UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 1999
Commission File Number: 0-17007
Republic First Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2486815
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
(Address of principal executive offices) (Zip code)
215-735-4422
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO ____
-------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
Issuer's classes of common stock, as of the latest practicable date.
6,086,293 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of July 31, 1999
Page 1 of 40
Exhibit index appears on page 38
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Part I: Financial Information
Item 1: Financial Statements 3
Item 2: Management's Discussion and Analysis of Financial Condition and 17
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 22
Part II: Other Information
Item 1: Legal Proceedings 38
Item 2: Changes in Securities and Use of Proceeds 38
Item 3: Defaults Upon Senior Securities 38
Item 4: Submission of Matters to a Vote of Security Holders 38
Item 5: Other Information 38
Item 6: Exhibits and Reports on Form 8-K 38
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
Page Number
(1) Consolidated Balance Sheets as of June 30,1999 and December 31, 1998................ 4
(2) Consolidated Statements of Operations for three and six months ended
June 30, 1999 and 1998............................................................. 5
(3) Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and 1998............................................................. 7
(4) Notes to Consolidated Financial Statements.......................................... 8
</TABLE>
3
<PAGE>
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
ASSETS: 1999 1998
------------- -------------
<S> <C> <C>
Cash and due from banks $ 14,134,000 $ 18,169,000
Interest bearing deposits with banks 114,000 126,000
------------- -------------
Total cash and cash equivalents 14,248,000 18,295,000
Securities available for sale, at fair value 185,602,000 160,554,000
Securities held to maturity at amortized cost 15,932,000 16,998,000
(fair value of $15,939,000 and $16,982,000,
respectively)
Loans receivable, (net of allowance for loan losses of
$2,878,000 and $2,395,000, respectively) 321,042,000 299,564,000
Loans held for sale 609,000 7,204,000
Premises and equipment, net 4,631,000 3,990,000
Real estate owned 643,000 718,000
Accrued income and other assets 11,179,000 9,038,000
------------- -------------
Total Assets $ 553,886,000 $ 516,361,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 29,156,000 $ 32,537,000
Demand - interest-bearing 12,552,000 20,155,000
Money market and savings 44,360,000 35,250,000
Time under $100,000 156,456,000 169,792,000
Time over $100,000 27,336,000 25,350,000
------------- -------------
Total Deposits 269,860,000 283,084,000
Other borrowed funds 237,621,000 188,009,000
Accrued expenses and other liabilities 10,361,000 8,646,000
------------- -------------
Total Liabilities 517,842,000 479,739,000
------------- -------------
Shareholders' Equity:
Common stock par value $.01 per share, 20,000,000
shares authorized; shares issued and outstanding
6,086,293 as of June 30, 1999
and 5,883,188 as of December 31, 1998 62,000 59,000
Treasury stock at cost (175,172 and 219,604 shares
at June 30, 1999 and December 31, 1998, respectively) (1,542,000) (1,927,000)
Additional paid in capital 31,554,000 26,510,000
Retained earnings 9,315,000 11,996,000
Accumulated other comprehensive income/(loss), net of tax (3,345,000) (16,000)
------------- -------------
Total Shareholders' Equity 36,044,000 36,622,000
------------- -------------
Total Liabilities and Shareholders' Equity $ 553,886,000 $ 516,361,000
============= =============
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE>
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30,
(unaudited)
<TABLE>
<CAPTION>
Quarter to Date Year to Date
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 6,540,000 $ 5,308,000 $ 12,814,000 $ 10,104,000
Interest on federal funds sold 1,000 26,000 2,000 207,000
Interest on investments 3,210,000 3,458,000 6,068,000 6,459,000
------------ ------------ ------------ ------------
Total interest income 9,751,000 8,792,000 18,884,000 16,770,000
------------ ------------ ------------ ------------
Interest expense:
Demand interest-bearing 42,000 84,000 112,000 139,000
Money market and savings 430,000 403,000 801,000 571,000
Time over $100,000 308,000 380,000 653,000 782,000
Time under $100,000 2,370,000 2,516,000 4,833,000 4,888,000
Other borrowed funds 2,852,000 2,019,000 5,278,000 3,526,000
------------ ------------ ------------ ------------
Total interest expense 6,002,000 5,402,000 11,677,000 9,906,000
------------ ------------ ------------ ------------
Net interest income 3,749,000 3,390,000 7,207,000 6,864,000
------------ ------------
------------ ------------
Provision for loan losses 210,000 80,000 460,000 210,000
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 3,539,000 3,310,000 6,747,000 6,654,000
------------ ------------ ------------ ------------
Non-interest income:
Service fees 172,000 105,000 328,000 200,000
Tax Refund Program revenue 0 223,000 2,715,000 2,379,000
Miscellaneous income 26,000 31,000 51,000 58,000
------------ ------------ ------------ ------------
198,000 359,000 3,094,000 2,637,000
Non-interest expense:
Salaries and benefits 1,251,000 1,211,000 2,682,000 2,399,000
Occupancy/Equipment 427,000 370,000 845,000 721,000
Other expenses 943,000 888,000 1,948,000 1,412,000
------------ ------------ ------------ ------------
2,621,000 2,469,000 5,475,000 4,532,000
------------ ------------ ------------ ------------
Income before income taxes 1,116,000 1,200,000 4,366,000 4,759,000
------------ ------------ ------------ ------------
Provision for income taxes 366,000 396,000 1,436,000 1,575,000
Income before cumulative effect of a
change in accounting principle 750,000 804,000 2,930,000 3,184,000
Cumulative effect of a change in
accounting principle (Note 5) 0 0 (63,000) 0
------------ ------------ ------------ ------------
Net income $ 750,000 $ 804,000 $ 2,867,000 $ 3,184,000
============ ============ ============ ============
Net income per share-basic:
Income before cumulative effect of a
change in accounting principle $ 0.13 $ 0.14 $ 0.49 $ 0.53
Cumulative effect of a change in
accounting principle (Note 5) 0.00 0.00 (0.01) 0.00
------------ ------------ ------------ ------------
Net Income $ 0.13 $ 0.14 $ 0.48 $ 0.53
============ ============ ============ ============
Net income per share-diluted:
Income before cumulative effect of a
change in accounting principle $ 0.12 $ 0.13 $ 0.47 $ 0.50
5
<PAGE>
Quarter to Date Year to Date
June 30, June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Cumulative effect of a change in
Accounting principle (Note 5) 0.00 0.00 (0.01) 0.00
------------ ------------ ------------ ------------
Net Income $ 0.12 $ 0.13 $ 0.46 $ 0.50
============ ============ ============ ============
</TABLE>
(See notes to consolidated financial statements)
6
<PAGE>
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
(unaudited)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,867,000 $ 3,184,000
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 460,000 210,000
Write down of other real estate owned 75,000 0
Depreciation and amortization 458,000 260,000
Decrease in loans held for sale 6,595,000 0
Increase in accrued income
and other assets (545,000) (8,747,000)
Increase in accrued expenses
and other liabilities 1,715,000 1,634,000
------------ ------------
Net cash provided by/(used in) operating activities 11,625,000 (3,461,000)
------------ ------------
Cash flows from investing activities:
Purchase of securities:
Available for Sale (44,978,000) 0
Held to Maturity (3,987,000) (74,360,000)
Proceeds from principal receipts, sales, and
Maturities of securities 19,853,000 35,774,000
Net increase in loans (21,996,000) (32,717,000)
Net increase in deferred fees 100,000 241,000
Purchase of other real estate owned 0 0
Premises and equipment expenditures (939,000) (1,249,000)
------------ ------------
Net cash used in investing activities (51,947,000) (72,311,000)
------------ ------------
Cash flows from financing activities:
Net increase/(decrease) in demand, money
Market, and savings deposits (1,874,000) 11,556,000
Net increase/(decrease) in borrowed funds less than 22,014,000 (5,832,000)
90 days
Net increase in borrowed funds greater than 90 days 27,600,000 70,000,000
Net increase (decrease) in time deposits (11,350,000) 8,167,000
Net proceeds from issued common stock 0 81,000
Purchase of Treasury Stock (1,028,000) 0
Net proceeds from exercise of stock options 913,000 0
------------ ------------
Net cash provided by financing activities 36,275,000 83,972,000
------------ ------------
(Decrease)/increase in cash and cash equivalents (4,047,000) 8,200,000
Cash and cash equivalents, beginning of period 18,295,000 6,326,000
------------ ------------
Cash and cash equivalents, end of period $ 14,248,000 $ 14,526,000
============ ============
Supplemental disclosure:
Interest paid $ 10,740,000 $ 8,308,000
============ ============
Taxes paid $ 875,000 $ 1,500,000
============ ============
Non-cash transactions:
Change in unrealized loss on securities
available for sale, net ($ 3,329,000) ($ 2,000)
of tax ============ ============
</TABLE>
(See notes to consolidated financial statements)
7
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Republic First Bancorp, Inc. (the "Company"), is a two-bank holding
company organized and incorporated under the laws of the Commonwealth of
Pennsylvania. Its wholly-owned 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.
