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: March 31, 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.
5,889,500 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of April 30, 1999
Page 1 of 34
Exhibit index appears on page 33
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TABLE OF CONTENTS
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Page
Part I: Financial Information
Item 1: Financial Statements 3
Item 2: Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
Part II: Other Information
Item 1: Legal Proceedings 32
Item 2: Changes in Securities and Use of Proceeds 32
Item 3: Defaults Upon Senior Securities 32
Item 4: Submission of Matters to a Vote of Security Holders 32
Item 5: Other Information 33
Item 6: Exhibits and Reports on Form 8-K 33
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2
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PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
<TABLE>
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Page
Number
(1) Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998..................................................................................4
(2) Consolidated Statements of Operations for three months ended March 31,
1999 and 1998......................................................................................5
(3) Consolidated Statements of Cash Flows for the three months ended March
31, 1999 and 1998..................................................................................6
(4) Notes to Consolidated Financial Statements.........................................................7
</TABLE>
3
<PAGE>
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of March 31, 1999 and December 31, 1998
(unaudited)
<TABLE>
<CAPTION>
ASSETS: 1999 1998
------------------------- -----------------------
<S> <C> <C>
Cash and due from banks $9,852,000 $18,169,000
Interest bearing deposits with banks 125,000 126,000
------------------------- -----------------------
Total cash and cash equivalents 9,977,000 18,295,000
Securities available for sale, at fair value 184,842,000 160,554,000
Securities held to maturity at amortized cost 14,528,000 16,998,000
(fair value of $14,545,000 and
$16,982,000,
respectively)
Loans receivable, (net of allowance for loan losses of
$2,653,000 and $2,395,000, respectively) 309,795,000 299,564,000
Loans held for sale 2,787,000 7,204,000
Premises and equipment, net 4,114,000 3,990,000
Real estate owned 643,000 718,000
Accrued income and other assets 9,884,000 9,038,000
------------------------- -----------------------
Total Assets $536,570,000 $516,361,000
========================= =======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $29,375,000 $32,537,000
Demand - interest-bearing 14,713,000 20,155,000
Money market and savings 44,449,000 35,250,000
Time 145,277,000 169,792,000
Time over $100,000 42,915,000 25,350,000
------------------------- -----------------------
Total Deposits 276,729,000 283,084,000
Other borrowed funds 214,174,000 188,009,000
Accrued expenses and other liabilities 8,643,000 8,646,000
------------------------- -----------------------
Total Liabilities 499,546,000 479,739,000
------------------------- -----------------------
Shareholders' Equity:
Common stock par value $.01 per share, 20,000,000
shares authorized; shares issued and outstanding
5,889,500 as of March 31, 1999
and 5,883,188 as of December 31, 1998 59,000 59,000
Treasury stock at cost (213,292 and 219,604 shares at March 31, 1999 and
December 31, 1998,
respectively) (1,882,000) (1,927,000)
Additional paid in capital 31,306,000 26,510,000
Retained earnings 8,558,000 11,996,000
Accumulated other comprehensive income/(loss), net of tax (1,017,000) (16,000)
------------------------- -----------------------
Total Shareholders' Equity 37,024,000 36,622,000
------------------------- -----------------------
Total Liabilities and Shareholders' Equity $536,570,000 $516,361,000
========================= =======================
</TABLE>
(See notes to consolidated financial statements)
4
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Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31,
(unaudited)
<TABLE>
<CAPTION>
1999 1998
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Interest income:
Interest and fees on loans $6,275,000 $4,796.000
Interest on federal funds sold 1,000 181,000
Interest on investments 2,858,000 3,066,000
---------------------- --------------------
Total Interest Income 9,134,000 8,043,000
---------------------- --------------------
Interest expense:
Demand interest-bearing 70,000 55,000
Money market and savings 371,000 232,000
Time over $100,000 344,000 402,000
Time under $100,000 2,464,000 2,372,000
Other borrowed funds 2,426,000 1,508,000
