consolidated Statements of Cash Flows and Consolidated
Statements of Changes in Stockholders' Equity for 1995 are those of Republic
only, and may not be comparable to subsequent periods. 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 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 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 86 employees.
FIRST REPUBLIC BANK
The Bank commenced operations on November 3, 1988 as First Executive
Bank. Concurrent with the merger on June 7, 1996, its name was changed to First
Republic Bank. The Bank is a commercial bank chartered pursuant to the laws of
the Commonwealth of Pennsylvania, 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 of the Federal Deposit Insurance Corporation ("FDIC"). It
presently conducts its principal banking activities through its four
Philadelphia offices and three suburban offices in Ardmore, East Norriton and
Abington, all of which are located in Montgomery County, Pennsylvania.
As of December 31, 1997, the Bank had total assets of approximately
$375,462,000, total shareholders' equity of approximately $34,622,000, total
deposits of approximately $248,401,000 and net loans receivable outstanding of
approximately $209,999,000. 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. The Bank actively solicits
non-interest and interest-bearing deposits from its borrowers.
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.
3
<PAGE>
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, 1997 and 1996, approximately 96% each year 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 and variable 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 which determine such ratios. The
purpose of the committee is, in part, to monitor the Bank's liquidity and
adherence to the ratios in addition to assessing the relative interest rate risk
to the Bank. 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 78% and 20% respectively, of total loans outstanding at December
31, 1997. 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. Although 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.
The Company has a contractual relationship with Jackson Hewitt, Inc.
("Jackson Hewitt"), one of the Nation's largest tax preparation services, to
provide tax refund products to consumer taxpayers for whom Jackson Hewitt
prepares and electronically files federal income tax returns (the "Tax Refund
Program"). The Tax Refund Program enables the Bank to provide accelerated check
refunds ("ACRs") and refund anticipation loan ("RALs") (collectively, "Tax
Refund Products").
SERVICE AREA/MARKET OVERVIEW
The Bank's primary market service area consists of the Greater
Philadelphia region, including Center City Philadelphia and the northern and
western suburban communities located principally in Montgomery County. To a
lesser extent, the Bank also serves the surrounding counties of Bucks, Chester
and Delaware in Pennsylvania, southern New Jersey and northern Delaware.
The Bank is a leading provider of Tax Refund Products, discussed below in
"Products and Services". There are a limited number of banks that provide this
service nationwide. Management believes that the demand for Tax Refund Products
will grow as a result of the IRS' intention to encourage electronic filing of
tax returns and the increasing complexity of tax forms. The Bank generates
significant revenue from the Tax Refund Program. In September 1997, the Company
and Jackson Hewitt extended the Tax Refund Program through October 31, 1999,
subject to automatic renewal provisions.
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 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
4
<PAGE>
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.
Many of the banks with which the Bank competes have more established
depositor and borrower relationships and greater financial resources than the
Bank, 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.
OPERATING STRATEGY
The Company's objective is for the Bank to become the primary alternative
to the large banks that dominate the Greater Philadelphia market. The Company's
management team has developed a business strategy consisting of the following
key elements to achieve this objective:
Expanding the Branch System. Management plans to develop a cohesive
network of branches that will be within a ten minute drive of most of the major
commercial centers in its marketplace. Management intends to build this network
by opening three branches each year in 1998 and 1999 that are strategically
located in commercial corridors of suburban Philadelphia. The Bank's Abington
branch, which opened in November 1997, is a prime example of this strategy. This
branch is located in a major suburban commercial center and is easily accessible
from a major local traffic artery. The branch manager has significant banking
experience and contacts in the targeted community. The efforts of this manager
are supported by marketing assistance from loan officers assigned to that
community. In addition, the Company will consider acquisition opportunities that
will enhance earnings and growth capabilities. The Company expects to fund this
expansion through, among other things, revenue generated from the Tax Refund
Program.
Providing Attentive and Personalized Service. The Company believes that a
very attractive niche exists serving small-to medium-sized business customers
not adequately served by the Bank's larger competitors. The Company believes
this segment of the market responds very positively to the attentive and highly
personalized service provided by the Bank. The Bank offers individuals and small
to medium-sized businesses a wide array of banking products, informed and
friendly service, extended operating hours, consistently applied credit
policies, and local, timely decision making. The banking industry is
experiencing a period of rapid consolidation and many local branches have been
acquired by large out-of-market institutions. The ensuing changes in these
banking institutions have resulted in a change in their product offerings and
the degree of personal attention they provide to their customers. The Company
has capitalized on these dynamics by offering a community banking alternative
and tailoring its product offering to fill voids created as larger competitors
increase the price of products and services or de-emphasize such products and
services.
Maintaining Superior Operating Results. The Company's long-term goal is
to maintain a return on average equity in excess of 13% while maintaining a 15%
asset growth rate. The Company expects to fund significant expansion and
simultaneously meet its operating goals, in part, because of the income earned
through the Tax Refund Program. To accomplish these goals, the Company's
strategy is for the Bank to maintain sufficient margins on incremental growth
through efficient utilization and leveraging of capital.
Attracting and Retaining Highly Experienced Personnel. The Bank's
executive officers and other personnel have substantial employment experience
with larger banks in the region. When opening new branches, as in the case of
the Abington office, the Bank extensively screens and trains its employees to
ensure the staff has the necessary ability and contacts in the community to
foster rapid growth. The Company seeks to instill a sales and service oriented
culture in its personnel in order to build customer relationships and maximize
cross-selling opportunities. The Company offers meaningful sales-based
incentives to all its customer contact employees.
Capitalizing on Market Dynamics. In the past two years, banks controlling
over 45% of the deposits in the Bank's primary market areas have been acquired
by large and super-regional bank holding companies. The ensuing cultural changes
in these banking institutions have resulted in a change in their product
offerings and the degree of personal attention they
5
<PAGE>
provide. The Company has sought to capitalize on these changes by offering a
community banking alternative. As a result, the Company believes it has a
tremendous opportunity to increase its market share.
Developing Specialized Products. The Company has built the Tax Refund
Program into a significant source of income. Management will continue to explore
and develop other opportunities to provide specialized banking products and
services that command higher profit margins.
PRODUCTS AND SERVICES
Traditional Banking Products and Services. The Bank offers a range of
commercial and retail banking services to its customers, including commercial
loans, commercial loans secured by real estate, personal and business checking
and savings accounts, certificates of deposit, residential mortgages and
consumer loans. The Bank's commercial loan customers typically borrow between
$250,000 and $750,000. The Bank attempts to offer a high level of personalized
service to both its commercial and consumer customers. In addition, the Bank
provides travelers' checks, money orders and other typical banking services. The
Bank is a member of the MAC(TM) and PLUS(TM) networks in ordeR to provide
customers with access to automated teller machines worldwide. The Bank makes
credit cards available to its customers through correspondent banking
institutions.
Tax Refund Products. The Bank is engaged in the Tax Refund Program
through a contractual relationship with Jackson Hewitt. Through the Tax Refund
Program, the Bank provides Tax Refund Products to qualifying Jackson Hewitt
customers. The Tax Refund Products, ACRs and RALs, enable taxpayers to receive
tax refunds faster than if they filed their tax returns by mail. An ACR enables
a taxpayer to have a refund directly deposited into a bank account, established
by the Bank solely for this purpose, within two to three weeks after filing a
tax return. A RAL is a recourse loan secured by the taxpayer's federal income
tax refund and is made within one or two days after filing a tax return. During
the 1997 tax season, the Bank provided approximately 234,000 ACRs and 103,000
RALs to Jackson Hewitt customers.
The Bank receives a processing fee for each ACR and RAL it provides. When
the Bank provides a RAL, it receives an additional fee that is equal to 4% of
the RAL. If the IRS does not deposit the expected refund into the bank account
established for its receipt because, among other reasons, the taxpayer owes back
taxes, the amount due under a RAL will not be paid without instituting
individual collection actions against the taxpayer. The risk of RAL default in
excess of 4% is apportioned between the Bank and Jackson Hewitt on a 35%/65%
basis, respectively. The default rate did not exceed 4% in 1997 or 1996.
The Bank participated in the Tax Refund Program in 1997 and 1996, but did
not participate in 1995 due to a significant change by the IRS in the
administration of the electronic filing and refund program, which was
subsequently changed the following year. The Tax Refund Program generated $2.2
million and $2.1 million in revenue during 1997 and 1996, respectively. The Tax
Refund Program earnings are realized primarily in the first quarter of the year.
These pretax earnings constituted approximately 70% and 89% of the Company's
first quarter 1997 and 1996 pretax earnings, respectively, 43.6% and 51.2% of
the Company's pretax earnings for the year ended December 31, 1997 and 1996,
respectively. Revenue generated by the Tax Refund Program accounted for 8.6% and
10.7% of total revenues in the year ended December 31, 1997 and 1996,
respectively.
The Bank has adopted stringent underwriting standards, instituted
independent credit checks, set loan limits based on past history and increased
pricing to reflect the risk associated with RALs. In addition, the Bank
participates in cross-collection arrangements with other RAL lenders. Under
these arrangements, the banks share information regarding the identity of, and
amounts payable by, delinquent RAL borrowers. By sharing this information the
banks are able to identify these individuals in later tax seasons should they
obtain a RAL from a tax preparation company. RAL borrowers are advised in
advance that should they become identified as owing any portion of a RAL from a
prior tax season, any tax refunds attributable to such borrower will be offset
first against the prior debt.
BRANCH EXPANSION PLANS AND GROWTH STRATEGY
The Company plans to achieve growth and market penetration by expanding
the Bank's branch network into markets with a significant number of commercial
businesses. The Bank has an aggressive branch expansion plan and expects to open
three branches per year in 1998 and 1999 and is currently considering 15 sites
as possible locations for new branches. Management's goal when establishing a
new branch is to achieve deposits of at least $35.0 million in three years or
less. The Bank opened its first suburban office in Ardmore, Montgomery County in
November of 1995. This was followed by three additional suburban branches on
City Line Avenue, East Norriton and Abington in March 1997, May 1997 and
November 1997, respectively. As of December 31, 1997, these branches had $7.5
million, $6.1 million and $1.3 million in deposits, respectively.
6
<PAGE>
ITEM 2: DESCRIPTION OF PROPERTIES
The Company leases approximately 26,410 square feet on the second, 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 $203,484 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 3,613 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 1997
was $336,984 payable monthly. The Company is currently negotiating a lease for
another retail branch site within one block from the current location.
Therefore, the Company does not intend to renew the original lease expiring on
March 30, 1998.
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 August,
2006 and contains one renewal option of five years. The annual rent for such
location was $42,600 in 1997 payable monthly.
The Bank leases approximately 785 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 expired June 30, 1997 and a five year
option which the Company exercised during the first quarter of 1997. The annual
rental at such location for 1997 was $20,410 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 June 2000. The annual rental
at such location for 1997 was $39,742 payable monthly.
The Bank leases an approximately 2,143 square foot building at 4190 City
Line Avenue, Philadelphia, Pennsylvania. The space contains a retail banking
facility. The initial 10 year term of the lease expires January 2007. The annual
rent for such location for 1996 was $53,575, payable monthly.
The Bank leases an approximately 4,500 square foot building at 75 East
Germantown Avenue, East Norriton, Pennsylvania. The space contains a banking
area and business development office. The initial 10 year term of the lease
expires in December 2006. The annual rent for 1997 is $66,000, payable monthly.
The Bank purchased an approximately 2,800 square foot facility for its
Abington, Montgomery County office at 1480 York Road, Abington, Pennsylvania.
This space contains a banking area and additional space for a possible loan
administration office.
ITEM 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.
7
<PAGE>
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.
SUPERVISION AND REGULATION
Various requirements and restrictions under the laws of the United States
and the Commonwealth of Pennsylvania affect the Company and the Bank.
General
The Company is a bank holding company subject to supervision and
regulation by the Federal Reserve Bank of Philadelphia ("FRB") under the Bank
Holding Company Act of 1956, as amended. As a bank holding company, the
Company's activities and those of the Bank are limited to the business of
banking and activities closely related or incidental to banking, and the Company
may not directly or indirectly acquire the ownership or control of more than 5%
of any class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the FRB.
The Bank is subject to supervision and examination by applicable federal
and state banking agencies. The Bank is a member of the Federal Reserve System
and subject to the regulations of the FRB. The Bank is also a
Pennsylvania-chartered bank subject to supervision and regulation by the
Pennsylvania Department of Banking.
In addition, because the FDIC insures the deposits of the Bank, the Bank
is subject to regulation by the FDIC. The Bank is also subject to requirements
and restrictions under federal and state law, including requirements to maintain
reserves against deposits, restrictions on the types and amounts of loans that
may be granted and the interest that may be charged thereon, and limitations on
the types of investments that may be made and the types of services that may be
offered. Various consumer laws and regulations also affect the operations of the
Bank. In addition to the impact of regulation, commercial banks are affected
significantly by the actions of the FRB in attempting to control the money
supply and credit availability in order to influence the economy.
Holding Company Structure
The Bank is subject to restrictions under federal law which limit its
ability to transfer funds to the Company, whether in the form of loans, other
extensions of credit, investments or asset purchases. Such transfers by the Bank
to the Company are generally limited in amount to 10% of the Bank's capital and
surplus. Furthermore, such loans and extensions of credit are required to be
secured in specific amounts, and all transactions are required to be on an arm's
length basis. The Bank has never made any loan or extension of credit to the
Company nor has it purchased any assets from the Company.
Under FRB policy, the Company is expected to act as a source of financial
strength to the Bank and to commit resources to support the Bank, i.e., to
downstream funds to the Bank. This support may be required at times when, absent
such policy, the Company might not otherwise provide such support. Any capital
loans by the Company to the Bank are subordinate in right of payment to deposits
and to certain other indebtedness of the Bank. In the event of the Company's
bankruptcy, any commitment by the Company to a federal bank regulatory agency to
maintain the capital of the Bank will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Regulatory Restrictions on Dividends
Dividend payments by the Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no
dividends may be paid except from "accumulated net earnings" (generally,
undivided profits). Under the FRB's regulations, the Bank cannot pay dividends
that exceed its net income from the current year and the preceding two years.