The Company opened a second wholly-owned banking subsidiary in the
state of Delaware. The newly formed Bank, Republic First Bank of Delaware (the
"Delaware Bank") is a Delaware State chartered Bank, located at Brandywine
Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County
Delaware. The Delaware Bank opened for business on June 1, 1999 and offers many
of the same services and financial products as First Republic Bank, described in
Part I, Item I of the Company's 1998 Form 10-K.
In the opinion of the Company, the accompanying unaudited
financial statements contain all adjustments (including normal recurring
accruals) necessary to present fairly the financial position as of June 30,
1999, the results of operations for the three and six months ended June 30, 1999
and 1998, and the cash flows for the six months ended June 30, 1999 and 1998.
These interim financial statements have been prepared in accordance with
instructions to Form 10-Q. The interim results of operations may not be
indicative of the results of operations for the full year. The accompanying
unaudited financial statements should be read in conjunction with the Company's
audited financial statements, and the notes thereto, included in the Company's
1998 Form 10-K filed with the Securities and Exchange Commission.
Note 2: Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements of the Company include the
accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries,
First Republic Bank and Republic First Bank of Delaware, (the "Banks"). Such
statements have been presented in accordance with generally accepted accounting
principles and general practice within the banking industry. 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 Banks. The
Banks are 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
Banks are subject to risks and uncertainties surrounding their exposure to
change in the interest rate environment.
Additionally, the Company derives fee income from First Republic Bank's
participation in a program (the "Tax Refund Program") which indirectly funds
consumer loans collateralized by federal income tax refunds, and provides
accelerated check refunds. Approximately $2.7 million and $2.4 million in gross
revenues were collected on these loans during the six months ended June 30, 1999
and 1998, respectively. The Bank will not participate in the program beyond
1999.
8
<PAGE>
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, carrying values of real estate owned and deferred tax
assets. Consideration is given to a variety of factors in establishing the
allowance for loan losses, including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. 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 Banks'
control, it is at least reasonably possible that the estimates of the allowance
for loan losses and the carrying values of the real estate owned could differ
materially in the near term.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
cash and due from banks, interest-bearing deposits with an original maturity of
ninety days or less and federal funds sold to be cash and cash equivalents. The
Bank is required to maintain certain average reserve balances as established by
the Federal Reserve Board. The amounts of those balances for the reserve
computation periods which include June 30, 1999 and December 31, 1998 were
$806,000 and $872,000, respectively. These requirements were satisfied through
the restriction of vault cash and balances at the Federal Reserve Bank of
Philadelphia.
Investment Securities:
Debt and equity securities are classified in one of three categories,
as applicable, and accounted for as follows: debt securities which the Company
has the positive intent and ability to hold to maturity are classified as
"securities held to maturity" and are reported at amortized cost; debt and
equity securities that are bought and sold in the near term are classified as
"trading" and are reported at fair market value with unrealized gains and losses
included in earnings; and debt and equity securities not classified as either
held to maturity and/or trading securities are classified as "securities
available for sale" and are reported at fair market value with net unrealized
gains and losses, net of tax, reported as a separate component of shareholders'
equity. Securities are adjusted for amortization of premiums and accretion of
discounts over the life of the related security on a level yield method.
Securities available for sale include those management intends to use as part of
its asset-liability matching strategy or that may be sold in response to changes
in interest rates or other factors. Realized gains and losses on the sale of
investment securities are recognized using the specific identification method.
The Company did not realize any gains during the first or second quarters of
1999 or 1998. Additionally, the Bank had no securities classified as trading
securities, as of the end of any period reported herein.
Loans:
Loans are stated at the principal amount outstanding, net of deferred
loan fees and costs. The amortization of deferred loan fees and costs are
accounted for by a method which approximates level yield. Any unamortized fees
or costs associated with loans which pay down in full are immediately recognized
in the Company's operations. Income is accrued on the principal amount
outstanding.
9
<PAGE>
Loans, including impaired loans, are generally classified as
non-accrual 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 non-accrual 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) of interest and principal by the
borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual 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
non-accrual 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.
Loans Held for Sale:
Loans held for sale are carried at the lower of aggregate cost or
market value. The Bank currently services all loans classified as held for sale
and servicing is released when such loans are sold. Market values were estimated
using the present value of the estimated cash flows, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Gains and losses on loans held for sale are included in
non-interest income. Additionally, the Company did not realize any gains or
losses during the first and second quarters of 1999 or 1998.
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 and current
economic conditions and trends that may affect the borrower's ability to pay.
The Company considers residential mortgage loans with balances less
than $250,000 and consumer loans, including home equity lines of credit, to be
small balance homogeneous loans. These loan categories are collectively
evaluated for impairment. Jumbo mortgage loans, those with balances greater than
$250,000, 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.
10
<PAGE>
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of furniture and equipment is calculated over the
estimated useful life of the asset using the straight-line method. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
terms of their respective leases, using the straight-line method.
Repairs and maintenance are charged to current operations as incurred,
and renewals and betterments are capitalized.
Real Estate Owned:
Real estate owned consists of foreclosed assets and is stated at the
lower of cost or estimated fair market value less estimated costs to sell the
property. Costs to maintain other real estate owned, or deterioration in value
of the properties are recognized as period expenses. There is no valuation
allowance associated with the Company's other real estate portfolio for the
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 dilutive common stock equivalents ("CSE").
Common stock equivalents consist of dilutive stock options granted through the
Company's stock option plan. The following table is a reconciliation of the
numerator and denominator used in calculating basic and diluted EPS. Common
stock equivalents which are anti-dilutive are not included for purposes of this
calculation. At June 30, 1999 and 1998, there were 104,610 and zero CSEs which
were antidilutive, respectively. These shares may be dilutive in the future.
The Company paid a 10% stock dividend on March 18, 1999 as well as a
six for five stock split effected in the form of a 20% stock dividend on March
27, 1998 and April 15, 1997. All relevant financial data contained herein has
been retroactively restated as if the dividend and splits had occurred at the
beginning of each period presented herein.
11
<PAGE>
The following table is a comparison of EPS for the three and six months
ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Quarter to Date Year to Date
1999 1998 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income before cumulative effect of
a change in accounting principle
(numerator for both calculations) $750,000 $804,000 $2,930,000 $3,184,000
Shares Per Share Shares Per Share Shares Per Share Shares Per Share
Weighted average shares
for period 5,937,124 5,980,838 5,999,803 6,023,954
Basic EPS $0.13 $0.14 $0.49 $0.53
Add common stock equivalents
representing dilutive stock options 270,017 387,520 257,217 412,788
------- ------- ------- -------
Effect on basic EPS and CSE (0.01) (0.01) (0.02) (0.03)
----- ----- ----- -----
Equals total weighted average
Shares and CSE (diluted) 6,207,141 6,368,358 6,257,020 6,436,742
========= ========= ========= =========
Diluted EPS $0.12 $0.13 $0.47 $0.50
===== ===== ===== =====
</TABLE>
The impact of the cumulative effect of a change in accounting principle
on the year-to-date 1999 EPS was to lower the numerator by $63,000 and the
resulting basic and diluted EPS by $0.01.
Treasury Stock
Effective June 21, 1999, the Company's stock repurchase program,
originally announced on August 24, 1998 and established for the period through
and including June 30, 1999 has been extended to December 31, 1999. The
aggregate amount of stock to be repurchased will be determined by market
conditions, but will not exceed 4.9% of the Company's issued and outstanding
stock, or approximately 297,000 shares. As of June 30, 1999, there were 54,916
shares repurchased pursuant to rule 10b-18 of the Securities and Exchange
Commission. There were also an additional 279,088 shares purchased in block
transaction purchases, that are not included as part of the stock repurchase
program specified under rule 10b-18. The exercise of 158,832 options were funded
from such block transaction purchases.
Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only components of other comprehensive income are those related to SFAS
Statement No. 115 available for sale securities.
<TABLE>
<CAPTION>
(dollar amounts in thousands) Three months ended Six months ended
June 30, June 30,
-----------------------------------
1999 1998 1999 1998
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $750 $804 $2,867 $3,184
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding losses during the period (2,328) (1) (3,329) (2)
Less: Reclassification adjustment for
gains
included in net income 0 0 0 0
---------------- ---------------- --------------- ---------------
Comprehensive (loss)/income ($1,578) $803 ($462) $3,182
================ ================ =============== ===============
</TABLE>
12
<PAGE>
Note 3: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
Note 4: Recent Accounting Pronouncements:
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("Statement No. 133"). This
Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and those used for
hedging activities, by requiring that an entity recognize those items as assets
or liabilities in the statement of financial position and measure them at fair
value. The statement categorized derivatives used for hedging purposes as either
fair value hedges, cash flow hedges, foreign currency fair value hedges, foreign
currency cash flow hedges, or hedges of certain foreign currency exposures. The
statement generally provides for matching of gain or loss recognition on the
hedging instrument with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, so long as
the hedge is effective. Prospective application of Statement No. 133, as amended
by Statement No. 137, is required for all fiscal years beginning after June 15,
2000, however earlier application is permitted. Currently, the Company does not
use any derivative instruments, nor does it engage in any hedging activities.