---------------------- --------------------
Total interest expense 5,675,000 4,569,000
---------------------- --------------------
Net interest income 3,459,000 3,474,000
---------------------- --------------------
Provision for loan losses 250,000 130,000
---------------------- --------------------
Net interest income after provision
for loan losses 3,209,000 3,344,000
---------------------- --------------------
Non-interest income:
Service fees 155,000 95,000
Tax Refund Program revenue 2,715,000 2,155,000
Miscellaneous income 26,000 29,000
---------------------- --------------------
2,896,000 2,279,000
Non-interest expense:
Salaries and benefits 1,431,000 1,188,000
Occupancy/Equipment 418,000 362,000
Other expenses 1,005,000 514,000
---------------------- --------------------
2,854,000 2,064,000
---------------------- --------------------
Income before income taxes 3,251,000 3,559,000
---------------------- --------------------
Provision for income taxes 1,071,000 1,179,000
Income before cumulative effect of a
change in accounting principle 2,180,000 2,380,000
Cumulative effect of a change in
accounting principle (Note 5) (63,000) 0
---------------------- --------------------
Net income $2,117,000 $2,380,000
====================== ====================
Net income per share - basic:
Income before cumulative effect of a
change in accounting principle $0.37 $0.39
Cumulative effect of a change in
accounting principle (Note 5) (0.01) 0.00
---------------------- --------------------
Net income $0.36 $0.39
Net income per share - diluted:
Income before cumulative effect of a
change in accounting principle $0.35 $0.37
Cumulative effect of a change in
accounting principle (Note 5) (0.01) 0.00
---------------------- --------------------
Net income $0.34 $0.37
</TABLE>
(See notes to consolidated financial statements)
5
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Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For Three Months Ended March 31,
(unaudited)
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1999 1998
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Cash flows from operating activities:
Net income $ 2,117,000 $ 2,380,000
Adjustments to reconcile net income
to net cash provided by operating activities
Provision for loan losses 250,000 130,000
Write down of other real estate owned 75,000 0
Depreciation and amortization 256,000 62,000
Decrease in loans held for sale 4,417,000 465,000
Increase in accrued income
and other assets (406,000) (8,854,000)
Decrease in accrued expenses
and other liabilities (3,000) 2,290,000
------------ ------------
Net cash used in operating activities 6,706,000 (3,527,000)
------------ ------------
Cash flows from investing activities:
Purchase of securities:
Available for Sale (34,913,000) 0
Held to Maturity (2,553,000) (71,522,000)
Proceeds from principal receipts, sales, and
maturities of securities 14,039,000 11,604,000
Net increase in loans (10,455,000) (12,627,000)
Net increase/(decrease) in deferred fees 31,000 156,000
Purchase of other real estate owned 0 0
Premises and equipment expenditures (271,000) (568,000)
------------ ------------
Net cash used in investing activities (34,122,000) (72,957,000)
------------ ------------
Cash flows from financing activities:
Net increase in demand, money
market, and savings deposits 595,000 5,968,000
Net increase/(decrease) in borrowed funds less than 8,565,000 13,288,000
90 days
Net increase in borrowed funds greater than 90 days 17,600,000 50,000,000
Net increase (decrease) in time deposits (6,950,000) 7,722,000
Purchase of Treasury Stock (1,028,000) 0
Net proceeds from exercise of stock options 315,000 0
------------ ------------
Net cash provided by financing activities 19,098,000 76,978,000
------------ ------------
Increase in cash and cash equivalents (8,318,000) 494,000
Cash and cash equivalents, beginning of period 18,295,000 6,326,000
------------ ------------
Cash and cash equivalents, end of period 9,977,000 6,820,000
============ ============
Supplemental disclosure:
Interest paid 5,541,000 3,556,000
============ ============
Non-cash transactions:
Changes in unrealized gain/(loss) on securities
available for sale (1,516,000) 0
============ ============
</TABLE>
(See notes to consolidated financial statements)
6
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REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Republic First Bancorp, Inc., is a one-bank holding company organized
and incorporated under the laws of the Commonwealth of Pennsylvania. Its
wholly-owned subsidiary, First Republic Bank (the "Bank"), offers a variety of
banking services to individuals and businesses throughout the Greater
Philadelphia and South Jersey area through its offices and branches in
Philadelphia and Montgomery Counties.