Under the FDIA, an insured bank may pay no dividends if the bank is in arrears
in the payment of any insurance assessment due to the FDIC. Under current
banking laws, the Bank would be limited to $6.7 million of dividends in 1997
plus an additional amount equal to the Bank's net profit for 1997, up to the
date of any such dividend declaration.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Bank to pay dividends to the Company.
8
<PAGE>
Other regulatory requirements and policies may also affect the payment of
dividends to the Company by the Bank. If, in the opinion of the FRB, the Bank is
engaged in, or is about to engage in, an unsafe or unsound practice (which,
depending on the financial condition of the Bank, could include the payment of
dividends), the FRB may require, after notice and hearing, that the Bank cease
and desist from such practice. The FRB has formal and informal policies
providing that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual basis,
assigns each institution to one of three capital groups (well capitalized,
adequately capitalized or under capitalized) and further assigns such
institution to one of three subgroups within a capital group corresponding to
the FDIC's judgment of the institution's strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.00% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a
Tier 1 leverage ratio of 5.0% or greater, are assigned to the well capitalized
group.
Over the last two years, FDIC insurance assessments have seen several
changes for both BIF and Savings Association Insurance Fund ("SAIF")
institutions. The most recent change occurred on March 31, 1996, when the
President signed into law a bill designed to remedy the disparity between BIF
and SAIF deposit premiums. The first part of the bill called for the SAIF to be
capitalized by a one-time assessment on all SAIF insured deposits held as of
December 31, 1995. This assessment, which was 65.7 cents per $100 in deposits,
raised $4.7 billion to bring the SAIF up to its required 1.25 reserve ratio.
This special assessment, paid on November 30, 1996, had no effect on the Bank.
The second part of the bill remedied the future anticipated shortfall with
respect to the payment of FDIC interest. For 1997 through 1999, the banking
industry will help pay the FDIC interest payments at an assessment rate that is
one-fifth the rate paid by thrifts. The FDIC assessment on BIF insured deposits
is 1.29 cents per $100 in deposits; for SAIF insured deposits it is 6.44 cents
per $100 in deposits. Beginning January 1, 2000, the FDIC interest payments will
be paid pro-rata by banks and thrifts based on deposits. At December 31, 1996,
the Company estimated the FDIC interest assessment to be $30,000 for 1997. For
the nine month period ended December 31, 1997, the Company paid FDIC expenses of
approximately $17,000. The Bank has not been required to pay any FDIC insurance
assessments since the fourth quarter of 1996 because BIF has met its statutory
required ratios and the Bank is categorized as "well capitalized".
Capital Adequacy
The FRB adopted risk-based capital guidelines for bank holding companies,
such as the Company. The required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) is 8.0%. At least half of the total capital is required to be
Tier 1 capital, consisting principally of common shareholders' equity,
noncumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder, Tier 2
capital, may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a leverage
ratio of at least 1% to 2% above the 3% stated minimum. The Company is in
compliance with these guidelines. The FRB subjects the Bank to similar capital
requirements.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
9
<PAGE>
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Law"), amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The interstate banking provisions allow for the acquisition by a bank
holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
were allowed effective September 1, 1997; however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting a law that
specifically prohibits such interstate transactions. States could, in the
alternative, enact legislation to allow interstate merger and purchase and
assumption transactions prior to September 1, 1997. States could also enact
legislation to allow for de novo interstate branching by out of state banks. In
July 1995, Pennsylvania adopted "opt-in" legislation which allows such
transactions.
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 the 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 the Bank will be affected by the
policies of regulatory authorities, including the Pennsylvania Department of
Banking, 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 the 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.
10
<PAGE>
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
MARKET INFORMATION
Shares of the Common Stock are traded in the over-the-counter market and
are quoted on the Nasdaq/NMS under the symbol "FRBK". The Common Stock began
trading on Nasdaq/NMS on December 4, 1996. Prior to that date, the Common Stock
was quoted on the Nasdaq SmallCap Market. The table below presents the range of
high and low trade prices reported for the Common Stock on Nasdaq/NMS or on the
Nasdaq SmallCap Market, as the case may be, for the periods indicated. Market
quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission, and may not necessarily reflect actual transactions. All price
information in the following table has been adjusted retroactively to reflect a
two 20% stock dividends paid on April 15, 1997 and March 27, 1998. As of
December 31, 1997, there were 316 holders of record of the Common Stock. On
February 28, 1998, the closing price of a share of Common Stock on the
Nasdaq/NMS was $13.50. For periods prior to the Merger, the prices disclosed in
the table are those of ExecuFirst.
YEAR QUARTER HIGH LOW
1997........... 4th $11.46 $9.17
3rd 9.79 8.86
2nd 10.00 7.08
1st 8.54 6.50
1996........... 4th 7.42 5.21
3rd 5.82 3.88
2nd 5.13 3.91
1st 4.52 3.13
1995........... 4th 4.51 2.95
3rd 3.82 2.43
2nd 2.95 2.43
1st 2.69 2.08
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock. At the
present time, the Company does not foresee paying cash dividends to shareholders
and intends to retain all earnings to fund the growth of the Company and the
Bank. The Company paid a 20% stock dividend on April 15, 1997. Additionally, the
Company declared an additional 20% stock dividend on February 19, 1998, to be
paid on March 27, 1998. The payment of dividends in the future, if any, will
depend upon earnings, capital levels, cash requirements, the financial condition
of the Company and the Bank, applicable government regulations and policies and
other factors deemed relevant by the Company's Board of Directors, including the
amount of cash dividends payable to the Company by the Bank. The principal
source of income and cash flow for the Company, including cash flow to pay cash
dividends on the Common Stock, is dividends from the Bank. Various federal and
state laws, regulations and policies limit the ability of the Bank to pay cash
dividends to the Company. For certain limitations on the Bank's ability to pay
cash dividends to the Company, see item 3 "Supervision and Regulation".
11
<PAGE>
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
RESULTS OF OPERATIONS
Overview
The Company's net income increased $838,000, or 30.9%, to $3.6 million
for the year ended December 31, 1997, from $2.7 million for the year ended
December 31, 1996. The earnings increased primarily due to an increase in net
interest income. Diluted earnings per share for the year ended December 31, 1997
was $0.76 compared to $0.77, for the year ended December 31, 1996, due to the
increase in net income, offset by the effect of the Merger, which resulted in a
materially smaller number of average shares outstanding for the year ended
December 31, 1996.
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 following table
provides an analysis of net interest income on an annualized basis, setting
forth for the periods (i) average assets, liabilities, and shareholders' equity,
(ii) interest income earned on interest-earning assets and interest expense paid
on interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, and (iv) the
Bank's net interest margin (net interest income as a percentage of average total
interest-earning assets). All averages are computed based on daily balances.
Nonaccrual loans are included in average loans receivable.
12
<PAGE>
<TABLE>
<CAPTION>
INTEREST INTEREST INTEREST
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE (2) BALANCE EXPENSE RATE (2) BALANCE EXPENSE RATE (2)
FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED
(Dollars in thousands) DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold...... $ 5,452 $ 304 5.58% $ 26,488 $ 1,346 5.08% $ 2,953 $ 176 5.96%
Securities.............. 94,047 6,360 6.76 60,389 3,759 6.23 34,687 2,016 5.81
Loans receivable (1).... 183,246 16,869 9.21 132,294 12,007 9.08 78,489 7,710 9.82
------- ------ -------- ------- ------- -----
Total interest-earning
assets............... 282,745 23,533 8.32 219,171 17,112 7.81 116,129 9,902 8.53
Other assets............. 11,440 3,029 4,139
------- -------- -------
Total assets........... $294,185 $222,200 $120,268
======== ======== ========
Interest-bearing liabilities:
Demand deposits,
non-interest bearing... $ 25,551 $ 0 N/A $ 23,909 $ 0 N/A $ 8,939 $ 0 N/A
Demand deposits,
interest-bearing....... 8,428 211 2.50% 5,623 140 2.49% 1,504 33 2.19%
Money market and
savings deposits....... 34,141 982 2.88 21,594 674 3.12 13,878 516 3.72
Time deposits........... 174,887 10,349 5.92 148,834 8,663 5.82 81,404 5,004 6.15
------- ------ -------- ------- ------- -----
Total deposits......... 243,007 11,542 4.75 199,960 9,477 4.74 105,725 5,553 5.25
Total interest-bearing
deposits............. 217,456 11,542 5.31 176,051 9,477 5.38 96,786 5,553 5.74
Other borrowed funds/
subordinated debt...... 23,832 1,370 5.75 2,920 238 8.15 4,431 338 7.63
------- ------ -------- ------- ------- -----
Total deposits and
other borrowed funds/
subordinated debt.... 266,839 12,912 4.84 202,880 9,715 4.79 110,156 5,891 5.35
------- ------ -------- ------- ------- -----
Other liabilities......... 6,255 4,124 1,845
Shareholders' equity...... 21,091 15,196 8,267
------- -------- -------
Total liabilities and
shareholders' equity. $294,185 $222,200 $120,268
======== ======== ========
Net interest income....... $10,621 $ 7,397 $4,011
======= ======= ======
Net interest spread....... 3.48% 3.02% 3.18%
==== ==== ====
Net interest margin(3).... 3.76% 3.37% 3.45%
==== ==== ====
<FN>
(1) Includes loan fee income.
(2) Yields on investments are calculated based on amortized costs; all yields
are annualized.
(3) Represents the difference between interest earned and interest paid,
divided by average total interest-earning assets.
</FN>
</TABLE>
13
<PAGE>
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and
rate components of interest income and interest expense. The following table
sets forth an analysis of volume and rate changes in net interest income for the
periods indicated. For purposes of this table, changes in interest income and
interest expense are allocated to volume and rate categories based upon the
respective percentage changes in average balances and average rates.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1997 VS. 1996 1996 VS. 1995
CHANGE DUE TO CHANGE DUE TO
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
AVERAGE AVERAGE INCREASE AVERAGE AVERAGE INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold......... $(1,162) $120 $(1,042) $ 1,200 $ (30) $ 1,170
Securities................. 2,252 349 2,601 1,591 152 1,743
Loans receivable........... 4,688 174 4,862 4,923 (626) 4,297
------- ---- ------- ------- ----- -------
Total interest income.... 5,778 643 6,421 7,714 (504) 7,210
------- ---- ------- ------- ----- -------
Interest paid on:
Demand deposits, money market
and savings deposits... 433 (54) 379 366 (101) 265
Time deposits.............. 1,540 146 1,686 3,938 (279) 3,659
Other borrowed funds....... 1,222 (90) 1,132 (122) 22 (100)
------- ---- ------- ------- ----- -------
Total interest expense... 3,195 2 3,197 4,182 (358) 3,824
------- ---- ------- ------- ----- -------
Net interest income........... $ 2,583 $641 $ 3,224 $ 3,532 $(146) $ 3,386
------- ---- ------- ------- ----- -------
</TABLE>
The Company's net interest margin increased 39 basis points to 3.76% for
the year ended December 31, 1997 from 3.37% for the year ended December 31,
1996. This increase was primarily due to an increase in the average volume of
interest-earning assets. The average yield on interest-earning assets increased
51 basis points to 8.32% for the year ended December 31, 1997 from 7.81% for the
year ended December 31, 1996. The average rate on total deposits and other
borrowed funds/subordinated debt increased by 5 basis points to 4.84% for the
year ended December 31, 1997 from 4.79% for the year ended December 31, 1996.
The Company's net interest income increased $3.2 million, or 43.6%, to
$10.6 million for the year ended December 31, 1997 from $7.4 million for the
year ended December 31, 1996. The increase in net interest income was primarily
due to an increase in average interest-earning assets due, in part, to the
Merger and also as a result of increased business development. The Company's
total interest income increased $6.4 million, or 37.5%, to $23.5 million for the
year ended December 31, 1997 from $17.1 million for the year ended December 31,
1996. Interest and fees on loans increased $4.9 million, or 40.5%, to $16.9
million for the year ended December 31, 1997 from $12.0 million for the year
ended December 31, 1996, largely as a result of an increase in average loan
balances of $51.0 million, or 38.5%, to $183.2 million for the year ended
December 31, 1997 from $132.3 million for the year ended December 31, 1996. The
yield on the loan portfolio increased 13 basis points to 9.21% for the year
ended December 31, 1997 from 9.08% for the year ended December 31, 1996. This
increase was due primarily to the change in the composition of the loan
portfolio as a result of the merger. Also contributing to the increase in total
interest income was an increase in interest and dividend income on securities of
$2.6 million, or 69.2%, to $6.4 million for the year ended December 31, 1997
from $3.8 million for the year ended December 31, 1996. This increase in
investment income was the result of a combination of an increase in the average
balance of securities owned of $33.7 million, or 55.7%, to $94.0 million for the
year ended December 31, 1997 from $60.4 million for the year ended December 31,
1996, and an increase in yield on the average balance in securities held to
6.76% for the year ended December 31, 1997 from 6.23% for the year ended
December 31, 1996.
The increase in the average balance of securities is the result of
leveraged funding programs employed by the Company that used 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
14
<PAGE>
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 was largely the
result of the Company's strategy to reduce its investment in overnight funds,
better utilize its borrowing capacity with FHLB advances, and minimize lower
yield assets needed for short-term liquidity needs.