The Company adopted Statement No. 133 effective July 1, 1998, which permitted
the Company to transfer certain securities originally designated as
held-to-maturity, to available-for-sale and trading. A portion of these
securities were subsequently sold during the third quarter of 1998. In
accordance with Statement No. 133, the Company recorded the gross gain of
$628,000 as a cumulative change in accounting principle, net of a $207,000
provision for income tax.
Accounting for Mortgage-backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This statement requires that
after the securitization of a mortgage loan held for sale, an equity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that is commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998 with earlier adoption permitted. This
Statement provides a one-time opportunity for an enterprise to reclassify, based
on the ability and intent on the date of adoption of this Statement,
mortgage-backed securities and other beneficial interests retained after
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place. The Company does not expect any
impact on earnings, financial condition or equity from this statement, as it
does not currently engage in the securitization of mortgage loans held for sale.
13
<PAGE>
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities
("SOP 98-5"). This statement requires costs of startup activities, including
organization costs, to be expensed as incurred. SOP 98-5 is effective for the
Company's financial statements for fiscal years beginning after December 15,
1998. As of December 31, 1998 the Company had deferred costs relating to
start-up activities of $94,000, remaining in the balance of other assets in the
Consolidated Balance Sheets. The Company adopted SOP 98-5 effective January 1,
1999, and accordingly, expensed $94,000 of costs of start-up activities in the
first quarter of 1999.
Note 5: Cumulative Effect of a Change in Accounting Principle
During the first quarter of 1999, the Company expensed $94,000 which represented
all of its business start-up costs, upon the adoption of the Statement of
Position 98-5 "Reporting on the Costs of Startup Activities", on January 1,
1999. This resulted in a $63,000 charge, net of an income tax benefit of
$31,000.
Note 6: Segment Reporting
The Company's reportable segments represent strategic businesses that
offer different products and services. The segments are managed separately
because each segment has unique operating characteristics, management
requirements and marketing strategies.
Republic First Bancorp has four reportable segments; two community
banking segments, its mortgage banking affiliate and the Tax Refund Program. The
community banking segment are primarily comprised of the results of operation
and financial condition of the Company's wholly owned banking subsidiaries,
First Republic Bank and Republic First Bank of Delaware. The mortgage banking
segment represents the Company's equity investment in Fidelity Bond and
Mortgage, a mortgage banking operation which services and originates residential
mortgage loans. Such investment is accounted for as an equity investment as the
Company does not have control over Fidelity Bond and Mortgage. The Tax Refund
Program enables the Bank to provide accelerated check refunds ("ACRs") and
refund anticipation loan ("RALs") on a national basis to customers of Jackson
Hewitt, a national tax preparation firm.
The accounting policies of the segments are the same as those described
in Note 2. The Company evaluates the performance of the community banking
segments based upon income before the provision or benefit for income taxes,
return on equity and return on average assets. The mortgage banking segment is
evaluated based upon return on average equity and the Tax Refund Program is
evaluated based upon income before provision for income taxes.
The Tax Refund Program and the mortgage banking affiliate were
developed as business segments to further expand the Company's products and
services offered to consumers and businesses.
The segment information presented below reflects that the Delaware Bank
originated in 1999, and the Company's investment in their Mortgage Banking
Affiliate was reduced to $0 as of December 31, 1998. Accordingly, the Mortgage
Banking Affiliate no longer represents a segment in 1999.
14
<PAGE>
As of and for the six months ended June 30,
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998
First Tax First Mortgage Tax
Republic Delaware Refund Republic Banking Refund
Bank Bank Program Total Bank Affiliate Program Total
External customer revenues:
Interest Income $18,851 $33 $0 $18,884 $16,770 $0 $0 $16,770
Other Income 379 0 2,715 3,094 258 0 $2,379 2,637
Total external customer
revenues 19,230 33 2,715 21,978 17,028 0 2,379 19,407
Intersegment revenues:
Interest Income 0 0 0 0 0 0 0 0
Other Income 6 0 0 6 0 0 0 0
Total intersegement
revenues 6 0 0 6 0 0 0 0
Total Revenue 19,236 33 2,715 21,984 17,028 0 2,379 19,407
Depreciation and amortization 455 3 0 458 260 0 0 260
Other operating expenses-
external 16,809 195 150 17,148 14,333 50 105 14,388
Other operating expenses-
intersegment 0 6 0 6 0 0 0 0
Segment expenses 17,264 204 150 17,612 14,593 50 105 14,748
Segment income before
taxes and
extraordinary items $1,972 ($171) $2,565 $4,366 $2,435 (50) $2,274 $4,659
Segment assets $550,232 $3,654 $0 $553,886 $462,486 $1,718 $0 $464,204
Capital expenditures $102 $837 $0 $939 $1,249 $0 $0 $1,249
15
<PAGE>
As of and for the three months ended June 30,
(dollars in thousands)
1999 1998
First Tax First Mortgage Tax
Republic Delaware Refund Republic Banking Refund
Bank Bank Program Total Bank Affiliate Program Total
External customer revenues:
Interest Income $9,717 $33 $0 $9,751 $8,727 $0 $0 $8,727
Other Income 192 0 0 192 134 0 224 358
Total external customer revenues 9,909 33 0 9,943 8,861 0 224 9,085
Intersegment revenues:
Interest Income 0 0 0 0 0 0 0 0
Other Income 6 0 0 6 0 0 0 0
Total intersegement revenues 6 0 0 6 0 0 0 0
Total Revenue 9,915 33 0 9,949 8,861 0 224 9,085
Depreciation and amortization 149 3 0 152 50 0 0 50
Other operating expenses -
external 8,486 189 0 8,675 7,785 50 0 7,835
Other operating expenses -
intersegment 0 6 0 6 0 0 0 0
Segment expenses 8,635 198 0 8,833 7,835 50 0 7,885
Segment income before taxes and
extraordinary items $1,280 ($165) $0 $1,116 $1,026 ($50) $224 $1,200
Segment assets $550,232 $3,654 $0 $553,886 $462,486 $1,718 $0 $464,204
Capital expenditures $48 $631 $0 $679 $681 $0 $0 $681
</TABLE>
16
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Quarter Ended June 30, 1999 Compared to June 30, 1998
Results of Operations:
Overview
The Company's net income decreased $54,000, or 6.7%, to $750,000 for
the quarter ended June 30, 1999, from $804,000 for the quarter ended June 30,
1998. This decrease was primarily the result of a decrease in the Tax Refund
Program revenue of $149,000 on an after tax basis. Diluted earnings per share
for the quarter ended June 30, 1999 was $0.12 compared to $0.13, for the quarter
ended June 30, 1998, primarily due to this decrease in net income.
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 Company's net interest income increased $359,000, or 10.6%, to $3.7
million for the quarter ended June 30, 1999 from $3.4 million for the quarter
ended June 30, 1998. The increase in net interest income was primarily due to an
increase in average interest-earning assets of $77.0 million due primarily to
increased commercial and real estate loan production. This increase was
partially offset by a decrease in the average rate of interest earning assets of
44 basis points, from 7.97% as of June 30, 1998 to 7.53% as of June 30, 1999.
This decrease was mainly due to a reduction in the prime rate, upon which many
of the Banks' loan products are priced.
The Company's total interest income increased $959,000, or 10.9%, to
$9.8 million for the quarter ended June 30, 1999 from $8.8 million for the
quarter ended June 30, 1998. Interest and fees on loans increased $1.2 million,
or 23.2%, to $6.5 million for the quarter ended June 30, 1999 from $5.3 million
for the quarter ended June 30, 1998. This increase was due primarily to an
increase in average loans outstanding for the period of $81.0 million. Interest
and dividend income on securities decreased $248,000, or 7.2%, to $3.2 million
for the quarter ended June 30, 1999 from $3.5 million for the quarter ended June
30, 1998. This decrease in investment income was primarily the result of a
decrease in the yield on the securities portfolio of 42 basis points.
Additionally, as a result of the sale of higher yielding investment securities
during the third and fourth quarters of 1998 the average balance of securities
owned decreased by $2.3 million, or 1.2%, to $200.5 million for the quarter
ended June 30, 1999 from $202.8 million for the quarter ended June 30, 1998.