The Company is also in the process of opening another 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 is scheduled to open for business on
May 31, 1999, and will offer 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 March 31, 1999, the
results of operations for the three months ended March 31, 1999 and 1998, and
the cash flows for the three months ended March 31, 1999 and 1998. 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 subsidiary, First
Republic Bank. 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 Bank. The
Bank is dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Bank are subject
to risks and uncertainties surrounding its exposure to change in the interest
rate environment.
Additionally, the Company derives fee income from the Bank's
participation in a program (the "Tax Refund Program") which indirectly funds
consumer loans collateralized by federal income tax refunds, and provides
accelerated check refunds. Approximately $2.4 million in gross revenues were
collected on these loans during 1998. The Company is participating in the
program again in 1999, and has recorded approximately $2.7 million in revenues
for the three months ended March 31, 1999, however, the Bank does not anticipate
participating in the program beyond 1999.
7
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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 Bank's
control, it is at least reasonably possible that the estimates of the allowance
for loan losses and the carrying values of the real estate owned could differ
materially in the near term.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
cash and due from banks, interest-bearing deposits with an original maturity of
ninety days or less and federal funds sold to be cash and cash equivalents. The
Bank is required to maintain certain average reserve balances as established by
the Federal Reserve Board. The amounts of those balances for the reserve
computation periods which include March 31, 1999 and December 31, 1998 were
$957,000 and $872,000, respectively. These requirements were satisfied through
the restriction of vault cash and a balance at the Federal Reserve Bank of
Philadelphia.
Investment Securities:
Debt and equity securities are classified in one of three categories,
as applicable, and 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 quarter 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.
8
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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. Gains and losses on loans held for sale are included in
non-interest income. 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.
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 and consumer loans,
including home equity lines of credit, to be small balance homogeneous loans.
These loan categories are collectively evaluated for impairment. Commercial
business loans and commercial real estate loans are individually measured for
impairment based on the present value of expected future cash flows discounted
at the historical effective interest rate, except that all collateral dependent
loans are measured for impairment based on the fair market value of the
collateral.
9
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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. Common
stock equivalents (CSE) 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 March 31, 1999 and 1998, there were 41,250 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
20% stock dividends 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.
10
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The following table is a comparison of EPS for the three months ended
March 31, 1999 and 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter to Date
1999 1998
---------------------------------------------------
Income before cumulative effect of
a change in accounting principle
(numerator for both calculations) $2,180,000 $2,380,000
---------------------------------------------------
Shares Per Share Shares Per Share
Weighted average shares
for period 5,889,500 6,067,069
Basic EPS $0.37 $0.39
Add common stock equivalents
representing dilutive stock options 395,821 402,208
Effect on basic EPS and CSE $(0.02) $(0.02)
Equals total weighted average
Shares and CSE (diluted) 6,285,321 6,469,277
Diluted EPS $0.35 $0.37
</TABLE>
Treasury Stock
Effective August 24, 1998, the Company implemented a stock repurchase
program, which will be in effect from time to time for varying periods after
August 25, 1998, through and including June 30, 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 outstanding stock, or approximately 297,000 shares.