The Company's total interest expense increased $3.2 million, or 32.9%, to
$12.9 million for the year ended December 31, 1997 from $9.7 million for the
year ended December 31, 1996. This increase was due to an increase in the volume
of average total deposits and other borrowed funds/subordinated debt of $64.0
million, or 31.5%, to $266.8 million for the year ended December 31, 1997 from
$202.9 million for the year ended December 31, 1996. The average rate paid on
total deposits and other borrowed funds/subordinated debt increased 5 basis
points to 4.84% for the year ended December 31, 1997 from 4.79% for the year
ended December 31, 1996 due primarily to a decrease in the average rate paid on
total interest-bearing deposits and other borrowed funds, partially offset by an
increase in the cost of time deposits.
Interest expense on time deposits increased $1.7 million, or 19.5%, to
$10.3 million for the year ended December 31, 1997 from $8.7 million for the
year ended December 31, 1996. This increase was due to an increase in the
average volume of certificates of deposit in the amount of $26.1 million, or
17.5%, to $174.9 million for the year ended December 31, 1997 from $148.8
million for the year ended December 31, 1996.
Interest expense on FHLB advances was $1.4 million for the year ended
December 31, 1997. The Company had no FHLB advances for the year ended December
31, 1996. In 1997, $85.5 million of 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 Company utilized FHLB borrowings to fund the Tax
Refund Program in 1997. The Company used brokered certificates of deposit to
fund the Tax Refund Program in 1996. The Company incurred no interest expense on
subordinated debt in the year ended December 31, 1997 compared to $238,000 in
the year ended December 31, 1996 as this debt was retired during the fourth
quarter of 1996.
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 $165,000, or 106.5%, to $320,000 for the year ended
December 31, 1997 from $155,000 for the year ended December 31, 1996 due to an
increase in total loans outstanding of $40.0 million during 1997. Non-performing
assets were 1.03% of total assets at December 31, 1997, compared to 0.81% at
December 31, 1996. Delinquencies were 1.43% of total loans at December 31, 1997,
compared to 1.78% at December 31, 1996.
Non-Interest Income
Total other income increased $220,000, or 9.1%, to $2.6 million for the
year ended December 31, 1997 from $2.4 million for the year ended December 31,
1996. The increase was due primarily to a $157,000 increase in Tax Refund
Program income associated with an increase in Tax Refund Product sales in the
1997 tax return season compared to the 1996 tax return season. Additionally,
there was an increase in service fees of $50,000 from $170,000 for the year
ended December 31, 1996 to $220,000 for the year ended December 31, 1997. This
was the result of the Merger, with a full year in 1997 compared to seven months
in 1996.
Non-Interest Expenses
Total other expenses increased $2.2 million, or 39.6%, to $7.8 million
for the year ended December 31, 1997 from $5.6 million for the year ended
December 31, 1996. Salaries and benefits increased $1.2 million, or 42.1%, to
$4.1 million for the year ended December 31, 1997 from $2.9 million for the year
ended December 31, 1996. The increase was due primarily to an increase in staff
as a result of the Merger as well as increases associated with the expansion of
the branches and business development staff.
15
<PAGE>
Occupancy and equipment expenses increased $314,000, or 34.9%, to $1.2
million for the year ended December 31, 1997 from $901,000 for the year ended
December 31, 1996 as a result of opening additional branch offices.
Professional fees increased $221,000 from $282,000 for the year ended
December 31, 1996 to $503,000 for the year ended December 31, 1997. This was
primarily due to legal expenses associated with credit workouts. Other operating
expenses encompass all expenses not otherwise categorized, and include items
such as data processing costs, advertising costs, printing and supplies,
insurance and other miscellaneous expenses. Other operating expenses increased
$467,000, or 30.6%, to $2.0 million for the year ended December 31, 1997 from
$1.5 million for the year ended December 31, 1996. The increases in other
operating expenses was the growth of the Bank associated with the Merger and
increased expenses related to the opening of new branch offices.
Provision for Income Taxes
The provision for income taxes increased $230,000, or 17.0%, to $1.6
million for the year ended December 31, 1997 from $1.4 million for the year
ended December 31, 1996. This increase is mainly the result of the increase in
pre-tax income from 1996 to 1997. The effective tax rate in 1997 declined to
30.8% from 33.3% in 1996 primarily due to a reduction in state and local income
taxes as a result of a change in the tax structuring of the Tax Refund Program.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Overview
For the year ended December 31, 1996, the Company reported net income of
$2.7 million, or $0.82 in basic earnings per share and $0.77 in diluted earnings
per share, compared to net income of $603,000, or $0.26 in basic earnings per
share and $0.24 in diluted 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 and the Bank's participation in the Tax Refund Program, which
generated $2.1 million in revenues during the year ended December 31, 1996. The
Bank did not participate in the Tax Refund Program during 1995 due to the
uncertain impact of certain IRS policy changes. Net interest income increased
$3.4 million, or 84.4%, to $7.4 million for the year ended December 31, 1996
from $4.0 million for the year ended December 31, 1995. This increase was
primarily due to the increase in interest-earning assets as a result of the
Merger.
The Company's total interest income increased $7.2 million, or 72.8%, to
$17.1 million for the year ended December 31, 1996 from $9.9 million for the
year ended December 31, 1995. The average balance of interest-earning assets
increased $103.0 million, or 88.7%, to $219.2 million for the year ended
December 31, 1996 from $116.1 million for the year ended December 31, 1995. The
yield on interest-earning assets decreased 72 basis points to 7.81% for the year
ended December 31, 1996 from 8.53% for the year ended December 31, 1995. Total
interest expense increased $3.8 million, or 64.9%, to $9.7 million for the year
ended December 31, 1996 from $5.9 million for the year ended December 31, 1995.
The average balance of total deposits and other borrowed funds/subordinated debt
increased $92.7 million, or 84.2%, to $202.9 million for the year ended December
31, 1996 from $110.2 million for the year ended December 31, 1995. The average
rate on total deposits and other borrowed funds/subordinated debt decreased 56
basis points to 4.79% for the year ended December 31, 1996 from 5.35% for the
year ended December 31, 1995. The dollar increases in interest income and
interest expense were principally the result of a higher volume of
interest-earning assets and interest-bearing liabilities in 1996 as a result of
the Merger. The ratio of interest expense to interest income was 56.8% for the
year ended December 31, 1996 compared to a ratio of 59.5% for the year ended
December 31, 1995. The Merger was also primarily responsible for the changes in
average rate in 1996 as compared to 1995.
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 decreased $68,000, or 30.5%, to $155,000 for the year ended
December 31, 1996 from $223,000 for the year ended December 31, 1995.
Non-performing assets were 0.81% of total assets at December 31, 1996, compared
to 0.63% at December 31, 1995. Delinquencies were 1.78% of total loans at
December 31, 1996, compared to 0.86% at December 31, 1995.
16
<PAGE>
Non-Interest Income
Non-interest income increased $2.3 million to $2.4 million for the year
ended December 31, 1996 from $155,000 for the year ended December 31, 1995.
Non-interest income as a percentage of gross revenues was 12.3% and 1.5% for the
years ended December 31, 1996 and 1995, respectively. This increase was due to
the Bank's participation in the Tax Refund Program in 1996. The Bank did not
participate in the Tax Refund program during 1995.
Non-Interest Expense
Salaries and employee benefits increased $1.3 million, or 80.4%, to $2.9
million for the year ended December 31, 1996 from $1.6 million for the year
ended December 31, 1995. This increase was the result of additions in staffing
due to the Merger, as well as non-recurring severance costs.
Occupancy and equipment expenses increased $337,000, or 59.8%, to
$901,000 for the year ended December 31, 1996 from $564,000 for the year ended
December 31, 1995. These expenses were comprised mainly of rental, equipment and
maintenance expense. Professional fees declined $45,000, or 13.8%, to $282,000
for the year ended December 31, 1996 from $327,000 for the year ended December
31, 1995, as the result of management's efforts to reduce the use of outside
consultants.
Other expenses increased $960,000, or 169.6%, to $1.5 million for the
year ended December 31, 1996 from $566,000 for the year ended December 31, 1995.
Major components of this category included advertising, and
general/administrative expenses. The year-to-year increase of $960,000 is
attributable to increased operating costs resulting from the Merger and the
increased size of the Company.
Provision for Income Taxes
The provision for income taxes increased $1.1 million to $1.4 million for
the year ended December 31, 1996 from $291,000 for the year ended December 31,
1995. Primarily as a result of an increase in pre-tax income. The effective tax
rate was 33.3% for the year ended December 31, 1996 compared to 32.6% for the
year ended December 31, 1995 primarily due to state and local income taxes
associated with the Tax Refund Program of $108,000 in 1996. There were no state
or local income taxes related to the Tax Refund Program in 1995, as the Bank did
not participate in the program during 1995.
FINANCIAL CONDITION
DECEMBER 31, 1997 COMPARED TO DECEMBER 31, 1996
Total assets increased $101.7 million, or 37.1%, to $375.5 million at
December 31, 1997 from $273.8 million at December 31, 1996. 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 $40.0 million, or 23.5%, to $210.0 million at December 31, 1997
from $170.0 million at December 31, 1996. Investment securities increased $67.0
million, or 82.8%, to $148.0 million at December 31, 1997 from $81.0 million at
December 31, 1996. The increase was due primarily to the purchase of $70.0
million in securities from funds generated from the public offering, and 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 decreased by $9.2 million,
or 59.2%, to $6.3 million at December 31, 1997 from $15.5 million at December
31, 1996 because the Company redeployed these funds into higher yielding loans
and securities. This redeployment of liquid assets was done in anticipation of
the utilization of the Company's borrowing capacity with the FHLB.
Bank premises and equipment, net of accumulated depreciation, increased
$1.8 million to $2.5 million at December 31, 1997 from $711,000 at December 31,
1996. The increase was attributable mainly to the construction of the Bank's new
branch offices.
Total liabilities increased $85.4 million, or 33.4%, to $340.8 million at
December 31, 1997 from $255.4 million at December 31, 1996. During the year
ended December 31, 1997, deposits, the Company's primary source of funds,
decreased $1.7 million, or 0.7%, to $248.4 million at December 31, 1997 from
$250.1 million at December 31, 1996. The aggregate of transaction accounts,
which include demand, money market and savings accounts, decreased $2.2 million,
or 3.2%, to $67.8 million at December 31, 1997 from $70.0 million at December
31, 1996. Certificates of deposit increased by $561,000, or 0.3%, to $180.6
million at December 31, 1997 from $180.0 million at December 31, 1996.
17
<PAGE>
FHLB borrowings were $85.9 million at December 31, 1997. There were no
FHLB borrowings at December 31, 1996. 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 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.
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.
18
<PAGE>
The following table presents a summary of the Bank's interest rate
sensitivity GAP at December 31, 1997. For purposes of this table, 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.
<TABLE>
<CAPTION>
0-90 91-180 181-365 1-5 OVER 5
AT DECEMBER 31, 1997 DAYS DAYS DAYS YEARS YEARS TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest sensitive assets:
Securities and interest-bearing
balances due from banks........ $ 21,370 $ 27,047 $ 34,448 $ 23,795 $ 41,796 $148,456
Loans receivable ................. 88,876 5,298 15,561 51,762 48,502 209,999
-------- -------- -------- -------- -------- --------
Total ............................ 110,246 32,345 50,009 75,557 90,298 358,455
-------- -------- -------- -------- -------- --------
Cumulative total ................. $110,246 $142,591 $192,600 $268,157 $358,455
-------- -------- -------- -------- --------
Interest sensitive liabilities:..
Demand interest-bearing(1)........ $ 4,294 $ 0 $ 0 $ 2,147 $ 2,146 $ 8,587
Savings accounts(1)............... 1,094 0 0 0 1,093 2,187
Money market accounts(1).......... 12,288 0 0 6,143 6,143 24,574
FHLB borrowings................... 37,187 3,125 0 45,600 0 85,912
Time deposits..................... 29,260 63,623 27,450 60,255 0 180,588
-------- -------- -------- -------- -------- --------
Total............................. 84,123 66,748 27,450 114,145 9,382 301,848
-------- -------- -------- -------- -------- --------
Cumulative total.................. $ 84,123 $150,871 $178,321 $292,466 $301,848
-------- -------- -------- -------- --------
Interest rate sensitivity GAP..... $ 26,123 $(34,403) $ 22,559 $(38,588) $ 80,916 $ 56,607
======== ======== ======== ======== ======== ========
Cumulative GAP.................... $ 26,123 $ (8,280) $ 14,279 $(24,309) $ 56,607
======== ======== ======== ======== ========
Interest sensitive assets/
interest sensitive liabilities. 1.3x 0.9x 1.1x 0.9x 1.2x
Cumulative GAP.................... 7.3% -2.3% 4.0% -6.8% 15.8%
Total earning Assets.............. $358,455
========
<FN>
(1) For interest rate sensitivity purposes 50% of these deposits are assumed to
reprice within one year.
</FN>
</TABLE>
CAPITAL RESOURCES
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 16.33% and 10.08% at December 31, 1997 and 1996,
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, 1997 and 1996 were 15.42% and 11.25%,
respectively. At December 31, 1997, and 1996, the Company exceeded the
requirements for risk-based capital adequacy under both federal and Pennsylvania
State guidelines.
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, 1997 and
1996, the leverage ratio was 10.53% and 6.65%, respectively. Accordingly, at
December 31, 1997 and 1996, the Company was considered "well capitalized" under
FRB and FDIC regulations.
The shareholders' equity of the Company as of December 31, 1997 totaled
approximately $34,622,000 compared to approximately $18,371,000 as of December
31, 1996. This increase was attributable to net income for the year of
approximately $3,551,000 and the issuance of 1,150,000 additional common stock
of the Company during the fourth quarter of 1997 resulting in net proceeds of
$12.6 million.
Book value per share of the Company's common stock increased from $4.48
as of December 31, 1996 to $6.28 as of December 31, 1997. The increase was
primarily attributable to net proceeds received from the secondary stock
offering of approximately $12.6 million in addition to earnings for the year
ended December 31, 1997 of $3,551,000.