The Company's total interest expense increased $600,000, or 11.1%, to
$6.0 million for the quarter ended June 30, 1999 from $5.4 million for the
quarter ended June 30, 1998. This increase was due to an increase in the volume
of average interest-bearing liabilities of $71.3 million, or 18.1%, to $466.2
million for the quarter ended June 30, 1999 from $394.9 million for the quarter
17
<PAGE>
ended June 30, 1998. The average rate paid on interest-bearing liabilities
decreased 33 basis points to 5.16% for the quarter ended June 30, 1999 from
5.49% for the quarter ended June 30, 1998 due primarily to the decrease in
average rates paid on other borrowings and deposit accounts.
Interest expense on time deposits decreased $218,000 or 7.5%. This
decrease was primarily due to a decrease in the average rate paid on time
deposit of 28 basis points from 6.14% at June 30, 1998 to 5.86% at June 30,
1999. Additionally, the average volume of certificates of deposit decreased by
$5.9 million, or 3.1%, to $183.2 million for the quarter ended June 30, 1999
from $189.0 million for the quarter ended June 30, 1998.
Interest expense on FHLB advances and overnight federal funds purchased
was $2.9 million for the quarter ended June 30, 1999 compared to $2.0 million
for the quarter ended June 30, 1998. This increase was due to an increase in the
average volume of other borrowed funds of $71.9 million to $221.6 million for
the quarter ended June 30, 1999 from $149.8 million for the quarter ended June
30, 1998. This increase was partially offset by a decrease in the average rate
of interest paid on other borrowed funds 25 basis points from $5.41% at June 30,
1998 to 5.16% at June 30, 1999. At June 30, 1999, 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.
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 Company's
loan portfolio. Management's periodic evaluation is based upon an examination of
the portfolio, past loss experience, current economic conditions, the results of
the most recent regulatory examinations and other relevant factors. The
provision for loan losses was $210,000 and $80,000 for the quarters ended June
30, 1999 and 1998, respectively. This increase is due primarily to an increase
in loans outstanding of $79.8 million from June 30, 1998 to June 30, 1999, as
well as a recent increase in the non-performing loans of $611,000 to $1.7
million at June 30, 1999 from $1.1 million at December 31, 1998.
Non-Interest Income
Total non-interest income decreased $161,000 to $198,000 for the
quarter ended June 30, 1999 from $359,000 for the quarter ended June 30, 1998.
This was mainly attributable to a decrease in revenues related to the Tax Refund
Program of $233,000, partially offset by an increase in service fee income
related to deposits.
Non-Interest Expenses
Total non-interest expenses increased $152,000, to $2.6 million for the
quarter ended June 30, 1999 from $2.5 million for the quarter ended June 30,
1998. Salaries and benefits increased $40,000, or 3.3%, to $1.3 million for the
quarter ended June 30, 1999 from $1.2 million for the quarter ended June 30,
1998. The increase was due primarily to an increase in staff as a result of
costs related to the addition of the Delaware Bank.
Occupancy and equipment expenses increased $57,000, or 15.4%, to
$427,000 for the quarter ended June 30, 1999 from $370,000 for the quarter ended
June 30, 1998 as a result of the opening of the Delaware Bank on June 1, 1999.
Other non-interest expense increased $55,000, to $943,000 for the
quarter ended June 30, 1999 from $888,000 for the same period in 1998. This was
mainly due to an increase in advertising costs and executive search fees
associated with the opening of the Delaware Bank. The remaining increase in
expenses were due to growth of the Company and business development costs,
partially offset by a reduction in insurance deductible costs related to a
branch robbery and customer fraud which occurred during the second quarter of
1998.
18
<PAGE>
Provision for Income Taxes
The provision for income taxes decreased $30,000, or 7.6%, to $366,000
for the quarter ended June 30, 1999 from $396,000 for the quarter ended June 30,
1998. This decrease is mainly the result of the decrease in pre-tax income from
1998 to 1999.
Six Months Ended June 30, 1999 Compared to June 30, 1998
Results of Operations:
Overview
The Company's net income decreased $317,000, or 10.0%, to $2.9 million
for the six months ended June 30, 1999, from $3.2 million for the six months
ended June 30, 1998. This was primarily the result of higher non-interest
expenses associated with a write down of other real estate owned, the adoption
of SOP 98-5 (see Note 5 in the consolidated financial statements) and the
accrual of a settlement in a lawsuit, all during the first quarter of 1999.
Diluted earnings per share for the six months ended June 30, 1999 was $0.46
compared to $0.50, for the six months ended June 30, 1998, due to the decrease
in net income.
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily upon the
Banks' 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 Company's net interest income increased $343,000, or 5.0%, to $7.2
million for the six months ended June 30, 1999 from $6.9 million for the six
months ended June 30, 1998. The increase in net interest income was primarily
due to an increase in average interest-earning assets os $81.2 million due to
increased commercial and real estate loan production. This increase was
partially offset by a decrease in the average rate of interest earning assets of
44 basis points, from 7.96% as of June 30, 1998 to 7.52% as of June 30, 1999.
This decrease was mainly due to a reduction in prime rate, upon which many of
the Banks' loan products are priced.
The Company's total interest income increased $2.1 million, or 12.6%,
to $18.9 million for the six months ended June 30, 1999 from $16.8 million for
the six months ended June 30, 1998. Interest and fees on loans increased $2.7
million, or 26.8%, to $12.8 million for the six months ended June 30, 1999 from
$10.1 million for the six months ended June 30, 1998. This increase was due
primarily to an increase in average loans outstanding for the period of $87.5
million. Interest and dividend income on securities decreased $391,000, or 6.1%,
to $6.1 million for the six months ended June 30, 1999 from $6.5 million for the
six months ended June 30, 1998. This decrease in investment income was the
result of a decrease in yield on the securities portfolio of 46 basis points due
primarily to the sale of higher yielding investment securities during the third
and fourth quarters of 1998, partially offset by an increase in the average
balance of securities owned of $1.2 million, to $190.7 million for the six
months ended June 30, 1999 from $189.5 million for the six months ended June 30,
1998.
19
<PAGE>
The Company's total interest expense increased $1.8 million, or 17.9%,
to $11.7 million for the six months ended June 30, 1999 from $9.9 million for
the six months ended June 30, 1998. This increase was due to an increase in the
volume of average interest-bearing liabilities of $87.3 million, or 23.9%, to
$452.5 million for the six months ended June 30, 1999 from $365.1 million for
the six months ended June 30, 1998. The average rate paid on interest-bearing
liabilities decreased 27 basis points to 5.20% for the six months ended June 30,
1999 from 5.47% for the six months ended June 30, 1998 due primarily to the
decrease in average rates paid on other borrowings and certain deposit accounts.
Interest expense on time deposits decreased $184,000 or 3.2%. This
decrease was primarily due to a decrease in the average volume of certificates
of deposit in the amount of $961,000, or 0.5%, to $187.5 million for the six
months ended June 30, 1999 from $186.6 million for the six months ended June 30,
1998.
Interest expense on FHLB advances and overnight federal funds purchased
was $5.3 million for the six months ended June 30, 1999 compared to $3.5 million
for the six months ended June 30, 1998. This increase was due to an increase in
the average volume of other borrowed funds of $76.9 million to $206.2 million
for the six months ended June 30, 1999 from $129.3 million for the six months
ended June 30, 1998. This increase was partially offset by a decrease in the
average rate of interest paid on other borrowed funds 32 basis points from
$5.50% at June 30, 1998 to 5.18% at June 30, 1999. At June 30, 1999, 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.
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 Company's
loan portfolio. Management's periodic evaluation is based upon an examination of
the portfolio, past loss experience, current economic conditions, the results of
the most recent regulatory examinations and other relevant factors. The
provision for loan losses was $460,000 and $210,000 for the six months ended
June 30, 1999 and 1998, respectively. This increase is due primarily to an
increase in loans outstanding of $79.8 million from June 30, 1998 to June 30,
1999, as well as a recent increase in the non-performing loans of $611,000 to
$1.7 million at June 30, 1999 from $1.1 million at December 31, 1998.
Non-Interest Income
Total non-interest income increased $457,000 or 17.3%, to $3.1 million
for the six months ended June 30, 1999 from $2.6 million for the six months
ended June 30, 1998. This was mainly attributable to an increase in revenues
related to the Tax Refund Program, as well as an increase in service fee income
related to deposits.
Non-Interest Expenses
Total non-interest expenses increased $943,000, to $5.5 million for the
six months ended June 30, 1999 from $4.5 million for the six months ended June
30, 1998. Salaries and benefits increased $283,000, or 11.8%, to $2.7 million
for the six months ended June 30, 1999 from $2.4 million for the six months
ended June 30, 1998. The increase was due primarily to an increase in staff as a
result of the addition of a branch banking office, as well as the opening of the
Delaware Bank.
20
<PAGE>
Occupancy and equipment expenses increased $124,000, or 17.2%, to
$845,000 for the six months ended June 30, 1999 from $721,000 for the six months
ended June 30, 1998 as a result of the opening an additional branch office
during the third quarter of 1998 as well as the opening of the Delaware Bank on
June 1, 1999.