As of March 31, 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 120,712 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
March 31
1999 1998
--------------- ----------------
<S> <C> <C>
Net income $2,117 $2,380
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding losses during the period (1,001) (21)
Less: Reclassification adjustment for gains
included in net income 0 0
--------------- ----------------
Comprehensive income $1,116 $2,359
=============== ================
</TABLE>
11
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Note: 3 Legal Proceedings
The Bank, along with a number of other financial institutions, has been
made a party to a lawsuit brought by a New Jersey bank claiming damages of
approximately $200,000 arising out of a series of mortgage loans made to a
borrower who apparently procured one or more of these loans fraudulently. In
addition, one of these loans was sold by the Bank to a mortgage banker who is
now alleging that the Bank breached its warranty obligations when it sold this
loan to the mortgage banker because the lien of the loan is possibly inferior to
other mortgages, and as a result, has asserted a claim of $800,000 against the
Bank. The Company has since reached a tentative settlement to the suit, and has
been advised that all parties involved have consented with the terms set forth
in the settlement agreement. As a result of this agreement, the Company has
recorded a liability for $233,000, which is reflected in the results of
operation for the quarter ended March 31, 1999.
The Company and the Bank are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Bank, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Bank.
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 is required
for all fiscal years beginning after June 15, 1999, 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 this statement
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.
12
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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, and 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.
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 startup 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
provision 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 two reportable segments; community banking
and the Tax Refund Program. The community banking segment is primarily comprised
of the results of operation and financial condition of the Company's wholly
owned banking subsidiary, First Republic Bank. 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 1. The Company evaluates the performance of the community banking
segment based upon income before the provision for income taxes, return on
equity and return on average assets. Tax Refund Program is evaluated based upon
income before provision for taxes.
The Company has no intersegment revenues.
13
<PAGE>
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.
Segment information for the quarters ended March 31, 1999 and 1998 is
as follows:
<TABLE>
<CAPTION>
As of and for the three months ended March 31,
(dollars in thousands)
1999 1998
Tax Tax
Refund Refund
Bank Program Total Bank Program Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
External customer revenues:
Interest Income $ 9,134 $0 $ 9,134 $8,043 $0 $8,043
Other Income 181 2,715 2,896 124 2,155 2,279
Total external customer
revenues 9,315 2,715 12,030 8,167 2,155 10,322
Intersegment revenues:
Interest Income 0 0 0 0 0 0
Other Income 0 0 0 0 0 0
Total intersegment revenues 0 0 0 0 0 0
Total Revenue 9,315 2,715 12,030 8,167 2,155 10,322
Depreciation and amortization 146 0 146 90 0 90
Other operating expenses -
external 8,483 150 8,633 6,568 105 6,673
Other operating expenses -
intersegment 0 0 0 0 0 0
Segment expenses 8,629 150 8,779 6,658 105 6,763
Segment income before taxes
and extraordinary items $ 686 $2,565 $ 3,251 $ 1,509 $2,050 $ 3,559
Segment assets $536,570 $0 $536,570 $457,110 $0 $457,110
Capital expenditures $271 $0 $271 $568 $0 $568
</TABLE>
14
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Quarter Ended March 31, 1999 Compared to March 31, 1998
Results of Operations:
Overview
The Company's net income decreased $263,000, or 11.1%, to $2,117,000
for the quarter ended March 31, 1999, from $2,380,000 for the quarter ended
March 31, 1998. Diluted earnings per share for the quarter ended March 31, 1999
was $0.34 compared to $0.37, for the quarter ended March 31, 1998, due to the
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 decreased $15,000, or 0.4%, to
$3,459,000 for the quarter ended March 31, 1999 from $3,474,000 for the quarter
ended March 31, 1998. The decrease in net interest income was primarily due to
a decrease in the average rate of interest bearing assets of 47 basis points,
from 7.97% as of March 31, 1998 to 7.50% as of March 31, 1999. This decrease was
mainly due to the reduction in prime rate, upon which many of the Bank's loan
products are priced.