REGULATORY CAPITAL REQUIREMENTS
Federal banking agencies impose three minimum capital requirements on the
Company's risk-based capital ratios based on total capital, Tier 1 capital, and
a leverage capital ratio. The risk-based capital ratios measure the adequacy of
a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level or
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
The following table presents the Bank's capital regulatory ratios at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ACTUAL ADEQUACY PURPOSES FRB CAPITAL GUIDELINES
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total risk based capital.. $36,395 16.33% $17,830 8.00% $22,289 10.00%
Tier I capital............. 34,367 15.42 8,915 4.00 13,372 6.00
Tier I (leveraged) capital. 34,367 10.53 16,312 5.00 16,312 5.00
AS OF DECEMBER 31, 1996:
Total risk based capital.. $20,126 10.08% $14,306 8.00% $17,883 10.00%
Tier I capital............. 18,034 11.25 7,153 4.00 10,730 6.00
Tier I (leveraged) capital. 18,034 6.65 13,550 5.00 13,550 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 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 6.71% as of December
31, 1996 to 9.22% as of December 31, 1997. The Company's daily average
capital-to-assets ratio for calendar year 1997 was 7.17% compared to 6.84% for
the same period in 1996. Management anticipates that its capital-to-assets ratio
will be maintained at approximately the current level. The Company's average
return on equity for 1997, 1996 and 1995 was 16.8%, 17.9% and 7.3%,
respectively; and its average return on assets for 1997, 1996 and 1995 was
1.21%, 1.22%, 0.50%, respectively.
20
<PAGE>
LIQUIDITY
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, take advantage of market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. Sources of asset
liquidity are provided by cash and amounts due from banks, interest-bearing
deposits with banks, and federal funds sold.
The Company's liquid assets totaled $6.3 million at December 31, 1997
compared to $15.5 million at December 31, 1996. Maturing and repaying loans are
another source of asset liquidity. At December 31, 1997, the Bank estimated that
an additional $29.7 million of loans will mature or repay in the next year
period ended December 31, 1998.
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 December 31, 1997, the Bank had $50.1
million in unused lines of credit available to it under informal arrangements
with correspondent banks compared to $99 million at December 31, 1996. These
lines of credit enable the Bank to purchase funds for short-term needs at
current market rates.
At December 31, 1997, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $17.8 million. Certificates of
deposit which are scheduled to mature within one year totaled $129.0 million at
December 31, 1997, and borrowings that are scheduled to mature within the same
period amounted to $21.7 million. The Company 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. 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 $129.0 million. At December 31,
1997 and 1996, there was $85.9 million and $0, respectively, outstanding on the
aforementioned lines. 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, 1997, 1996, and 1995
were primarily due to the investing of excess and borrowed funds into investment
securities. Cash was provided by financing activities during 1997 and 1996, as
the Bank has grown its deposit base and increased its borrowings.
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, 1997, 21.7% of the Bank's
interest-bearing deposits were to mature, and be repriceable, within three
months, and an additional 29.5% 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.
21
<PAGE>
SECURITIES PORTFOLIO
The Company's securities portfolio is intended to provide liquidity,
reduce interest rate risk and contribute to earnings while exposing the Company
to reduced credit risk. As a result of the Merger, the securities portfolio has
grown substantially. The securities portfolio has also grown through the use of
leverage provided by FHLB advances.
A summary of securities available for sale and securities held to
maturity at December 31, 1997 , 1996, and 1995 follows.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE FOR SALE
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury.......................... $ 0 $ 998 $ 0
U.S. Government Agencies............... 2,943 4,128 4,320
CMOs and Mortgage Backed Securities (1) 0 770 0
Other securities (2)................... 0 0 0
------- ------- -------
Total amortized cost of securities..... $ 2,943 $ 5,896 $ 4,320
------- ------- -------
Total fair value of securities......... $ 2,950 $ 5,900 $ 4,348
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
SECURITIES HELD TO MATURITY
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury.......................... $ 0 $ 0 $ 1,002
U.S. Government Agencies............... 56,331 49,214 7,002
CMOs and Mortgage Backed Securities (1) 83,028 23,682 25,215
Other securities (2)................... 5,671 2,158 785
------- ------- -------
Total amortized cost of securities..... $145,030 $75,054 $34,004
------- ------- -------
Total fair value of securities......... $145,908 $75,307 $33,846
------- ------- -------
<FN>
(1) All of these obligations consist of U.S. Government Agency issued
securities.
(2) Comprised mostly of FHLB stock and Federal Reserve Bank stock.
</FN>
</TABLE>
22
<PAGE>
The following table presents the maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 1997
and December 31, 1996.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
AFTER 1 YEAR BUT AFTER 5 YEARS BUT AFTER 10 YEARS OR
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS NO MATURITY TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
Amortized cost:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury............ $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00%
U.S. Government Agencies. 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
Mortgage-backed securities 0 0.00 0 0.00 2,080 8.77 863 8.38 2,943 8.66
Other securities......... 0 0.00 0 0.00 0 0.00 0 0.00 0 0.00
--- ---- --- ---- ------ ---- ---- ---- ------ ----
Total securities
available for sale.... $ 0 0.00% $ 0 0.00% $2,080 8.77% $863 8.38% $2,943 8.66%
=== ==== === ==== ====== ==== ==== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
HELD TO MATURITY AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
AFTER 1 YEAR BUT AFTER 5 YEARS BUT AFTER 10 YEARS OR
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS NO MATURITY TOTAL
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortized cost:
U.S. Treasury............ $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00%
U.S. Government Agencies. 0 0.00 20,325 6.65 34,413 8.51 24,053 6.64 78,791 7.46
Mortgage-backed securities 0 0.00 573 7.00 7,010 6.94 52,978 7.20 60,561 7.17
Other securities......... 250 8.00 100 7.50 125 7.00 5,203 6.00 5,678 6.14
---- ---- ------- ---- ------- ---- ------- ---- -------- ----
Total securities
held to maturity...... $250 8.00% $20,998 6.66% $41,548 8.24% $82,234 6.96% $145,030 7.29%
==== ==== ======= ==== ======= ==== ======= ==== ======== ====
</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 average from
$250,000 to $750,000 in amount.
The Company's net loans increased $40.0 million, or 23.5%, to $210.0
million at December 31, 1997 from $170.0 million at December 31, 1996, which
were 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:
<TABLE>
<CAPTION>
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial:
Real estate secured .............. $ 87,701 $ 62,016 $34,353 $22,979 $16,160
Non-real estate secured/unsecured 42,519 45,007 23,183 27,429 29,653
Total commercial ............... 130,220 107,023 57,536 50,408 45,813
Residential real estate ............. 78,366 61,240 26,781 20,493 16,279
Consumer and other .................. 3,441 3,831 1,546 1,182 829
-------- -------- ------- ------- -------
Total loans, net of unearned
income ....................... $212,027 $172,094 $85,863 $72,083 $62,921
======== ======== ======= ======= =======
</TABLE>
23
<PAGE>
LOAN MATURITY AND INTEREST RATE SENSITIVITY
The amount of loans outstanding by category as of the dates indicated,
which are due in (i) one year or less, (ii) more than one year through five
years and (iii) over five years, is shown in the following table. Loan balances
are also categorized according to their sensitivity to changes in interest
rates.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
ONE YEAR MORE THAN ONE YEAR
OR LESS THROUGH FIVE YEARS OVER FIVE YEARS TOTAL LOANS
<S> <C> <C> <C> <C>
Commercial .......................... $24,369 $ 75,747 $30,104 $130,220
Residential real estate ............. 9,677 43,737 24,952 78,366
Consumer and other .................. 545 1,749 1,147 3,441
------- -------- ------- --------
Total .......................... $34,591 $121,233 $56,203 $212,027
======= ======== ======= ========
Loans with fixed rate ............... 16,227 83,010 32,796 132,033
Loans with floating rate ............ 18,364 38,223 23,407 79,994
------- -------- ------- --------
Total .......................... $34,591 $121,233 $56,203 $212,027
======= ======== ======= ========
Percent composition by maturity ..... 16.31% 57.18% 26.51% 100.00%
Fixed rate loans as a percentage
of total loans maturing .......... 46.91% 68.47% 58.35% 62.27%
Floating rate loans as a percentage
of total loans maturing .......... 53.09% 31.53% 41.65% 37.73%
</TABLE>
In the ordinary course of business, loans maturing within one year may be
renewed, in whole or in part, as to principal amount, at interest rates
prevailing at the date of renewal.
At December 31, 1997, 62.27% of total loans were fixed rate compared to
51.82% at December 31, 1996.
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 or 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 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.
24
<PAGE>
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Loans accruing, but past due 90 days or more . $ 113 $ 27 $ 11 $ 196 $ 256
Nonaccrual loans ............................. 1,800 1,892 526 878 274
------ ------ ---- ------ -----
Total non-performing loans ................... 1,913 1,919 537 1,074 530
Foreclosed real estate ....................... 1,944 295 295 0 0
------ ------ ---- ------ -----
Total non-performing assets(1) .......... $3,857 $2,214 $832 $1,074 $ 530
====== ====== ==== ====== =====
Non-performing loans as a percentage of
total loans, net of unearned income(1) .... 0.90% 1.12% 0.63% 1.49% 0.84%
Non-performing assets as a percentage
of total assets ........................... 1.03% 0.81% 0.63% 1.01% 0.52%
<FN>
(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual
basis, (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans. Non-performing assets are composed of non-performing
loans and foreclosed real estate (assets acquired in foreclosure).
</FN>
</TABLE>
At December 31, 1997, 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 million, which
represented 23% 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 December 31, 1997, all
identified potential problem loans are included in the preceding table.
The Bank had no credit exposure to "highly leveraged transactions" at
December 31, 1997, as defined by the FRB.
25
<PAGE>
ALLOWANCE FOR LOAN LOSSES
A detailed analysis of the Company's allowance for loan losses for the
years ended December 31, 1997, 1996, 1995, 1994 , and 1993 is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ..... $ 2,092 $ 680 $ 650 $ 460 $ 340
Charge-offs:
Commercial ...................... 383 293 162 136 64
Real estate ..................... 67 0 50 0 0
Consumer ........................ 31 98 0 8 23
-------- -------- -------- -------- --------
Total charge-offs ............. 481 391 212 144 87
-------- -------- -------- -------- --------
Recoveries:
Commercial ...................... 18 101 16 6 0
Real estate ..................... 67 0 2 0 0
Consumer ........................ 12 19 1 5 0
-------- -------- -------- -------- --------
Total recoveries .............. 97 120 19 11 0
-------- -------- -------- -------- --------
Net charge-offs .................... 384 271 193 133 87
Acquisition of ExecuFirst .......... 0 1,528 0 0 0
Provision for loan losses .......... 320 155 223 323 207
-------- -------- -------- -------- --------
Balance at end of period ........ $ 2,028 $ 2,092 $ 680 $ 650 $ 460
======== ======== ======== ======== ========
Average loans outstanding(1) .... $183,246 $132,294 $ 78,489 $ 69,838 $ 62,489
As a percent of average loans(1):
Net charge-offs ................. 0.21% 0.20% 0.25% 0.19% 0.14%
Provision for loan losses ....... 0.17 0.12 0.28 0.46 0.33
Allowance for loan losses ....... 1.11 1.58 0.87 0.93 0.74
Allowance for possible loan losses to:
Total loans, net of unearned income 0.96% 1.22% 0.79% 0.90% 0.73%
Total non-performing loans ...... 106.01 109.02 126.63 60.52 86.79
<FN>
(1) Includes nonaccruing loans.
</FN>
</TABLE>
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 Company has an existing loan review program which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
and is reported quarterly to the Board of Directors. The Board of Directors
reviews the finding of the loan review program on a 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.
26
<PAGE>
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
December 31, 1997, approximately 22.6% or $459,000 of the allowance for loan
losses is allocated to specific problem loans. The allocation is based upon
historical experience. The remainder of the allowance for loan losses is
available to absorb future loan losses in any loan category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
(DOLLARS IN THOUSANDS)
1997 1996 1995 1994 1993
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
IN EACH IN EACH IN EACH IN EACH IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1) AMOUNT LOANS(1)
<S> <C> <C> <C> <C> <C>
Allocation of allowance
for loan losses:
Commercial .......... $1,595 61.42% $1,573 62.19% $161 67.01% $146 69.93% $203 66.34%
Residential real
estate ............ 41 36.96 21 35.59 40 31.19 44 28.43 103 33.66
Consumer and
other ............. 58 1.62 90 2.22 9 1.80 8 1.64 0 0
Unallocated ......... 334 408 470 452 154
------ ------ ---- ---- ----
Total ............. $2,028 $2,092 $680 $650 $460
====== ====== ==== ==== ====
</TABLE>
The unallocated allowance decreased $74,000, or 18.1%, to $334,000 at
December 31, 1997 from $408,000 at December 31, 1996, primarily as the result of
a decline in non-performing loans.
(1) Gross loans net of unearned income
The recorded investment in loans for which impairment has been recognized
totaled $1,800,000 and $1,892,000 , at December 31, 1997 and 1996 respectively,
of which $764,000 and $845,000 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, 1997, 1996 and 1995
were $1,152,000, $1,047,000 and $516,000, respectively. For the years ended
December 31, 1997, 1996 and 1995, the average recorded investment in impaired
loans was approximately $1,809,000, $1,573,000, and $452,000 respectively. The
Bank did not recognize any interest on impaired loans in 1997, 1996 or 1995.
The following summary shows the impact on interest income of
nonperforming loans for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest income that would have been
recorded had the loans been in accordance
with their original terms $279,000 $135,100 $48,000 $26,000 $12,000
Interest income included in net income $ 0 $ 60,000 $ 0 $75,000 $ 0
</TABLE>
The Bank had delinquent loans as follows; (i) 30 to 59 days past due, at
December 31, 1997 and 1996, in the aggregate principal amount of $2,694,000 and
$2,016,000 respectively, which were contractually overdue in the aggregate
amount of approximately $42,000 and $69,000 respectively; and (ii) 60 to 89 days
past due, at December 31, 1997 and 1996 in the aggregate principal amount of
$340,000 and $1,053,000 respectively, which were contractually overdue in the
amount of approximately $21,000 and $60,000 respectively.