Other non-interest expense increased $536,000, to $1.9 million for the
six months ended June 30, 1999 from $1.4 million for the same period in 1998.
This was mainly due to the accrual of a legal settlement (discussed in Part II,
Other Information, [Item 1 Legal Proceedings], in this form 10-Q), for $233,000.
The Company also recorded a write-down of its only property held in other real
estate owned, of $75,000. Additionally, the Company adopted SOP-5 which had a
pre-tax effect of increasing non-interest expenses by $94,000 (see note 5 of the
consolidated financial statements). The remaining expenses were due to growth of
the Company and business development costs.
Provision for Income Taxes
The provision for income taxes decreased $139,000, or 8.8%, to $1.4
million for the six months ended June 30, 1999 from $1.6 million for the six
months ended June 30, 1998. This decrease is mainly the result of the decrease
in pre-tax income from 1998 to 1999.
Financial Condition:
June 30, 1999 Compared to December 31, 1998
Total assets increased $37.5 million, or 7.3%, to $553.9 million at
June 30, 1999 from $516.4 million at December 31, 1998. The increase in assets
was the result of higher levels of loans and securities, which were funded by a
net increase in other borrowed funds. Net loans (including loans held for sale)
increased $14.9 million, or 4.9%, to $321.7 million at June 30, 1999 from $306.8
million at December 31, 1998. Investment securities increased $24.0 million, or
13.5%, to $201.5 million at June 30, 1999 from $177.6 million at December 31,
1998.
Cash and due from banks, interest-bearing deposits, and federal funds
sold are all liquid funds. The aggregate amount in these three categories
decreased by $4.0 million, or 22.1%, to $14.2 million at June 30, 1999 from
$18.3 million at December 31, 1998.
Premises and equipment, net of accumulated depreciation, increased
$641,000 to $4.6 million at June 30, 1999 from $4.0 million at December 31,
1998. The increase was attributable mainly to the construction and furnishing of
the Delaware Bank.
Total liabilities increased $38.1 million, or 7.9%, to $517.8 million
at June 30, 1999 from $479.7 million at December 31, 1998. Deposits, the
Company's primary source of funds, decreased $13.2 million, 4.7% to $269.9
million at June 30, 1999 from $283.1 million at December 31, 1998. The aggregate
of transaction accounts, which include demand, money market and savings
accounts, decreased $1.9 million, or 2.1%, to $86.1 million at June 30, 1999
from $87.9 million at December 31, 1998. Certificates of deposit decreased by
$11.3 million, or 5.8%, to $183.8 million at June 30, 1999 from $195.1 million
at December 31, 1998.
21
<PAGE>
Other borrowed funds were $237.6 million at June 30, 1999 as compared
to $188.0 million at December 31, 1998. 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.
ITEM 3: QUANTITAVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
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.
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. Management uses gap analysis and simulation models to attempt to
monitor the effect of its interest sensitive assets and liabilities. 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.
22
<PAGE>
The following tables present a summary of the Bank's interest rate
sensitivity GAP at June 30, 1999. For purposes of these tables, the Bank has
used assumptions based on industry data and historical experience to calculate
the expected maturity of loans because, statistically, certain categories of
loans are prepaid before their maturity date, even without regard to interest
rate fluctuations. Additionally certain prepayment assumptions were made with
regard to investment securities based upon the expected prepayment of the
underlying collateral of the mortgage backed securities.
23
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Republic First Bancorp
Interest Sensitive Gap
(dollars in thousands) as of June 30, 1999
--------------------------------------------------------------------------------------------------------
0 - 90 91 - 180 181 - 365 1 - 2 2 - 3 3 - 4 4 - 5 More than 5
Days Days Days Years Years Years Years Years Total Fair Value
----------------------------------------------------------------------------------- --------- ---------
Interest Sensitive Assets:
Securities and interest
bearing balances due
from banks $ 38,943 $ 6,000 $ 12,417 $ 20,970 $ 20,463 $ 21,550 $ 21,187 $ 63,118 $204,649 $204,655
Average interest rate 6.53% 6.53% 6.53% 6.54% 6.53% 6.52% 6.55% 6.39%
Loans receivable (1) 102,774 18,638 9,995 37,157 36,026 47,320 54,200 18,418 324,528 317,718
Average interest rate 8.63% 9.07% 9.52% 7.55% 7.97% 7.95% 7.83% 2.42%
Total 141,718 24,638 22,412 58,127 56,489 68,871 75,387 81,536 529,177 522,373
----------------------------------------------------------------------------------- --------- ---------
Cumulative Totals $141,718 $166,356 $188,768 $ 246,895 $303,384 $372,254 $447,641 $ 529,177
===================================================================================
Interest Sensitive Liabilities:
Demand Interest Bearing $ 1,506 $ 251 $ 879 $ 1,130 $ 1,130 $ 1,130 $ 1,130 $ 5,397 $ 12,551 $ 12,551
Average interest rate 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Savings Accounts 769 70 140 280 280 280 280 1,398 3,495 3,495
Average interest rate 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Money Market Accounts 25,336 817 1,635 3,269 3,269 3,269 3,269 - 40,865 40,865
Average interest rate 3.70% 3.70% 3.70% 3.70% 3.70% 3.70% 3.70% 3.70%
Time Deposits 48,655 54,345 49,755 24,996 1,609 894 3,532 5 183,791 184,472
Average interest rate 5.57% 5.59% 5.88% 5.74% 5.71% 5.96% 5.70% 5.25%
FHLB Borrowings 62,621 - - 42,500 17,500 65,000 - 50,000 237,621 243,681
Average interest rate 5.25% 0.00% 0.00% 5.09% 5.58% 5.43% 0.00% 5.15%
Total 138,888 55,483 52,408 72,175 23,787 70,572 8,210 56,800 478,324 485,064
----------------------------------------------------------------------------------- --------- ---------
Cumulative Totals $138,888 $194,371 $246,779 $ 318,953 $342,741 $413,313 $421,523 $ 478,324
===================================================================================
Interest Rate
sensitivity GAP $ 2,830 $ (30,845) $ (29,996)$ (14,048) $ 32,702 $ (1,702) $ 67,176 $ 24,736
Cumulative GAP $ 2,830 $ (28,015) $ (58,011)$ (72,059) $ (39,357)$ (41,059) $ 26,117 $ 50,853
Interest Sensitive Assets/
Interest Sensitive
Liabilities 102.04% 44.41% 42.76% 80.54% 237.47% 97.59% 918.20% 143.55%
Cumulative GAP/
Total Earning Assets 0.53% -5.29% -10.96% -13.62% -7.44% -7.76% 4.94% 9.61%
Total Earning Assets $529,177
=========
Off balance sheet items notional value:
Commitments to
extend credit $ 404 $ 27,925 $ 28,329 $ 283
-------------------- --------- ---------
Average interest rate 7.75% 8.25%
(1) Includes loans held for sale.