The Company's total interest income increased $1.1 million, or 13.6%, to $9.1
million for the quarter ended March 31, 1999 from $8.0 million for the quarter
ended March 31, 1998. Interest and fees on loans increased $1.5 million, or
30.8%, to $6.3 million for the quarter ended March 31, 1999 from $4.8 million
for the quarter ended March 31, 1998. This increase was due primarily to an
increase in average loans outstanding for the period of $93.4 million. Interest
and dividend income on securities decreased $208,000, or 6.8%, to $2.9 million
for the quarter ended March 31, 1999 from $3.1 million for the quarter ended
March 31, 1998. This decrease in investment income was the result of a decrease
in yield on the securities portfolio of 55 basis points, partially offset by an
increase in the average balance of securities owned of $4.9 million, or 2.8%, to
$181.0 million for the quarter ended March 31, 1999 from $176.1 million for the
quarter ended March 31, 1998.
The Company's total interest expense increased $1.1 million, or 24.2%,
to $5.7 million for the quarter ended March 31, 1999 from $4.6 million for the
quarter ended March 31, 1998. This increase was due to an increase in the volume
of average interest-bearing liabilities of $103.2 million, or 30.8%, to $438.6
million for the quarter ended March 31, 1999 from $335.4 million for the quarter
ended March 31, 1998. The average rate paid on interest-bearing liabilities
decreased 27 basis points to 5.25% for the quarter ended March 31, 1999 from
5.52% for the quarter ended March 31, 1998 due primarily to the decrease in
average rates paid on other borrowings and certain deposit accounts.
15
<PAGE>
Interest expense on time deposits increased $34,000 or 1.2%. This
increase was primarily due to an increase in the average volume of certificates
of deposit in the amount of $7.8 million, or 4.3%, to $191.9 million for the
quarter ended March 31, 1999 from $184.1 million for the quarter ended March 31,
1998.
Interest expense on FHLB advances and overnight federal funds purchased
was $2.4 million for the quarter ended March 31, 1999 compared to $1.5 million
for the quarter ended March 31, 1998. At March 31, 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 $250,000 and $130,000 for the quarters ended March
31, 1999 and 1998, respectively. This increase is due primarily to an increase
in loans outstanding of $91.2 million from March 31, 1998 to March 31, 1999.
Non-Interest Income
Total non-interest income increased $617,000 or 27.1%, to $2.9 million
for the quarter ended March 31, 1999 from $2.3 million for the quarter ended
March 31, 1998. This was mainly attributable to an increase in revenues related
to the Tax Refund Program, as well as an increase from service fee income
related to loans.
Non-Interest Expenses
Total non-interest expenses increased $790,000, to $2.9 million for the
quarter ended March 31, 1999 from $2.1 million for the quarter ended March 31,
1998. Salaries and benefits increased $243,000, or 20.5%, to $1.4 million for
the quarter ended March 31, 1999 from $1.2 million for the quarter ended March
31, 1998. The increase was due primarily to an increase in staff as a result of
the addition of a branch and hiring lending staff.
Occupancy and equipment expenses increased $56,000, or 15.5%, to
$418,000 for the quarter ended March 31, 1999 from $362,000 for the quarter
ended March 31, 1998 as a result of opening an additional branch office during
in the third quarter of 1998.
Other non-interest expense increased $491,000, to $1.0 million for the
quarter ended March 31, 1999 from $514,000 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 The remaining increase in expenses were due to growth
of the Company and business development costs.
Provision for Income Taxes
The provision for income taxes decreased $108,000, or 9.2%, to
$1,071,000 for the quarter ended March 31, 1999 from $1,179,000 for the quarter
ended March 31, 1998. This decrease is mainly the result of the decrease in
pre-tax income from 1998 to 1999.
16
<PAGE>
Financial Condition:
March 31, 1999 Compared to December 31, 1998
Total assets increased $20.2 million, or 3.9%, to $536.6 million at
March 31, 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 increased $5.8 million, or 1.9%,
to $312.6 million at March 31, 1999 from $306.8 million at December 31, 1998.
This increase in loans was attributable to the growth in residential mortgages
of $5.3 million. Investment securities increased $21.8 million, or 12.3%, to
$199.4 million at March 31, 1999 from $177.6 million at December 31, 1998.