27
<PAGE>
In addition, the Bank has classified certain loans as substandard and
doubtful. At December 31, 1997 and 1996, substandard loans totaled approximately
$2,402,000 and $1,514,000 respectively; and doubtful loans totaled approximately
$16,000 and $207,000 respectively.
The following table is an analysis of the change in Other Real Estate
Owned for the years ended December 31, 1997 and 1996.
1997 1996
Balance at January 1, ............. $ 295,000 $295,000
Additions, net .................... 1,649,000 0
Charge-offs ....................... 0 0
---------- --------
Balance at December 31, ........... $1,944,000 $295,000
========== ========
DEPOSIT STRUCTURE
Of the total daily average deposits of approximately $243.0 million held
by the Bank during the year ended December 31, 1997, approximately $25.6
million, or 10.5%, represented non-interest-bearing deposits, compared to
approximately $23.9 million, or 12.0%, of approximately $200.0 million total
daily average deposits during 1996. Total deposits at December 31, 1997
consisted of approximately $32.9 million in non-interest-bearing demand
deposits, approximately $8.6 million in interest-bearing demand deposits,
approximately $26.3 million in savings deposits and money market accounts,
approximately $152.0 million in time deposits under $100,000, and approximately
$28.6 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 average balances of the
Bank's deposits and the average rates paid thereon, for the twelve month periods
ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-interest-bearing balances ....... $ 25,551 N/A $ 23,909 N/A $ 8,939 N/A
======== ==== ======== ==== ======= ====
Money market and savings deposits ... $ 34,141 2.88% $ 21,594 3.12% $13,878 3.72%
Time deposits ....................... 174,887 5.92 148,834 5.82 81,404 6.15
Demand deposits, interest-bearing ... 8,428 2.50 5,623 2.49 1,504 2.19
-------- ---- -------- ---- ------- ----
Total interest-bearing deposits ..... $217,456 5.31% $176,051 5.38% $96,786 5.74%
======== ==== ======== ==== ======= ====
</TABLE>
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
December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996 1995
(DOLLARS IN THOUSANDS)
Maturing in:
<S> <C> <C> <C>
Three months or less ............................ $ 9,896 $10,654 $1,700
Over three months through six months ............ 8,726 4,381 983
Over six months through twelve months ........... 7,233 6,120 1,358
Over twelve months .............................. 2,719 8,072 4,029
------- ------- ------
Total ......................................... $28,574 $29,227 $8,070
======= ======= ======
</TABLE>
28
<PAGE>
The following is a breakdown, by contractual maturities of the Company's
time certificate of deposits for the years 1998 through 2002 and beyond.
<TABLE>
<CAPTION>
1998 1999 2000 2001 2001 TOTAL
<S> <C> <C> <C> <C> <C> <C>
Time certificates of deposit
(In thousands) ................. $128,963 $31,218 $17,112 $2,811 $484 $180,588
-------- ------- ------- ------ ---- --------
</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 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, 1997 and 1996, firm loan commitments approximated
$17.3 million and $28.5 million respectively and commitments of standby letters
of credit approximated $453,000 and $1,129,000, 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 Company's need and ability to react to
changes in interest rates. As discussed previously, management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest income
from being affected by wide interest rate fluctuations.
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 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 has adopted a
comprehensive plan to be implemented this year, 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 two
years. These costs include new equipment and software purchases in addition to
testing applications prior to the year 2000.
RECENT ACCOUNTING PRONOUNCEMENTS:
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement
No. 125"). This statement supersedes and amends certain existing standards by
providing consistent standards for distinguishing transfers of financial assets
that are sales, from transfers that are secured borrowings. Under Statement No.
125, after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. Statement No. 125 is required to
29
<PAGE>
be effective for transactions occurring after December 31, 1996 and is to be
applied prospectively. The adoption of Statement No. 125 was not material to the
results of operations, financial condition or stockholders' equity.
Earnings Per Share
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share"
("Statement No. 128"). 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 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 SFAS No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). 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. The impact of this Statement on the Company would be to
require additional disclosures in the Company's financial statements.
Operating Segment Disclosure
In June 1997, the FASB issued SFAS 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 periods beginning after December
15, 1997. The impact, if any, of this Statement on the Company would be to
require additional disclosures in the Company's financial statements.
Employers' Disclosures about Pension and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("Statement No. 132") which
amends the disclosure requirements of Statements Nos. 87, "Employers' Accounting
for Pensions" ("Statement No. 87"), 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pensions Plans and for Termination Benefits"
("Statement No. 88"), and 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 Nos. 87 and 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 Nos. 87, 88, or 106. The Statement is effective for fiscal years
beginning after December 15, 1997. Restatement of comparative period disclosures
is required unless 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 impact, if any, of this
Statement on the Company would be to require additional disclosures in the
Company's financial statements.
30
<PAGE>
The following tables are summary unaudited income statement information
for each of the quarters ended during 1997 and 1996.
SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE
QUARTER ENDED, 1997
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA FOURTH THIRD SECOND FIRST
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $ 6,725 $ 5,939 $ 5,432 $ 5,437
Total interest expense 3,853 3,330 2,883 2,846
------- -------- ------- -------
Net interest income 2,872 2,609 2,549 2,591
Provision for loan losses 180 30 80 30
Net non-interest income/(expense) (1,899) (1,780) (1,790) 302
Federal income taxes 246 274 204 859
------- -------- ------- -------
Net income $ 547 $ 525 $ 475 $ 2,004
======= ======= ======= =======
PER SHARE DATA:
Basic earnings per share $ 0.11 $ 0.13 $ 0.12 $ 0.49
------- ------- ------- -------
Diluted earnings per share $ 0.11 $ 0.12 $ 0.11 $ 0.45
------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
FOR THE
QUARTER ENDED, 1996
FOURTH THIRD SECOND FIRST
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income ..................... $ 5,283 $ 4,972 $ 3,601 $ 3,256
Total interest expense .................... 2,854 2,687 2,077 2,097
------- ------- ------- -------
Net interest income ....................... 2,429 2,285 1,524 1,159
Provision for loan losses ................. 100 30 25 0
Net non-interest income/(expense) ......... (1,829) (1,531) (970) 1,154
Federal income taxes ...................... 164 224 178 787
------- ------- ------- -------
Net income ................................ $ 336 $ 500 $ 351 $ 1,526
======= ======= ======= =======
PER SHARE DATA:
Basic earnings per share .................. $ 0.08 $ 0.12 $ 0.13 $ 0.66
------- ------- ------- --------
Diluted earnings per share ................ $ 0.08 $ 0.12 $ 0.12 $ 0.62
------- ------- ------- --------
</TABLE>
ITEM 7: FINANCIAL STATEMENTS
The financial statements of the Company begin in Exhibit A on Page 37.
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
31
<PAGE>
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 1998 annual meeting of shareholders scheduled for
April 28, 1998.
ITEM 10: EXECUTIVE COMPENSATION
The following table shows the annual 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 1997, 1996 and 1995.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
RESTRICTED SECURITIES
OTHER STOCK UNDERLYING LTIP ALL OTHER
ANNUAL AWARDS OPTIONS PAYOUTS ANNUAL
NAME & PRINCIPAL POSITION YEAR SALARY BONUS COMP ($) SARS (#) ($) COMP
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rolf A. Stensrud 1997 $175,000 $50,000 $ 0 0 0 0 $ 8,950 (2)
Chief Executive Officer and 1996 175,000 50,000 0 0 0 0 $ 8,950 (2)
President of the Company 1995 165,000 50,000 0 0 0 0
and the Bank
Kevin J. Gallagher 1997 $112,500 $35,000 $ 0 0 0 0
Executive Vice President and 1996 105,000 31,069 0 0 7,200 0
Chief Lending Officer 1995 95,000 0 0 0 0
of the Bank
Jerome D. McTiernan 1997 $100,000 $10,000 $ 0 0 0 0
Executive Vice President 1996 95,000 10,000 0 0 0 0
of the Bank 1995 90,000 0 0 0 0
George S. Rapp 1997 $112,500 $25,000 $ 0 0 0 0
Executive Vice President and 1996 105,000 15,000 0 0 7,200 0
Chief Financial Officer 1995 N/A N/A N/A N/A N/A
of the Company and the Bank
Zvi Muscal (1) 1997 25,000 $ 0 $ 0 0 0 0
Former Chief Executive Officer 1996 220,000 0 9,000 0 0 0 $16,036 (2)
of the Company and the Bank 1995 220,000 0 15,000 0 0 0 16,036 (2)
<FN>
(1) Mr. Zvi Muscal resigned his position as Chief Executive Officer of the
Company and the Bank effective February 28, 1997.
(2) Represents premiums paid by the Bank for life and disability insurance
for the benefit of the executive.
</FN>
</TABLE>
32
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Rolf A. Stensrud currently serves as President and Chief Executive
Officer of the Company and the Bank under the terms and conditions of an
employment agreement with the Company and the Bank dated June 7, 1996, (the
"Stensrud Agreement"). Effective February 25, 1998, the terms of the contract
were modified to include an increase in base salary, a more favorable bonus
criteria and a change of the expiration date to December 31, 1998. Presently,
under the Stensrud Agreement, as modified, Mr. Stensrud receives an annual base
salary of $200,000 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 the Bank or the Company
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 of an automobile provided
by the 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 compensation and benefits for certain specified periods of time. The
Stensrud Agreement, as modified, provides for the non-disclosure by Mr. Stensrud
of confidential information acquired by him in the context of his employment.
George S. Rapp currently serves as Executive Vice President and Chief
Financial and Administrative Officer of the Company and the Bank under the terms
of an employment agreement (the "Rapp Agreement"). The Rapp Agreement provides
that Mr. Rapp is employed as Executive Vice President and Chief Financial and
Administrative Officer of the Company and the Bank at an annual base salary of
$112,500, which may not be terminated by the Company and the Bank prior to March
31, 1998. Thereafter, the Company and the Bank may terminate the Rapp Agreement
on one year's notice, and Mr. Rapp may terminate this Agreement upon 30 days'
notice. Mr. Rapp is also eligible to receive an annual bonus at the discretion
of the Board of Directors and to participate in any executive or employee stock
option, bonus or other compensation plan and all other employee benefit plans.
The Company provides Mr. Rapp with an automobile allowance and the reimbursement
of certain expenses related to the use of such automobile in connection with his
employment.
Kevin J. Gallagher currently serves as Executive Vice President and Chief
Lending Officer of the Company and the Bank under the terms of an employment
agreement (the "Gallagher Agreement"). The Gallagher Agreement has a one-year
term at an annual base salary of $112,500. 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 Company's Stock Option Plan and all
other employee benefit plans. The Company provides Mr. Gallagher with an
automobile allowance and the reimbursement of certain expenses related to the
use of such automobile in connection with his employment.
Jerome D. McTiernan currently serves as Executive Vice President of the
Company and the Bank under the terms of an employment agreement (the "McTiernan
Agreement"). The McTiernan Agreement provides that Mr. McTiernan is employed as
Executive Vice President at an annual base salary of $100,000, until terminated
by the Bank or Mr. McTiernan. The Agreement may be terminated by the Bank on
twelve months' written notice or by Mr. McTiernan on 30 days' notice. Mr.
McTiernan is also eligible to receive an annual bonus at the discretion of the
Board of Directors and to participate in the Company's Stock Option Plan and all
other employee benefit plans. The Company maintains a life insurance policy for
the benefit of Mr. McTiernan's designated beneficiaries and provides him with
use of an automobile and the reimbursement of certain expenses related to the
use of such automobile in connection with his employment.
33
<PAGE>
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There were no options granted for the year ended December 31, 1997.
AGGREGATED OPTION EXERCISES FOR THE YEAR ENDED DECEMBER 31, 1997
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
(D) # OF SECURITIES
UNDERLYING UNEXERCISED
(B) SHARES ACQUIRED (C) VALUE OPTIONS AT FYI-END (#)
(A) NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE / UNEXERCISABLE
<S> <C> <C> <C> <C>
Zvi Muscal 28,800 105,000 43,200 0
</TABLE>
The Company's director compensation plan throughout 1997 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 1997; no director received more than $15,750.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the directors of the Company 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 37
(1) Report of Independent Accountants.
(2) Consolidated Balance Sheets dated respectively, December 31, 1997
and December 31, 1996.
(3) Consolidated Statements of Income for the years ended December 31,
1997, December 31, 1996 and December 31, 1995.
(4) Consolidated Statements of Cash Flows for the years ended December
31, 1997, December 31, 1996 and December 31, 1995.
(5) Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1997, December 31, 1996 and December 31,
1995.
(6) Notes to Consolidated Financial Statements.
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.*
34
<PAGE>
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.
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 ReserSystem 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
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.
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.
35
<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.
Date: March 24, 1998 REPUBLIC FIRST BANCORP, INC.
By: /s/ Rolf Stensrud
Rolf Stensrud
President and
Chief Executive Officer
Date: March 24, 1998 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 24, 1998 /s/ Eustace W. Mita /s/ Harry D. Madonna, Esq.
Eustace W. Mita, Director Chairman of the Board
/s/ Harris Wildstein, Esq. /s/ Kenneth Adelberg
Harris Wildstein, Esq., Director Kenneth Adelberg, Director
/s/ Neal I. Rodin /s/ William Batoff
Neal I. Rodin, Director William Batoff, Director
/s/ James E. Schleif /s/ Daniel S. Berman
James E. Schleif, Director Daniel S. Berman, Director
/s/ Steven J. Shotz /s/ Michael J. Bradley
Steven J. Shotz, Director Michael J. Bradley, Director and
Vice Chairman of the Board
/s/ Rolf A. Stensrud /s/ John F. D'Aprix
Rolf A. Stensrud, Director John F. D'Aprix, Director
/s/ Sheldon E. Goldberg /s/ Zeev Shenkman
Sheldon E. Goldberg, Director Zeev Shenkman, Director
</TABLE>
36
<PAGE>
EXHIBIT A. FINANCIAL STATEMENTS.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
REPUBLIC FIRST BANCORP, INC.