</TABLE>
24
<PAGE>
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1998: 0 - 90 91 - 180 181 - 365 1-2 2-3 3-4 4-5 Over 5 Fair
(dollars in thousands) Days Days Days Years Years Years Years Years Total Value
--------- ---------- --------- --------- ---------- ---------- ---------- --------- --------------------
Interest sensitive assets:
Securities and interest bearing
balances due from banks $ 32,862 $ 10,185 $ 18,202 $ 28,690 $ 20,906 $ 15,855 $ 12,038 $ 38,940 $177,678 $ 177,662
Average interest rate 6.53% 7.00% 7.01% 7.03% 7.04% 7.03% 7.02% 6.94%
Loans receivable (1) 91,885 9,453 18,526 39,278 33,195 31,220 29,488 53,723 306,768 311,775
Average interest rate 8.53% 8.33% 8.33% 8.19% 8.20% 8.23% 8.27% 7.55%
Total 124,747 19,638 36,728 67,968 54,101 47,075 41,526 92,663 484,446 485,613
--------- ---------- --------- --------- ---------- --------------------- --------- ---------
Cumulative total $124,747 $144,385 $181,113 $249,081 $303,182 $ 350,257 $391,783 $484,446
--------- ---------- --------- --------- ---------- --------------------- ---------
Interest sensitive liabilities:
Demand interest bearing $ 2,320 $ 457 $ 1,476 $ 1,829 $ 1,829 $ 1,829 $ 1,829 $ 8,586 $20,155 20,155
Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Savings accounts 675 63 128 255 255 255 255 1,280 3,166 3,166
Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Money market accounts 19,687 652 1,305 2,610 2,610 2,610 2,610 - 32,084 32,084
Average interest rate 4.42% 2.75% 2.75% 2.75% 2.75% 2.75% 2.75% 0.00%
FHLB borrowings 40,609 7,400 - - - 40,000 50,000 50,000 188,009 191,684
Average interest rate 5.00% 6.32% 0.00% 0.00% 0.00% 5.59% 4.99% 5.15%
Time deposits 35,549 26,134 86,620 39,424 2,885 2,262 2,262 6 195,142 188,009
Average interest rate 5.51% 5.70% 5.82% 6.43% 5.93% 5.92% 5.92% 5.30%
--------- ---------- --------- --------- ---------- ---------- ---------- ---------
Totals $ 98,840 $ 34,706 $ 89,529 $ 44,118 $ 7,579 $ 46,956 $ 56,956 $ 59,872 438,556
--------- ---------- --------- --------- ---------- --------------------- --------- ---------
Cumulative total $ 98,840 $133,546 $223,075 $267,193 $274,772 $ 321,728 $378,684 $438,556
--------- ---------- --------- --------- ---------- --------------------- ---------
Interest rate
sensitivity GAP $ 25,907 $ (15,068) $ (52,801) $ 23,850 $ 46,522 $ 119 $ (15,430) $ 32,791 $ 45,890
========= ========== ========= ========= ========== ===================== ========= =========
Cumulative GAP $ 25,907 $ 10,839 $ (41,962) $ (18,112) $ 28,410 $ 28,529 $ 13,099 $ 45,890
========= ========== ========= ========= ========== ===================== =========
Interest sensitive assets/
Interest sensitive
liabilities 1.3 x 1.1 x 0.8 x 0.9 1.1 1.1 1.0 x 1.1 x
Cumulative GAP 5.3% 2.2% -8.7% -3.7% 5.9% 5.9% 2.7% 9.5%
Total earning assets $484,446
=========
Off Balance Sheet Items
notional value:
Commitments to extend credit$ 430 $ 21,534 $ 21,534 $ 220
Average interest rate 7.75% 8.25%
(1) Includes loans held for sale
</TABLE>
25
<PAGE>
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. Applying the federal guidelines, the ratio of qualifying
total capital to weighted-risk assets, was 13.11% and 12.54% at June 30, 1999
and December 31, 1998 , 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 June 30, 1999 and December 31,
1998 was 12.21% and 11.76%, respectively. At December 31, 1998, and 1997, the
Company exceeded the requirements for risk-based capital adequacy under both
federal and Pennsylvania State guidelines.
Under FRB and FDIC regulations, a bank is deemed to be "well
capitalized" when it has a "leverage ratio" ("Tier l capital to total assets")
of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%,
and a total capital to weighted-risk assets ratio of at least 10%. At June 30,
1999 and December 31, 1998 , the leverage ratio was 7.24% and 7.50%,
respectively. Accordingly, at June 30, 1999 and December 31, 1998, the Company
was considered "well capitalized" under FRB and FDIC regulations.
The Company's shareholders' equity as of June 30, 1999 and December 31,
1998 was $36,044,000 and $36,622,000, respectively. Book value per share of the
Company's common stock decreased from $6.22 as of December 31, 1998 to $5.92 as
of June 30, 1999. These decreases were attributable to the change in unrealized
losses of $3.3 million on available for sale securities, and stock repurchases
of $1.0 million during the six months ended June 30, 1999, partially offset by
net income of approximately $2,867,000.
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 of
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
26
<PAGE>
The following table presents the Company's capital regulatory ratios at
June 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
To be well
For capital capitalized under FRB
Actual Adequacy purposes capital guidelines
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-----------------------------------------------------------------------------------------
As of June 30, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total risk based capital $42,017 13.11% $25,647 8.00% $32,058 10.00%
Tier I capital 39,139 12.21 12,823 4.00 19,235 6.00
Tier I (leveraged) capital 39,139 7.24 27,047 5.00 27,047 5.00
As of December 31, 1998:
Total risk based capital $38,784 12.54% $24,746 8.00% $30,932 10.00%
Tier I capital 36,389 11.76 12,373 4.00 18,559 6.00
Tier I (leveraged) capital 36,389 7.50 24,263 5.00 24,263 5.00
</TABLE>
Management believes that the Company meets as of June 30, 1999 and
December 31, 1998, all capital adequacy requirements to which it is subject. As
of June 30, 1999 and December 31, 1998, the most recent notification from the
Federal Reserve Bank categorized the Company as well capitalized under the
regulatory framework for prompt corrective action provisions of section 3b of
the Federal deposit Insurance Act. There are no calculations or events since
that notification, that management believes would have changed the Company's
category.
The Company's ability to maintain the required levels of capital is
substantially dependent upon the success of the Banks capital and business
plans, the impact of future economic events on the Banks' loan customers, the
Banks' 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 Banks currently exceed 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.
27
<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 $14.2 million at June 30, 1999
compared to $18.3 million at December 31, 1998. Maturing and repaying loans are
another source of asset liquidity. At June 30, 1999, the Company estimated that
an additional $49.3 million of loans will mature or repay in the next one year
period ending June 30, 2000.
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. At June 30, 1999, the Banks had $33.4
million in unused lines of credit available to it under informal arrangements
with correspondent banks compared to $55.5 million at December 31, 1998. These
lines of credit enable the Banks to purchase funds for short-term needs at
current market rates.
At June 30, 1999, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $28.3 million. Certificates of
deposit which are scheduled to mature within one year totaled $152.8 million at
June 30, 1999, and borrowings that are scheduled to mature within the same
period amounted to $62.6 million. The Company anticipates that it will have
sufficient funds available to meet its current commitments.
The Banks' 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 a line of credit from its
correspondent, in the amount of $7.5 million, to assist in managing the Bank's
liquidity position. Additionally, the Bank has established a line of credit with
the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of
approximately $263.9 million. As of June 30, 1999 and December 31, 1998, the
Company had borrowed $237.6 and $180.5, respectively, under its lines of credit.
The Company's Board of Directors has appointed an Asset/Liability
Committee (ALCO) to assist Management in establishing parameters for
investments. The Asset/Liability Committee is responsible for managing the
liquidity position and interest sensitivity of the Banks. Such committee's
primary objective is to maximize net interest margin in an ever changing rate
environment, while balancing the Banks' interest-sensitive assets and
liabilities and providing adequate liquidity for projected needs.
Management presently believes that the effect on the Banks of any
future rise in interest rates, reflected in higher cost of funds, would be
detrimental since the amount of the Banks' interest bearing liabilities which
would reprice, are greater than the Banks' interest earning assets which would
reprice, over the next twelve months. However, a decrease in interest rates
generally could have a positive effect on the Banks, due again to the timing
difference between repricing the Banks' liabilities, primarily certificates of
deposit and other borrowed funds, and the largely automatic repricing of its
existing interest-earning assets. As of June 30, 1999, 31.7% of the Banks'
interest-bearing deposits were to mature, and be repriceable, within three
months, and an additional 23.1% were to mature, and be repriceable, within three
to six months.
28
<PAGE>
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.
Securities Portfolio
At June 30, 1999, the Company had identified certain investment
securities that are being held for indefinite periods of time, including
securities that will be used as part of the Company's asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments and similar factors. These securities are classified as
available-for-sale and are intended to increase the flexibility of the Company's
asset/liability management. Available-for-sale securities consist of US
Government Agency securities and other investments. The book and market values
of securities available-for-sale were $190.7 million and $185.6 million as of
June 30, 1999. The net unrealized loss on securities available-for-sale, as of
this date, was $5.1 million.
The following table represents the carrying and estimated fair values
of Investment Securities at June 30, 1999.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Available-for-Sale Cost Gain Loss Fair Value
-------------------- ---------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Mortgage-backed $187,545,000 $47,000 ($5,117,000) $182,475,000
U.S. Government Agencies 3,127,000 10,000 (10,000) 3,127,000
-------------------- ---------------- ------------------ ---------------------
Total Available-for-Sale $190,672,000 $57,000 ($5,127,000) $185,602,000
-------------------- ---------------- ------------------ ---------------------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Cost Gain Loss Fair Value
-------------------- ---------------- ------------------ ---------------------
Mortgage-backed $941,000 $13,000 $0 $954,000
US Government Agencies 500,000 1,000 (7,000) 494,000
Other 14,491,000 0 0 14,491,000
-------------------- ---------------- ------------------ ---------------------
Total Held-to-Maturity $15,932,000 $14,000 ($7,000) $15,939,000
-------------------- ---------------- ------------------ ---------------------
</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
29
<PAGE>
commercial loans are collateralized by real estate and further secured by other
collateral and personal guarantees. The Company's commercial loans generally
range from $250,000 to $1,000,000 in amount.
The Company's net loans increased $14.9 million, or 4.9%, to $321.7
million at June 30, 1999 from $306.8 million at December 31, 1998, which were
primarily funded by an increase in other borrowed funds.