Cash and due from banks, interest-bearing deposits, which are held at
the Federal Home Loan Bank of Pittsburgh, and federal funds sold are all liquid
funds. The aggregate amount in these three categories decreased by $8.3 million,
or 45.5%, to $10.0 million at March 31, 1999 from $18.3 million at December 31,
1998.
Premises and equipment, net of accumulated depreciation, increased
$124,000 to $4.1 million at March 31, 1999 from $4.0 million at December 31,
1998. The increase was attributable mainly to the construction of the Delaware
Bank, scheduled to open in May 1999.
Total liabilities increased $19.8 million, or 4.1%, to $499.5 million
at March 31, 1999 from $479.7 million at December 31, 1998. Deposits, the
Company's primary source of funds, decreased $6.4 million, 2.2% to $276.7
million at March 31, 1999 from $283.1 million at December 31, 1998. The
aggregate of transaction accounts, which include demand, money market and
savings accounts, increased $595,000, or 0.7%, to $88.5 million at March 31,
1999 from $87.9 million at December 31, 1998. Certificates of deposit decreased
by $7.0 million, or 3.6%, to $188.2 million at March 31, 1999 from $195.1
million at December 31, 1998.
Other borrowed funds were $214.2 million at March 31, 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.
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
17
<PAGE>
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. 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.
The following tables present a summary of the Bank's interest rate
sensitivity GAP at March 31, 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.
18
<PAGE>
<TABLE>
<CAPTION>
First Republic Bank
Interest Sensitive Gap
(dollars in thousands) as of March 31, 1999
---------------------------------------------------------------------------------------------
0 - 90 91 - 180 181 - 365 1 - 2 2 - 3
Days Days Days Years Years
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest Sensitive Assets:
Securities and interest
bearing balances due
from banks $ 18,056 $ 6,000 $ 12,417 $ 20,413 $ 21,024
Average interest rate 6.61% 6.53% 6.53% 6.53% 6.54%
Loans receivable (1) 98,186 20,708 11,202 31,621 29,774
Average interest rate 8.65% 8.80% 9.47% 7.50% 7.88%
Total 116,242 26,708 23,619 52,034 50,798
---------------------------------------------------------------------------------------------
Cumulative Totals $ 116,242 $ 142,950 $ 166,569 $ 218,603 $ 269,401
=============================================================================================
Interest Sensitive Liabilities:
Demand Interest Bearing $ 1,694 $ 334 $ 1,077 $ 1,335 $ 1,335
Average interest rate 1.75% 1.75% 1.75% 1.75% 1.75%
Savings Accounts 761 71 144 288 288
Average interest rate 2.00% 2.00% 2.00% 2.00% 2.00%
Money Market Accounts 25,082 831 1,663 3,325 3,325
Average interest rate 4.69% 2.75% 2.75% 2.75% 2.75%
Time Deposits 29,721 54,864 68,640 29,565 789
Average interest rate 5.44% 5.64% 5.87% 5.97% 5.84%
FHLB Borrowings 49,174 - - 12,500 12,500
Average interest rate 5.19% 0.00% 0.00% 5.32% 5.39%
Total 103,232 56,099 71,525 47,013 18,237
---------------------------------------------------------------------------------------------
Cumulative Totals $ 103,232 $ 162,531 $ 234,056 $ 281,069 $ 299,306
=============================================================================================
Interest Rate
sensitivity GAP $ 9,810 $ (29,391) $ (47,906) $ 5,021 $ 32,561
Cumulative GAP $ 9,810 $ (19,581) $ (67,487) $ (62,466) $ (29,905)
Interest Sensitive Assets/
Interest Sensitive Liabilities 109.22% 87.95% 71.17% 77.78% 90.01%
Cumulative GAP/
Total Earning Assets 1.90% -3.79% -13.07% -12.10% -5.79%
Total Earning Assets $ 516,271
=================
Off balance sheet items notional value:
Commitments to
extend credit $ 404 $ 24,058
------------------------------------
Average interest rate 7.75% 8.25%
(dollars in thousands)