Page
Report of Independent Accountants ......................................... 38
Consolidated Balance Sheets as of December 31, 1997, and December 31, 1996. 41
Consolidated Statements of Income for the years ended December 31, 1997
December 31, 1996 and December 31, 1995 ................................... 42
Consolidated Statements of Cash Flows for the years ended December 31, 1997
December 31, 1996 and December 31, 1995 ................................... 43
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1997, December 31, 1996 and December 31, 1995 .......... 44
Notes to Consolidated Financial Statements ................................ 45
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 (except for the information in Note 2
related to the 1997 stock split effected in the form of a
dividend, dated March 4, 1997, the information in Note 2
related to earnings per share, dated January 27, 1998 and the
information in Note 17 related to the 1998 stock split
effected in the form of a dividend dated February 19, 1998.)
38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Republic Bancorporation, Inc.:
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of Republic Bancorporation, Inc. and
subsidiaries (the "Bank") for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of the Bank for the
year ended December 31, 1995, in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 1, 1996
(Except Note 1 related to the merger
which is dated June 7, 1996,
Note 2 related to the earnings per common
share which is dated January 27, 1998,
and Note 17 related to the 1998 stock split
effected in the form of a dividend which is
dated February 19, 1998)
39
<PAGE>
Independent Auditors' Report
The Board of Directors
Republic First Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Republic First
Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 1997, 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
on opinion on the 1997 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Republic First
Bancorp, Inc. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
January 27, 1998, except as to note 17,
which is as of February 19, 1998
40
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS:
Cash and due from banks ........................................ $ 5,850 $ 7,716
Interest - bearing deposits with banks ......................... 476 665
Federal funds sold ............................................. 0 7,115
-------- --------
Total cash and cash equivalents ............................ 6,326 15,496
Securities available for sale, at fair value ................... 2,950 5,900
Securities held to maturity, at amortized cost (fair value of
$145,908 and $75,307, respectively) ...................... 145,030 75,054
Loans receivable, (net of the allowance for loan losses
of $2,028 and $2,092, respectively) ........................ 209,999 170,002
Premises and equipment, net .................................... 2,534 711
Real estate owned, net ......................................... 1,944 295
Accrued income and other assets ................................ 6,679 6,337
-------- --------
Total Assets ................................................... $375,462 $273,795
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Deposits:
Demand-- non-interest-bearing .................................. $ 32,885 $ 32,611
Demand-- interest-bearing ...................................... 8,587 10,181
Money market and savings ....................................... 26,341 27,240
Time ........................................................... 152,014 150,800
Time over $100,000 ............................................. 28,574 29,227
-------- --------
Total Deposits ............................................. 248,401 250,059
Other borrowed funds/Subordinated debt ......................... 85,912 0
Accrued expenses and other liabilities ......................... 6,527 5,365
-------- --------
Total Liabilities .............................................. 340,840 255,424
-------- --------
Commitments and contingencies (Note 10)
SHAREHOLDERS' EQUITY:
Common stock, par value $.01 per share; 20,000,000
shares authorized; shares issued and outstanding
5,515,571 and 4,101,010 as of December 31, 1997
and 1996 respectively ........................................ 55 41
Additional paid in capital ..................................... 26,364 13,680
Retained earnings .............................................. 8,198 4,647
Unrealized gain on securities available for sale, net of taxes . 5 3
-------- --------
Total Shareholders' Equity ..................................... 34,622 18,371
-------- --------
Total Liabilities and Shareholders' Equity ..................... $375,462 $273,795
======== ========
(See notes to consolidated financial statements)
41
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(dollars in thousands, except for per share data)
1997 1996 1995
Interest income:
Interest and fees on loans ........................ $16,869 $12,007 $7,710
Interest on federal funds sold .................... 304 1,346 176
Interest on deposits in banks ..................... 0 20 0
Interest on investments ........................... 6,360 3,739 2,016
------- ------- ------
23,533 17,112 9,902
------- ------- ------
Interest expense:
Demand-- interest-bearing ......................... 211 140 33
Money market and savings .......................... 982 674 516
Time .............................................. 8,708 7,069 4,485
Time over $100,000 ................................ 1,641 1,594 519
Other borrowed funds/Subordinated debt ............ 1,370 238 338
------- ------- ------
12,912 9,715 5,891
------- ------- ------
Net interest income ................................... 10,621 7,397 4,011
Provision for loan losses ............................. 320 155 223
------- ------- ------
Net interest income after provision for loan losses ... 10,301 7,242 3,788
------- ------- ------
Non-interest income:
Service fees ...................................... 220 170 155
Tax Refund Program revenue ........................ 2,237 2,080 0
Other income ...................................... 168 155 0
------- ------- ------
2,625 2,405 155
------- ------- ------
Non-interest expenses:
Salaries and employee benefits .................... 4,081 2,872 1,592
Occupancy expenses ................................ 702 696 470
Equipment ......................................... 513 205 94
Professional fees ................................. 503 282 327
Other operating expenses .......................... 1,993 1,526 566
------- ------- ------
7,792 5,581 3,049
------- ------- ------
Income before income taxes ............................ 5,134 4,066 894
Provision for income taxes ........................... 1,583 1,353 291
------- ------- ------
Net income ............................................ $ 3,551 $ 2,713 $ 603
======= ======= ======
Earnings per share:
Basic ............................................. $0.83 $0.82 $0.26
------- ------- ------
Diluted ........................................... $0.76 $0.77 $0.24
------- ------- ------
</TABLE>
(See notes to consolidated financial statements)
42
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995 (dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 3,551 $ 2,713 $ 603
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for possible loan losses ........................... 320 155 223
Depreciation and amortization ................................ 285 62 89
Amortization of securities ................................... 140 131 57
Realized gain on sale of real estate owned ................... 0 (18) 0
Decrease (increase) in accrued income and other assets ....... (762) 824 (697)
Increase (decrease) in accrued expenses and other liabilities 1,160 693 1,354
--------- --------- ---------
Net cash provided by operating activities .................... 4,694 4,560 1,629
--------- --------- ---------
Cash flows from investing activities:
Acquisition of ExecuFirst Bancorp, Inc. ......................... 0 11,952 0
Purchase of securities:
Available for sale ........................................... 0 (1,000) (4,022)
Held to maturity ............................................. (101,385) (24,650) (6,330)
Proceeds from maturities and calls of securities:
Available for sale ........................................... 0 1,500 0
Held to maturity ............................................. 14,334 5,500 0
Principal collected on MBS's and CMO's:
Available for sale ........................................... 2,950 691 0
Held to maturity ............................................. 16,619 6,517 180
Net increase in loans ........................................... (40,860) (11,927) (14,043)
Net increase in deferred fees ................................... 307 (10) 0
Net proceeds (investment from acquisition of ) from sale
(purchase) of real estate owned ............................... (1,093) 86 0
Premises and equipment expenditures ............................. (2,108) (556) (401)
--------- --------- ---------
Net cash used in investing activities ........................... (111,236) (11,897) (24,616)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from exercise of stock options .................. 105 0 0
Net Proceeds from stock offering ............................. 12,593 0 0
Net increase (decrease) in demand and money market .............. (1,799) 7,628 5,570
Net increase in time deposits ................................... 561 14,749 22,888
Redemption of subordinated debt ................................. 0 (3,400) 0
Net increase (decrease) in borrowed funds ....................... 85,912 0 (5,583)
--------- --------- ---------
Net cash provided by financing activities ....................... 97,372 18,977 22,875
--------- --------- ---------
Increase (decrease) in cash and cash equivalents .................... (9,170) 11,640 (112)
--------- --------- ---------
Cash and cash equivalents, beginning of period ...................... 15,496 3,856 3,968
Cash and cash equivalents, end of period ............................ 6,326 $ 15,496 $ 3,856
Supplemental disclosures:
Interest paid ................................................... $ 12,393 $ 8,409 $ 4,571
Income taxes paid ............................................... $ 1,183 $ 1,105 $ 290
Non-cash investing and financing activities:
Acquisition of ExecuFirst Bancorp, Inc.:
FMV of assets acquired ....................................... $ 0 $(108,415) $ 0
FMV of liabilities assumed ................................... 0 113,315 0
Stock issued ................................................. 0 7,052 0
--------- --------- ---------
Total cash received, net of merger related costs ............. 0 $ 11,952 $ 0
--------- --------- ---------
Net non-cash transfers from loans to real estate owned .......... $ 839 $ 68 $ 70
</TABLE>
(See notes to consolidated financial statements)
43
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND
1995 (dollars 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 December 31, 1994 ...................... $ 26 $ 6,643 $ 1,331 $ 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 ...................... 26 6,643 1,934 19 8,622
Acquisition of Execufirst Bancorp, Inc. ........ 15 7,037 0 0 7,052
Net income for the year ........................ 0 0 2,713 0 2,713
Change in unrealized gain
on securities available for sale ............. 0 0 0 (16) (16)
-------- -------- -------- -------- --------
Balance December 31, 1996 ...................... 41 13,680 4,647 3 18,371
-------- -------- -------- -------- --------
Options exercised .............................. 0 106 0 0 106
Change in securities available for sale ........ 0 0 0 2 2
Net income for the year ........................ 0 0 3,551 0 3,551
Sale of common stock ........................... 14 12,578 0 0 12,592
-------- -------- -------- -------- --------
Balance December 31, 1997 ...................... $ 55 $ 26,364 $ 8,198 $ 5 $ 34,622
======== ======== ======== ======== ========
</TABLE>
(See notes to consolidated financial statements)
44
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Republic First 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, (the "Merger"). 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, Consolidated Statements of Cash Flows, and
the Consolidated Statements of Changes in Shareholders' Equity for 1995 are
those of Republic only, and may not be comparable to subsequent periods. 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 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 respective
stock of ExecuFirst and Republic.
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.
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.
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1996 1995
<S> <C> <C>
Net interest income $9,337 $9,404
Net income $2,954 $1,454
Basic earnings per share $0.89 $0.63
Diluted earnings per share $0.84 $0.59
</TABLE>
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.
45
<PAGE>
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 ("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 "Tax Refund 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 1997. The Company
is participating in the program again in 1998, 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 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, deferred tax asset 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 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. The
level of future earnings could significantly effect the realization of the
Company's deferred tax asset in future periods. However, management expects that
the Company will have sufficient future earnings to realize the deferred tax
asset, therefore, no valuation allowance exists at December 31, 1997.
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, 1997 and 1996 were $850,000 and
$798,000, respectively. These requirements were satisfied through the
restriction of vault cash and a balance at the Federal Reserve Bank of
Philadelphia.
INVESTMENT SECURITIES:
Debt and equity securities are classified in one of three categories, as
applicable, and to be 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 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
46
<PAGE>
investment securities are recognized using the specific identification method.
The Company did not realize any gains or losses on the sale of securities during
1997, 1996 or 1995. Additionally, the Bank does not have any trading securities.
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. 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 paydown 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 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.
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.
47
<PAGE>
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.
EARNINGS PER SHARE:
Earnings per share ("EPS") consists of two separate components, basic EPS
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus 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 December 31, 1997.
1997 1996 1995
Net income for year ended
(numerator, both calculations) ...... $3,551,000 $2,713,000 $603,000
========== ========== ========
<TABLE>
<CAPTION>
PER PER PER
SHARES SHARE SHARES SHARE SHARES SHARE
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares outstanding
for period ........................ 4,293,531 3,318,827 2,310,352
Basic EPS ............................ $ 0.83 $ 0.82 $ 0.26
Add common stock equivalents (CSE)
representing diluted stock options.. 355,249 200,091 174,279
Effect on basic EPS of CSE .......... $(0.07) $(0.05) $(0.02)
Equals total weighted average shares
and CSE (diluted) .................. 4,648,780 3,518,918 2,484,631
Diluted EPS .......................... $ 0.76 $ 0.77 $ 0.24
</TABLE>
RECLASSIFICATIONS:
Certain items in the 1996 and 1995 financial statements and accompanying
notes have been reclassified to conform to the 1997 presentation format. There
was no effect to net income for the periods presented herein as a result of
reclassifications.
The Company paid a six for five stock split on April 15, 1997, effected
in the form of a 20% stock dividend. All relevant financial data herein has been
retroactively adjusted for this stock split.
48
<PAGE>
REGULATORY MATTERS:
Regulatory Restrictions on Dividends:
Dividend payments by the Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no
dividends may be paid except from "accumulated net earnings" (generally,
undivided profits). Under the FRB's regulations, the Bank cannot pay dividends
that exceed its net income from the current year and the preceding two years.
Under the FDIA, an insured bank may pay no dividends if the bank is in arrears
in the payment of any insurance assessment due to the FDIC. Under current
banking laws, the Bank would be limited to $6.9 million of dividends in 1997
plus an additional amount equal to the Bank's net profit for 1998, up to the
date of any such dividend declaration.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Bank to pay dividends to the Company.
Other regulatory requirements and policies may also affect the payment of
dividends to the Company by the Bank. If, in the opinion of the FRB, the Bank is
engaged in, or is about to engage in, an unsafe or unsound practice (which,
depending on the financial condition of the Bank, could include the payment of
dividends), the FRB may require, after notice and hearing, that the Bank cease
and desist from such practice. The FRB has formal and informal policies
providing that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
RECENT ACCOUNTING PRONOUNCEMENTS:
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement
No. 125"). This statement supersedes and amends certain existing standards by
providing consistent standards for distinguishing transfers of financial assets
that are sales, from transfers that are secured borrowings. Under Statement No.