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
<TABLE>
<CAPTION>
(dollars in thousands) As of June 30, 1999 As of December 31, 1998
------------------------------------- --------------------------------------
Balance % of Total Balance % of Total
-------------------- ---------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Real Estate:
1-4 Family $145,237 44.8% $133,158 43.1%
Multi-Family 24,464 7.5 21,800 7.0
Commercial Real Estate 111,895 34.5 110,385 35.7
-------------------- ---------------- -------------------- -----------------
Total Real Estate 281,596 86.8 265,343 85.8
Commercial 37,983 11.7 42,644 13.8
Other 4,950 1.5 1,176 0.4
-------------------- ---------------- -------------------- -----------------
Total Loans (1) 324,529 100.0% 309,163 100.0%
Less allowance for loan losses (2,878) (2,395)
-------------------- --------------------
Net loans $321,651 $306,768
==================== ====================
</TABLE>
(1) Includes loans held for sale
Credit Quality
The Company's written lending policies require underwriting, loan
documentation, and credit analysis standards to be met prior to funding. In
addition, a senior loan officer reviews all loan applications. The Board of
Directors reviews the status of loans monthly to ensure that proper standards
are maintained.
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal and/or interest for
a period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in accordance
with the contractual terms of the loan.
While a loan is classified as nonaccrual or as an impaired loan and the
future collectability of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectability of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case where a
nonaccrual loan had been partially charged off, recognition of interest on a
30
<PAGE>
cash basis is limited to that which would have been recognized on the remaining
recorded loan balance at the contractual interest rate. Cash interest receipts
in excess of that amount are recorded as recoveries to the allowance for loan
losses until prior charge-offs have been fully recovered.
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
June 30, December 31, 1998
1999
---------------------------------------------
<S> <C> <C>
Loans accruing, but past due 90 days or $745,000 $121,000
more
Non-accrual loans 989,000 1,002,000
---------------------------------------------
Total non-performing loans (1) 1,734,000 1,123,000
Foreclosed real estate 643,000 718,000
---------------------------------------------
Total non-performing assets (2) $2,377,000 $1,841,000
=============================================
Non-performing loans as a percentage of total
loans net of unearned
Income (3) 0.54% 0.36%
Non-performing assets as a percentage of total
assets 0.43% 0.36%
</TABLE>
(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual
basis; (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans.
(2) Non-performing assets are composed of non-performing loans and foreclosed
real estate (assets acquired in foreclosure).
(3) Includes loans held for sale
Total non-performing loans increased by $611,000 to $1,734,000 at June
30, 1999 from $1,123,000 at December 31, 1998. Total non performing assets
increased by $536,000 at June 30, 1999 to $2,377,000 from $1,841,000 at December
31, 1998.
At June 30, 1999, 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 $85.0 million, which
represented 26.2% 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.
Real estate owned is initially recorded at the lower or cost or fair
value, net of estimated selling costs at the date of foreclosure. After
foreclosure, management periodically performs valuations and any subsequent
deteriations in fair value, and all other revenue and expenses are charged
against operating expenses in the period in which they occur.
Potential problem loans consist of loans that are included in
performing loans, but for which potential credit problems of the borrowers have
31
<PAGE>
caused management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At June 30, 1999, all
identified potential problem loans are included in the preceding table.
The Company had no credit exposure to "highly leveraged transactions"
at June 30, 1999, as defined by the FRB.
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for the
six months ended June 30, 1999, and 1998 and the twelve months ended December
31, 1998:
<TABLE>
<CAPTION>
For the six months For the twelve months For the six months
ended ended ended
June 30,1999 December 31, 1998 June 30,1998
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period ....... $2,395,000 $2,028,000 $2,028,000
Charge-offs:
Commercial ........................ 27,000 76,000 53,000
Real estate ....................... 0 0 0
Consumer .......................... 8,000 34,000 0
------------- ------------- -------------
Total charge-offs .............. 35,000 110,000 53,000
------------- ------------- -------------
Recoveries:
Commercial ........................ 51,000 13,000 32,000
Real estate ....................... 0 0 0
Consumer .......................... 7,000 94,000 18,000
------------- ------------- -------------
Total recoveries ............... 58,000 107,000 50,000
------------- ------------- -------------
Net charge-offs/(recoveries) ......... (23,000) 3,000 3,000
------------- ------------- -------------
Provision for loan losses ............ 460,000 370,000 210,000
------------- ------------- -------------
Balance at end of period .......... $2,878,000 $2,395,000 $2,235,000
============= ============= =============
Average loans outstanding (1)(2) .. $314,028,000 $248,479,000 $237,194,000
============= ============= =============
As a percent of average loans (1):
Net charge-offs ................... 0.01% 0.00% 0.00%
Provision for loan losses ......... 0.15% 0.15% 0.09%
Allowance for loan losses ......... 0.92% 0.96% 0.94%
Allowance for loan losses to:
Total loans, net of unearned income 0.89% 0.77% 0.91%
Total non-performing loans ........ 128.83% 213.27% 117.38%
<FN>
(1) Includes nonaccruing loans.
(2) Includes loans held for sale.
</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 Company's regulators and internal loan review officer. The internal loan
review officer reviews both the loan portfolio and the overall adequacy of the
loan loss reserve. During the review of the loan loss reserve, the Board of
Directors considers specific loans, pools of similar loans, and historical
charge-off activity. 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 operations.
The Company has an existing loan review program, which monitors the
loan portfolio on an ongoing basis. Loan review is conducted by a loan review
officer and is reported quarterly to the Board of Directors. The Board of
Directors reviews the finding of the loan review program on a monthly basis.
32
<PAGE>
Determining the appropriate level of the allowance for loan losses at
any given date is difficult, particularly in a continually changing economy.
However, there can be no assurance that, if asset quality deteriorates in future
periods, additions to the allowance for loan losses will not be required.
The Company's management considers the entire allowance for loan losses
to be adequate, however, to comply with regulatory reporting requirements,
management has allocated the allowance for loan losses as shown in the table
below into components by loan type at each period end. Through such allocations,
management does not intend to imply that actual future charge-offs will
necessarily follow the same pattern or that any portion of the allowance is
restricted.
<TABLE>
<CAPTION>
At June 30, 1999 At December 31, 1998
---------------- --------------------
Percent of Loans Percent of Loans
In Each Category In Each Category
Amount To Loans (1) Amount to Loans (1)
------ ------------ ------ ------------
Allocation of allowance for loan losses:
<S> <C> <C> <C> <C>
Commercial $1,811,000 53.72% $1,638,000 56.33%
Residential real estate 422,000 44.75% 391,000 43.07%
Consumer and other 76,000 1.53% 71,000 0.60%
Unallocated 569,000 295,000
------------------ ---------------
Total 2,878,000 100.00% $2,395,000 100.00%
================== ===============
</TABLE>
The unallocated allowance increased $274,000 to $569,000 at June 30,
1999 from $295,000 at December 31, 1998. This increase is consistent with the
increase in the provision for loan losses for the six months ended June 30,
1999.
(1) Includes loans held for sale
The Company had delinquent loans as of June 30, 1999 and December 31,
1998 as follows; (i) 30 to 59 days past due, consisted of commercial and
consumer and home equity loans in the aggregate principal amount of $1.7 million
and $1.2 million respectively; and (ii) 60 to 89 days past due, consisted of
commercial and consumer loan in the aggregate principal amount of $838,000 and
$386,000 respectively. In addition, the Company has classified certain loans as
substandard and doubtful (as those terms are defined in applicable Bank
regulations). At June 30, 1999 and December 31, 1998, substandard loans totaled
approximately $801,000 and $1,382,000 respectively; and doubtful loans totaled
approximately $188,000 and $0 respectively.
Deposit Structure
Total deposits at June 30, 1999 consisted of approximately $29.2
million in non-interest-bearing demand deposits, approximately $12.6 million in
interest-bearing demand deposits, approximately $44.4 million in savings
deposits and money market accounts, approximately $156.5 million in time
deposits under $100,000, and approximately $27.3 million in time deposits
33
<PAGE>
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 Company's deposit liabilities may fluctuate from period-to-period.
The following table is a distribution of the balances of the Company's
average deposit balances and the average rates paid therein for the six months
ended June 30, 1999 and the year ended December 31, 1998.