125, after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. Statement No. 125 is required to be
effective for transactions occurring after December 31, 1996 and is to be
applied prospectively. The adoption of Statement No. 125 was not material to the
results of operations, financial condition or stockholders' equity.
Earnings Per Share
In February 1997 the FASB issued SFAS No. 128, "Earnings Per Share"
("Statement No. 128"). 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 Statement No. 128 effective December 31, 1997. All prior period earnings
per share presentations have been restated to conform to this pronouncement.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("Statement No. 130"). 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. The impact of this Statement on the Company would be to
require additional disclosures in the Company's financial statements.
49
<PAGE>
Operating Segment Disclosure
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information" ("Statement No. 131"). 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 periods beginning after December
15, 1997. The impact, if any, of this Statement on the Company would be to
require additional disclosures in the Company's financial statements.
Employers' Disclosures about Pension and Other Postretirement Benefits
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("Statement No. 132") which
amends the disclosure requirements of Statements Nos. 87, "Employers' Accounting
for Pensions" ("Statement No. 87"), 88, "Employers' Accounting for "Settlements
and Curtailments of Defined Benefit Pensions Plans and for Termination Benefits"
("Statement No. 88"), and 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 Nos. 87 and 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 Nos. 87, 88, or 106. The Statement is effective for fiscal years
beginning after December 15, 1997. Restatement of comparative period disclosures
is required unless 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. Management expects that upon
adoption of this statement, the Company will require additional disclosures in
their financial statements.
3. INVESTMENT SECURITIES:
Investment securities available for sale as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
AMORTIZED COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government Agencies ........ $2,943,000 $7,000 $0 $2,950,000
---------- ------ -- ----------
Total ...................... $2,943,000 $7,000 $0 $2,950,000
---------- ------ -- ----------
</TABLE>
Investment securities held to maturity as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
AMORTIZED COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
CMOs and Mortgage Backed Securities $ 83,028,000 $ 713,000 $(218,000) $ 83,523,000
U.S. Government Agencies 56,331,000 383,000 0 56,714,000
Other Investment Securities 5,671,000 0 0 5,671,000
------------ ---------- --------- ------------
Total $145,030,000 $1,096,000 $(218,000) $145,908,000
------------ ---------- --------- ------------
</TABLE>
Investment securities available for sale as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
AMORTIZED COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasuries ..................... $ 998,000 $ 3,000 $ 0 $1,001,000
U.S. Government Agencies ............ 4,128,000 8,000 (5,000) 4,131,000
CMOs and Mortgage Backed Securities . 770,000 0 (2,000) 768,000
---------- ------- ------- ----------
Total .......................... $5,896,000 $11,000 $(7,000) $5,900,000
---------- ------- ------- ----------
</TABLE>
50
<PAGE>
Investment securities held to maturity as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
AMORTIZED COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Government Agencies ............ $49,214,000 $661,000 $(293,000) $49,582,000
CMOs and Mortgage Backed Securities . 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>
The Company held an investment in stock of the Federal Reserve Bank in
accordance with regulatory requirements, with a carrying value of $409,000 and
$521,000 as of December 31, 1997 and 1996, respectively, which are included in
Other Investment Securities. Also included in Other Investment Securities are
investments in the stock of the Federal Home Loan Bank of Pittsburgh of $4.1
million and $318,000 at December 31, 1997 and 1996, respectively. Both the
Federal Reserve Bank stock and the Federal Home Loan Bank Stock are recorded at
cost, which approximates liquidation value.
The maturity distribution of the amortized cost and estimated market
value of investment securities by contractual maturity at December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
AMORTIZED COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Due in 1 year or less ............... $ 0 $ 0 $ 250 $ 250
After 1 year to 5 years ............. 0 0 20,998,000 21,019,000
After 5 years to 10 years ........... 2,080,000 2,087,000 41,548,000 41,603,000
After 10 years or no maturity ....... 863,000 863,000 82,234,000 83,036,000
---------- ---------- ------------ ------------
Total ....................... $2,943,000 $2,950,000 $145,030,000 $145,908,000
========== ========== ============ ============
</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 collateralized mortgage
obligations (CMOs) are shown separately due to the amortization and prepayment
of principal accruing throughout the life of these instruments.
At December 31, 1997, investment securities in the amount of
approximately $6.75 million 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:
1997 1996
Commercial and industrial ......... $ 42,519,000 $ 45,007,000
Real estate-- commercial .......... 87,701,000 62,016,000
Real estate-- residential ......... 78,366,000 61,240,000
Consumer and other ................ 3,441,000 3,831,000
------------ ------------
212,027,000 172,094,000
Less allowance for loan losses .... (2,028,000) (2,092,000)
------------ ------------
Total loans receivable, net ....... $209,999,000 $170,002,000
------------ ------------
51
<PAGE>
The recorded investment in loans for which impairment has been recognized
totaled $1,800,000 and $1,892,000, at December 31, 1997 and 1996 respectively,
of which $764,000 and $845,000 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, 1997, 1996 and 1995
were $1,152,000, $1,047,000 and $516,000, respectively. For the years ended
December 31, 1997, 1996 and 1995, the average recorded investment in impaired
loans was approximately $1,809,000, $1,573,000, and $452,000 respectively. The
Bank did not recognize any interest on impaired loans in 1997 or 1995. During
1996, the Bank recognized interest income of $60,000 on impaired loans.
The following summary shows the impact on interest income of
nonperforming loans for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Interest income that would have been recorded
had the loans been in accordance
with their original terms ................... $279,000 $135,000 $48,000 $26,000 $12,000
Interest income included in net income ......... $ 0 $60,000 $ 0 $75,000 $ 0
</TABLE>
As of December 31, 1997, 1996 and 1995, there were loans of approximately
$1,800,000, $1,892,000 and $526,000, respectively, which were nonperforming. If
these loans were performing under their original contractual rate, interest
income on such loans would have approximated $279,000, $135,000 and $48,000 for
1997, 1996 and 1995, respectively. Interest income that would have been earned
on non-accrual loans increased from $135,000 for the year ended December 31,
1996 to $279,000 for the year ended December 31, 1997 as interest on the
non-accrual loans acquired, as a result of the Merger would not have calculated
for this purpose, until after the merger date of June 7, 1996.
The majority of loans are with borrowers in the Company's marketplace,
Philadelphia and surrounding suburbs, including southern New Jersey. In addition
the Company has loans to customers whose assets and businesses are concentrated
in real estate and professional services. Repayment of the Company's loans is in
part dependent upon general economic conditions affecting the Company's market
place and specific 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 $5,320,000 and $5,226,000 at December 31, 1997 and 1996, respectively. All
loans made to directors and other related parties have substantially the same
terms and interest rates as other Bank borrowers. The following presents the
activity in amounts due from directors and other related parties for the year
ended December 31, 1997.
1997
Balance at beginning of year ...................... $5,226,000
Additions .................................... 1,260,000
Repayments ................................... (1,166,000)
----------
Balance at end of year ....................... $5,320,000
==========
5. ALLOWANCE FOR LOAN LOSSES:
Changes in the allowance for loan losses for the years ended December 31,
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year .................. $2,092,000 $ 680,000 $ 650,000
Charge-offs ................................ (481,000) (391,000) (212,000)
Recoveries ................................. 97,000 120,000 19,000
Acquisition of ExecuFirst .................. 0 1,528,000 0
Provision for loan losses .................. 320,000 155,000 223,000
---------- ---------- ---------
Balance at end of year ........................ $2,028,000 $2,092,000 $ 680,000
========== ========== =========
</TABLE>
52
<PAGE>
6. PREMISES AND EQUIPMENT:
A summary of premises and equipment is as follows:
1997 1996
Furniture and equipment ................ $ 2,119,000 $1,122,000
Bank building .......................... 883,000 0
Leasehold improvements ................. 632,000 404,000
----------- ----------
3,634,000 1,526,000
Less accumulated depreciation .......... (1,100,000) (815,000)
----------- ----------
Net premises and equipment ............. $ 2,534,000 $ 711,000
----------- ----------
Depreciation expense on premises and equipment amounted to $285,000,
$166,000 and $89,000 in 1997, 1996 and 1995, respectively.
The range of depreciable lives for Leasehold Improvements is five to ten
years. The depreciable lives of the Bank building and furniture/equipment is
forty years and five to seven years respectively.
The Company has entered into non-cancelable 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
1998 ...................... $1,058,000
1999 ...................... 1,000,000
2000 ...................... 771,000
2001 ...................... 544,000
2002 and beyond ........... 540,000
----------
Total ..................... $3,913,000
----------
The Company incurred rent expense of $667,000, $613,000 and $427,000 in
1997, 1996 and 1995, respectively.
7. OTHER BORROWED FUNDS/SUBORDINATED DEBT:
The Company has two lines of credit totaling $7.0 million 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 $ 129.0 million. This maximum
borrowing capacity is subject to change on a quarterly basis. As of December 31,
1997 and 1996, there were $85.9 million and $0, respectively, outstanding of
fixed rate borrowings on these lines of credit. The contractual maturity of the
borrowings through Federal Home Loan Bank range from overnight to five years.
With a portion of these borrowings, the Federal Home Loan Bank has the option to
convert the borrowings from a fixed rate to a variable rate. When the borrowing
level exceeds 75% of the maximum borrowing capacity on the Federal Home Loan
Bank line of credit, the Company is required to deliver as collateral,
securities in the amount of borrowings which exceed 75% of the line.
At December 31, 1997, the Company had $85.9 million of outstanding
borrowed funds at the Federal Home Loan Bank, $60.0 million of which were term
funds and $25.9 million of which were overnight borrowed funds. The weighted
average cost of the term borrowed funds was 5.74% at December 31, 1997. All term
funds are due within five years.
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.
53
<PAGE>
8. DEPOSITS
The following is a breakdown, by contractual maturities, of the Company's
time deposits issued in denominations of $100,000 or more as of December 31,
1997, 1996, and 1995.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996 1995
CERTIFICATES OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maturing in:
Three months or less ............................... $ 9,896 $10,654 $ 1,700
Over three months through six months ............... 8,726 4,381 983
Over six months through twelve months .............. 7,233 6,120 1,358
Over twelve months ................................. 2,719 8,072 4,029
------- ------- -------
Total ........................................... $28,574 $29,227 $ 8,070
======= ======= =======
</TABLE>
The following is a breakdown, by contractual maturities of the Company's
time deposits for the years 1998 through 2001.
1998 1999 2000 2001 2001 TOTAL
Time deposits
(In thousands) $128,963 $31,218 $17,112 $2,811 $484 $180,588
-------- ------- ------- ------ ---- --------
9. INCOME TAXES:
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 34.0% to income before income taxes for the years ended December 31,
1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Tax provision computed at statutory rate ............ $1,745,000 $1,383,000 $304,000
State income taxes net of federal tax benefit ....... 0 108,000 0
Amortization of negative goodwill ................... (103,000) (170,000) 0
Other ............................................... (59,000) 32,000 (13,000)
---------- ---------- --------
Total provision for income taxes ............ $1,583,000 $1,353,000 $291,000
========== ========== ========
</TABLE>
54
<PAGE>
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, 1997 and 1996 are as follows:
1997 1996
Allowance for loan losses ............... $ 380,000 $ 320,000
Net operating loss carryforward ......... 433,000 503,000
Deferred compensation ................... 356,000 199,000
Depreciation ............................ 151,000 164,000
Real estate owned ....................... 52,000 46,000
Other ................................... 83,000 142,000
---------- ---------
Deferred tax asset ...................... 1,455,000 1,374,000
---------- ---------
Negative goodwill allocated to
deferred tax asset, net of
amortization ......................... (412,000) (515,000)
---------- ---------
Adjusted deferred tax assets ............ $1,043,000 $ 859,000
---------- ---------
Deferred tax liabilities:
Unrealized gain on securities
available for sale ................ (2,000) (1,000)
Deferred loan costs .................. (178,000) 0
Prepaid expenses ..................... (95,000) 0
Joint venture ........................ (205,000) 0
---------- ---------
Deferred tax liabilities ................ (480,000) (1,000)
---------- ---------
Net deferred tax asset .................. $ 563,000 $ 858,000
========== =========
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 1997 and 1996, the negative goodwill allocated to the deferred
tax assets was amortized by $103,000 and $170,000, respectively, 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 underlying components of the deferred tax assets.
At December 31, 1997, the Company has available approximately $1,275,000
of net operating loss carryforwards available for income tax reporting purposes
which expire from 2004 through 2009.
Based upon the Company's current and historical tax history and the
anticipated level of future taxable income, management believes the existing net
deferred tax asset will, more likely than not, be realized based on future
taxable income.
The following represents the components of income tax expense (benefit)
for the years ended December 31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current provision
Federal .................................. $1,289,000 $ 950,000 $370,000
State .................................... 0 163,000 0
Deferred provision-- Federal ................ 294,000 240,000 (79,000)
---------- ---------- --------
Total provision for income taxes ..... $1,583,000 $1,353,000 $291,000
---------- ---------- --------
</TABLE>
55
<PAGE>
10. 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, 1997, 1996 and 1995 totaled
$287,000, $224,000 and $146,000, respectively. The expense for the years ended
December 31, 1997, 1996 and 1995 was $63,000, $72,000 and $56,000, 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 $1,328,000, $1,277,000 and $1,181,000 at December 31, 1997,
1996 and 1995, respectively, which is included in accrued interest and other
assets.
11. 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.
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 $17.3 million and $28.5
million and standby letters of credit of approximately $453,000 and $1,129,000
at December 31, 1997 and 1996, respectively. Of the $17.4 million commitments to
extend credit at December 31, 1997, $16.9 million were variable rate and
$387,000 were fixed rate commitments.
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 President,
Chief Operating Officer and Chief Lending Officer and Chief Financial Officer of
the subsidiary Bank, which provides for the payment of base salary and certain
benefits through the year 1998. The aggregate commitment for future salaries and
benefits under these employment agreements at December 31, 1997 is approximately
$525,000.
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 Bank participates in a partially self-insured health insurance plan
(the "Plan"), for which employees of the Bank receive medical, dental, vision
and pharmaceutical insurance coverage and reimbursements. During 1997, the Bank
paid claims under the Plan of $158,000.
56
<PAGE>
12. SHAREHOLDERS' EQUITY/REGULATORY CAPITAL:
During the fourth quarter of 1997, the Company sold 1,150,000 shares of
common stock in a secondary offering. The price per share was $12.00, and the
net proceeds to the Company after commissions and costs were approximately $12.6
million.
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, 1997, there were no dividends declared or paid.
Dividend payments by the Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no
dividends may be paid except from "accumulated net earnings" (generally,
undivided profits). Under the FRB's regulations, the Bank cannot pay dividends
that exceed its net income from the current year and the preceding two years.
Under the FDIA, an insured bank may pay no dividends if the bank is in arrears
in the payment of any insurance assessment due to the FDIC. Under current
banking laws, the Bank would be limited to $6.9 million of dividends in 1997
plus an additional amount equal to the Bank's net profit for 1998, up to the
date of any such dividend declaration.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Bank to pay dividends to the Company. Federal
banking agencies impose three minimum capital requirements on the Company's
risk-based capital ratios based on total capital, Tier 1 capital, and a leverage
capital ratio. The risk-based capital ratios measure the adequacy of a bank's
capital against the riskiness of its assets and off-balance sheet activities.
Failure to maintain adequate capital is a basis for "prompt corrective action"
or other regulatory enforcement action. In assessing a bank's capital adequacy,
regulators also consider other factors such as interest rate risk exposure;
liquidity, funding and market risks; quality and level or earnings;
concentrations of credit, quality of loans and investments; risks of any
nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
The Federal Reserve Board's risk-based capital leverage ratio guidelines
require all state-chartered member banks to maintain total capital equal to at
least 8% of risk-weighted total assets, Tier 1 capital (adjusted for certain
excludable regulatory items ) equal to 4% of risk-weighted total assets, and a
Tier 1 leverage ratio of 4%. At December 31, 1997, the aforementioned ratios are
as follows:
The following table presents the Bank's capital regulatory ratios at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL FRB CAPITAL
ACTUAL ADEQUACY PURPOSES GUIDELINES
(DOLLARS IN THOUSANDS) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Total risk based capital... $36,395 16.33% $17,830 8.00% $22,289 10.00%
Tier I capital.............. 34,367 15.42 8,915 4.00 13,372 6.00
Tier I (leveraged) capital.. 34,367 10.53 16,312 5.00 16,312 5.00
AS OF DECEMBER 31, 1996:
Total risk based capital... $20,126 10.08% $14,306 8.00% $17,883 10.00%
Tier I capital.............. 18,034 11.25 7,153 4.00 10,730 6.00
Tier I (leveraged) capital.. 18,034 6.65 13,550 5.00 13,550 5.00
</TABLE>
57
<PAGE>
13. RETIREMENT PLAN:
The Company maintains a Supplemental Retirement Plan for its former 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 with a matching contribution from the Bank, limited to 3%. The
total expense relating to the plan was $74,000 and $47,000 in 1997 and 1996,
respectively.
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:
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.
58
<PAGE>
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, 1997, the carrying amount and the estimated fair value of
the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Balance Sheet Data:
Financial Assets:
Cash and cash equivalents $ 6,326,000 $ 6,326,000 $ 15,496,000 $ 15,496,000
Securities available for sale 2,950,000 2,950,000 5,900,000 5,900,000
Securities held to maturity 145,030,000 145,908 ,000 75,054,000 75,307,000
Loans receivable, net 209,999,000 211,524,000 170,002,000 170,513,000
Accrued interest receivable 2,654,000 2,654,000 2,171,000 2,171,000
Financial Liabilities:
Deposits:
Demand, savings, and
money market $68,233,000 $ 68,233,000 $ 70,032,000 $ 70,032,000
Time 180,588,000 182,140,000 180,027,000 181,167,000
Accrued interest payable 4,402,000 4,402,000 3,802,000 3,802,000
DECEMBER 31, 1997 DECEMBER 31, 1996
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
Off Balance Sheet:
Commitments to extend credit $17,300,000 $ 173,000 $28,500,000 $285,000
Letters of Credit 453,000 4,000 1,129,000 11,000
</TABLE>
The fair value of commitments to extend credit is estimated using the
fees currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparts. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
agreements.
59
<PAGE>
15. PARENT COMPANY FINANCIAL INFORMATION
The following financial statements for Republic First 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.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS:
Cash ..................................................... $ 8,434 $ 84
Investment in subsidiary, at equity ...................... 26,188 18,287
-------- --------
Total Assets ............................................. $ 34,622 $ 18,371
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Total Liabilities ........................................ $ 0 $ 0
SHAREHOLDERS' EQUITY:
Common stock ............................................. 55 41
Additional paid in capital ............................... 26,364 13,680
Retained earnings ........................................ 8,198 4,647
Unrealized gain on securities available for sale,
net of deferred tax ................................. 5 3
-------- --------
Total Shareholders' Equity .............................. 34,622 18,371
-------- --------
Total Liabilities and Shareholders' Equity ............... $ 34,622 $ 18,371
======== ========
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(dollar amounts in thousands)
1997 1996
Income ................................................... $ 44 $ 0
Expenses ................................................. 0 0
Equity in undistributed income of subsidiary ............ 3,507 2,713
-------- --------
Net income ............................................... 3,551 2,713
Shareholders' equity, beginning of year .................. 18,371 8,622
Exercise of stock options ................................ 106 0
Proceeds from stock offering ............................. 12,592 0
Change in unrealized gain on securities available for sale 2 (16)
Acquisition of ExecuFirst Bancorp, Inc. .................. 0 7,052
-------- --------
Shareholders' equity, end of year ........................ $ 34,622 $ 18,371
-------- --------
</TABLE>
60
<PAGE>
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................ $ 3,551 $ 2,713
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed income of subsidiary . (3,507) (2,713)
-------- --------
Net cash provided by operating activities ......... 44 0
-------- --------
Cash flows from investing activities:
Purchase of subsidiary common stock .......... (4,392) 84
-------- --------
Net cash provided by investing activities ......... (4,392) 84
-------- --------
Cash from financing activities:
Exercise of stock options ..................... 106 0
Proceeds from stock issuance .................. 12,592 0
Net cash provided by financing activities
Increase in cash .................................. 8,350 84
Cash, beginning of period ......................... 84 0
-------- --------
Cash, end of period ............................... $ 8,434 $ 84
======== ========
</TABLE>
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. As of
December 31, 1997, there were no options granted under the plan for independent
contractors.
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, 122,427 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.
61
<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. These options and option prices have also
been restated as a result of two separate six for five stock splits effected in
the form of 20% stock dividends. These dividends were paid on April 15, 1997 and
March 27, 1998. Changes in total shares are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997: WEIGHTED
AVERAGE
WEIGHTED REMAINING
RANGE OF AVERAGE CONTRACTUAL
SHARES EXERCISE PRICES EXERCISE PRICE LIFE (YEARS)
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 451,835 $2.15 to $2.92 $2.75 5.3
216,135 3.30 to 4.95 4.08 6.0
141,120 5.34 5.34 8.8
Granted during year................. 0 N/A N/A
Exercised during year............... 34,560 2.78 to 3.30 3.04
Forfeited during year............... 0 N/A N/A
- ------------------------------------------------------------------------------------------------------
Outstanding at end of year.......... 774,530 $2.15 to $5.34 $3.45
Options exercisible at end of year.. 774,530 $2.15 to $5.34 $3.45
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996: WEIGHTED
AVERAGE
WEIGHTED REMAINING
RANGE OF AVERAGE CONTRACTUAL
SHARES EXERCISE PRICES EXERCISE PRICE LIFE (YEARS)
<S> <C> <C> <C> <C>
Outstanding at beginning of year.... 410,075 $2.15 to $2.92 $2.75 6.3
41,868 3.30 to 3.44 3.44 2.4
Granted during year:................ 141,120 5.34 5.34 9.8
122,427 4.42 4.42 9.4
Acquisition of Execufirst........... 76,319 2.78 to 3.46 3.21 4.9
17,280 4.26 4.26 2.0
Exercised during year............... 0 N/A N/A N/A
Forfeited during year............... 0 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------
Outstanding at end of year.......... 809,089 $2.15 to $5.34 $3.45
Options exercisible at end of year.. 545,542 $2.15 to $4.26
</TABLE>
The proforma compensation expense is based upon the fair value of the
options at grant date, reduced by the Company's statutory tax rate of 34%. The
weighted average fair value price of the options granted in 1996 was $2.35.
There were no options granted or exercised during and 1995.
62
<PAGE>
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
<S> <C> <C> <C> <C>
Net income................... $3,551,000 $3,282,000 $2,713,000 $2,119,000
Basic earnings per share..... $0.83 $0.76 $0.82 $0.64
Diluted earnings per share... $0.76 $0.71 $0.77 $0.60
</TABLE>
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 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.
There were also no options granted in 1997.
17. SUBSEQUENT EVENTS
On February 19, 1998, the Company announced that its Board of Directors
approved a six for five stock split effected in the form of a 20% stock dividend
for shareholders of record as of March 2, 1998 to be distributed on March 27,
1998. The stock split will represent an increase in outstanding shares of
approximately 919,000, bringing the total outstanding shares to approximately
5.5 million. All relevant financial data herein has been retroactively adjusted
for this stock split.
63
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000834285
<NAME> REPUBLIC FIRST BANCORP INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,850,000
<INT-BEARING-DEPOSITS> 476,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 2,950,000
<INVESTMENTS-CARRYING> 145,030,000
<INVESTMENTS-MARKET> 0
<LOANS> 212,027,000
<ALLOWANCE> 2,028,000
<TOTAL-ASSETS> 375,462,000
<DEPOSITS> 248,401,000
<SHORT-TERM> 85,912,000
<LIABILITIES-OTHER> 6,527,000
<LONG-TERM> 0
0
0
<COMMON> 55,000
<OTHER-SE> 34,567,000
<TOTAL-LIABILITIES-AND-EQUITY> 375,462,000
<INTEREST-LOAN> 16,869,000
<INTEREST-INVEST> 6,360,000
<INTEREST-OTHER> 304,000
<INTEREST-TOTAL> 23,533,000
<INTEREST-DEPOSIT> 11,542,000
<INTEREST-EXPENSE> 12,912,000
<INTEREST-INCOME-NET> 10,621,000
<LOAN-LOSSES> 320,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,792,000
<INCOME-PRETAX> 5,134,000
<INCOME-PRE-EXTRAORDINARY> 5,134,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,551,000
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.76
<YIELD-ACTUAL> 3.76
<LOANS-NON> 1,800,000
<LOANS-PAST> 3,034,000
<LOANS-TROUBLED> 1,913,000
<LOANS-PROBLEM> 1,913,000
<ALLOWANCE-OPEN> 2,092,000
<CHARGE-OFFS> 481,000
<RECOVERIES> 97,000
<ALLOWANCE-CLOSE> 2,028,000
<ALLOWANCE-DOMESTIC> 2,028,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 334,000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000834285
<NAME> REPUBLIC FIRST 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> 41,000
<OTHER-SE> 18,330,000
<TOTAL-LIABILITIES-AND-EQUITY> 273,795,000
<INTEREST-LOAN> 12,007,000
<INTEREST-INVEST> 3,739,000
<INTEREST-OTHER> 1,366,000
<INTEREST-TOTAL> 17,112,000
<INTEREST-DEPOSIT> 9,477,000
<INTEREST-EXPENSE> 9,715,000
<INTEREST-INCOME-NET> 7,397,000
<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> 0.82
<EPS-DILUTED> 0.77
<YIELD-ACTUAL> 3.37
<LOANS-NON> 1,892,000
<LOANS-PAST> 3,069,000
<LOANS-TROUBLED> 1,919,000
<LOANS-PROBLEM> 1,919,000
<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>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<CIK> 0000834285
<NAME> REPUBLIC FIRST BANCORP INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,884,000
<INT-BEARING-DEPOSITS> 39,000
<FED-FUNDS-SOLD> 933,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,348,000
<INVESTMENTS-CARRYING> 34,004,000
<INVESTMENTS-MARKET> 0
<LOANS> 85,863,000
<ALLOWANCE> 680,000
<TOTAL-ASSETS> 131,063,000
<DEPOSITS> 116,424,000
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,617,000
<LONG-TERM> 3,400,000
0
0
<COMMON> 26,000
<OTHER-SE> 8,596,000
<TOTAL-LIABILITIES-AND-EQUITY> 131,063,000
<INTEREST-LOAN> 7,710,000
<INTEREST-INVEST> 2,016,000
<INTEREST-OTHER> 176,000
<INTEREST-TOTAL> 9,902,000
<INTEREST-DEPOSIT> 5,553,000
<INTEREST-EXPENSE> 5,891,000
<INTEREST-INCOME-NET> 4,011,000
<LOAN-LOSSES> 223,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,049,000
<INCOME-PRETAX> 894,000
<INCOME-PRE-EXTRAORDINARY> 894,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 603,000
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.24
<YIELD-ACTUAL> 3.45
<LOANS-NON> 526,000
<LOANS-PAST> 1,488,000
<LOANS-TROUBLED> 537,000
<LOANS-PROBLEM> 537,000
<ALLOWANCE-OPEN> 650,000
<CHARGE-OFFS> 212,000
<RECOVERIES> 19,000
<ALLOWANCE-CLOSE> 680,000
<ALLOWANCE-DOMESTIC> 680,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 470,000
</TABLE>