<TABLE>
<CAPTION>
Average Deposit Table
For the six months ended For the twelve months ended
June 30, 1999 December 31, 1998
---------------------------------------------------------------------
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Non-interest-bearing balances $29,139,000 0.00% $31,260,000 0.00%
=====================================================================
Money market and savings deposits $44,473,000 3.63% $41,157,000 2.85%
Time deposits 187,532,000 5.90 191,829,000 6.09
Demand deposits, interest-bearing 14,299,000 1.58 13,727,000 2.50
---------------------------------------------------------------------
Total interest-bearing deposits $246,304,000 5.24% $246,713,000 5.35%
=====================================================================
</TABLE>
The following is a breakdown, by contractual maturities, of the
Company's time deposits issued in denominations of $100,000 or more as of June
30, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------------------------------------
Maturing in:
<S> <C> <C>
Three months or less $8,975,000 $14,229,000
Over three months through six months 6,859,000 7,756,000
Over six months through twelve months 5,321,000 3,365,000
Over twelve months 6,181,000 0
---------------------------------------
Total $27,336,000 $25,350,000
=======================================
</TABLE>
Commitments
In the normal course of its business, the Company makes commitments to
extend credit and issues standby letters of credit. Generally, such commitments
are provided as a service to its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
34
<PAGE>
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 is based on Management's
evaluation of the creditworthiness of the borrower and the quality of the
collateral. At June 30, 1999 and December 31, 1998, firm loan commitments
approximated $27.9 million and $20.1 million respectively and commitments of
standby letters of credit approximated $404,000 and $1,912,000, 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
The following section contains forward-looking statements which involve
risks and uncertainties. The actual impact on the Company of the year 2000 issue
could materially differ from that which is anticipated in the forward looking
statements as a result of certain factors identified below.
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.
The Company is subject to various regulations and oversight by
regulatory authorities, including the Federal Reserve Bank, the Pennsylvania
Department of Banking and the Federal Deposit Insurance Corporation (FDIC).
These regulatory agencies have coordinated various regulatory examinations
focusing on the year 2000 issues, and report their findings to the Company's
management and the Board of Directors.
Company's State of Readiness
The Company's management is committed to ensuring that the Company's
daily operations suffer little impact as a result of the date change at the end
of the century. The Company is following the Federal Financial Institutions
Examination Council's (FFIEC), Interagency Guidelines. The guidelines identify a
process in which year 2000 issues are addressed, such as awareness, assessment,
remediation, testing and implementation.
The Company has identified key areas for which management is focusing
its efforts. These areas include data center, desktop environment and networks,
branch environment and services, financial applications, facilities, legal,
insurance, and outside services. For each of these areas identified, the Company
is employing a process which will compile inventories of all identified areas
which could be affected by the year 2000, including information technology
("IT") systems and non-information technology systems such as phone systems, fax
machines and alarm systems. A testing schedule is defined and the identified
systems are tested, and results evaluated. A remedy process is then defined, and
35
<PAGE>
implemented and testing is performed again. The process is repeated until
repairs are complete.
All identified critical applications have been tested. Non-critical
testing validation and repair were performed and completed during the first
quarter of 1999.
The Company has relationships with third parties including its
borrowers, which are also subject to the year 2000 uncertainties. Management has
identified relationships which are considered material, and would have an
adverse effect on the Bank and the Company if such third parties were not year
2000 compliant. Management has solicited year 2000 certifications from
significant vendors, and also completed its own year 2000 due diligence. No
borrower or third party vendor has given the Company a response that indicates
that they will not be year 2000 compliant. However, one borrower has yet to
receive a year 2000 certification from a major supplier of business, and the
bank is closely monitoring the situation. It is anticipated that all identified
third party vendors will be compliant, however, no assurance can be given with
regard to their compliance with year 2000. Also, no assurances can be given that
a third party vendor or borrower will not have a material effect on the Company
or Bank, due to their non-compliance with the year 2000 issue.
While no assurance can be given to actual system operations upon the
turn of the century, based upon information currently known to it, and upon
consideration of its testing efforts to date, management believes that in the
worse case scenario, the Company will suffer only a slight interruption of
business, as a result of minor application failures of its IT and non-IT systems
and software as a result of the year 2000. However, if the appropriate
modifications are not made, or are not completed on a timely basis, the year
2000 issue could have a material impact on the operations of the Bank and the
Company.
Costs of Year 2000
The Company has spent approximately $175,000 and estimates that the
future dollar cost to the Company to be in compliance with the year 2000 issue
will range from $25,000 to $50,000 by December 31, 1999. These costs include new
equipment and software purchases, in addition to testing applications prior to
the year 2000.
Risks of the Company's Year 2000 Issues
Management believes that it has addressed the major areas with respect
to Year 2000 compliance. Management also believes its progress of remedying year
2000 issues is being completed according to plan. However, there can be no
assurances that the Company will not be impacted by Year 2000 complications.
Contingency Plans
The Company has prepared contingency plans for each major area of
business identified above. The plans will utilize in part alternative
procedures, other third party vendors and manual intervention, to compensate for
the loss of certain computer systems. As of June 30, 1999, all such plans have
been substantially completed.
36
<PAGE>
Recent Accounting Pronouncements:
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("Statement No. 133"). This
Statement standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and those used for
hedging activities, by requiring that an entity recognize those items as assets
or liabilities in the statement of financial position and measure them at fair
value. The statement categorized derivatives used for hedging purposes as either
fair value hedges, cash flow hedges, foreign currency fair value hedges, foreign
currency cash flow hedges, or hedges of certain foreign currency exposures. The
statement generally provides for matching of gain or loss recognition on the
hedging instrument with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk, so long as
the hedge is effective. Prospective application of Statement No. 133, as amended
by statement No. 137, is required for all fiscal years beginning after June 15,
2000, however earlier application is permitted. Currently, the Company does not
use any derivative instruments, nor does it engage in any hedging activities.
The Company adopted Statement No. 133 effective July 1, 1998, which permitted
the Company to transfer certain securities originally designated as
held-to-maturity, to available-for-sale and trading. A portion of these
securities were subsequently sold during the third quarter of 1998. In
accordance with Statement No. 133, the Company recorded the gross gain of
$628,000 as a cumulative change in accounting principle, net of a $207,000
provision for income tax.
Accounting for Mortgage-backed Securities Retained after the Securitization
of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". This statement requires that
after the securitization of a mortgage loan held for sale, an entity engaged in
mortgage banking activities classify any retained mortgage-backed securities
based on the ability and intent to sell or hold those investments, except that a
mortgage banking enterprise must classify as trading any retained
mortgage-backed securities that is commits to sell before or during the
securitization process. This Statement is effective for the first fiscal quarter
beginning after December 15, 1998 with earlier adoption permitted. This
Statement provides a one-time opportunity for an enterprise to reclassify, based
on the ability and intent on the date of adoption of this Statement,
mortgage-backed securities and other beneficial interests retained after
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place. The Company does not expect any
impact on earnings, financial condition or equity from this statement, as it
does not currently engage in the securitization of mortgage loans held for sale.
Reporting on the Costs of Start-Up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities
("SOP 98-5"). This statement requires costs of startup activities, including
organization costs, to be expensed as incurred. SOP 98-5 is effective for the
Company's financial statements for fiscal years beginning after December 15,
1998. As of December 31, 1998 the Company had deferred costs relating to
start-up activities of $94,000, remaining in the balance of other assets in the
Consolidated Balance Sheets. The Company adopted SOP 98-5 effective January 1,
1999, and accordingly, expensed $94,000 of costs of start-up activities in the
first quarter of 1999. This amount, net of tax, is presented as a cumulative
effect of a change in account principle in the consolidated statement of
operations.
37
<PAGE>
Part II Other Information
Item 1: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
Item 2: Changes in Securities and use of proceeds
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-K for an
annual report on Form 10-K)
Exhibit No.
3(a) Amended and Restated Articles of Incorporation of the
Company, as amended.*
3(b) Amended and Restated Bylaws of the Company. *
4(b)(i) Amended and Restated Articles of Incorporation of the
Company, as amended.*
4(b)(ii) Amended and Restated Bylaws of the Company.*
10 Amended and Restated Material Contracts.- None
10(a) Amended and Restated Employment Agreement between the
Company and Zvi H. Muscal.*
10(b) Agreement and Plan of Merger by and between the Company and
Republic Bancorporation, Inc. dated November 17, 1996.*
38
<PAGE>
10(c) Employment agreement between the Company and Jere A.
Young.**
10(d) Employment agreement between the Company and Robert D.
Davis.**
10(e) Agreement between the Company and Harry D. Madonna.**
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"), a wholly-owned
subsidiary, commenced operations on November 3, 1988. The
Bank is a commercial bank chartered pursuant to the laws of
the Commonwealth of Pennsylvania. Republic First Bank of
Delaware (the "Delaware Bank") is also a wholly-owned
subsidiary of the Company, commenced operations on June 1,
1999. The Delaware Bank is a commercial bank chartered
pursuant to the laws of the State of Delaware. The Bank and
the Delaware Bank are both members of the Federal Reserve
System and their primary federal regulators are the 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 hereto.
*Incorporated by reference from the Registration Statement on Form S-4
of the Company, as amended, Registration No. 333-673 filed April 29, 1996.
**Incorporated by reference in the Company's Form 10-K for the year
ended December 31, 1998, filed March 25, 1999.
Reports on Form 8-K
None
39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic First Bancorp, Inc.
/s/ Jere A. Young
Jere A. Young
President and Chief Executive Officer
/s/ George S. Rapp
George S. Rapp
Executive Vice President and Chief Financial Officer
Dated: August 13, 1999
40
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