---------------------------------------------------------------------------------------------
3 - 4 4 - 5 More than 5
Years Years Years Total Fair Value
---------------------------------------------------------------------------------------------
Interest Sensitive Assets:
Securities and interest
bearing balances due
from banks $ 21,287 $ 21,087 $ 80,753 $ 201,036 $ 199,387
Average interest rate 6.52% 6.55% 6.54%
Loans receivable (1) 40,195 45,458 38,090 315,235 320,300
Average interest rate 8.38% 8.09% 7.08%
Total 61,482 66,544 118,843 516,271 519,687
---------------------------------------------------------------------------------------------
Cumulative Totals $ 330,883 $ 397,427 $ 516,271
=========================================================
Interest Sensitive Liabilities:
Demand Interest Bearing $ 1,335 $ 1,335 $ 6,268 $ 14,713 $ 14,713
Average interest rate 1.75% 1.75% 1.75%
Savings Accounts 288 288 1,444 3,572 3,572
Average interest rate 2.00% 2.00% 2.00%
Money Market Accounts 3,325 3,325 - 40,877 40,877
Average interest rate 2.75% 2.75% 2.75%
Time Deposits 914 3,694 5 188,192 189,910
Average interest rate 6.23% 5.81% 5.25%
FHLB Borrowings 40,000 50,000 50,000 214,174 218,420
Average interest rate 5.59% 5.00% 5.15%
Total 45,862 58,642 57,717 461,527 467,491
---------------------------------------------------------------------------------------------
Cumulative Totals $ 345,168 $ 403,810 $ 461,527
=========================================================
Interest Rate
sensitivity GAP $ 15,621 $ 7,902 $ 61,126
Cumulative GAP $ (14,285) $ (6,383) $ 54,744
Interest Sensitive Assets/
Interest Sensitive Liabilities 95.86% 98.42% 111.86%
Cumulative GAP/
Total Earning Assets -2.77% -1.24% 10.60%
Total Earning Assets
Off balance sheet items notional value:
Commitments to
extend credit $ 24,462 $ 245
-----------------
Average interest rate
</TABLE>
(1) Includes loans held for sale.
19
<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 12.88% and 12.54% at March 31, 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 March 31, 1999 and December 31,
1998 was 12.03% 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 March 31,
1999 and December 31, 1998 , the leverage ratio was 7.39% and 7.50%,
respectively. Accordingly, at March 31, 1999 and December 31, 1998, the Company
was considered "well capitalized" under FRB and FDIC regulations.
The Company's shareholders' equity as of March 31, 1999 and December
31, 1998 was $37,024,000 and $36,622,000, respectively. Book value per share of
the Company's common stock increased from $6.22 as of December 31, 1998 to $6.29
as of March 31, 1999. These increases were attributable to net income for the
quarter of approximately $2,117,000, partially offset by the unrealized loss on
available for sale securities, and stock repurchases of $1.0 million during the
quarter.
Regulatory Capital Requirements
Federal banking agencies impose three minimum capital requirements on
the Company's risk-based capital ratios based on total capital, "Tier 1 capital,
and a leverage capital ratio. The risk-based capital ratios measure the adequacy
of a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level or
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
20
<PAGE>
The following table presents the Bank's capital regulatory ratios at
March 31, 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 March 31, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total risk based capital $40,445 12.88% $25,125 8.00% $31,406 10.00%
Tier I capital 37,792 12.03 12,562 4.00 18,844 6.00
Tier I (leveraged) capital 37,792 7.39 25,557 5.00 25,557 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 Bank meets as of March 31, 1999 and
December 31, 1998, all capital adequacy requirements to which it is subject. As
of March 31, 1999 and December 31, 1998, the most recent notification from the
Federal Reserve Bank categorized the Bank 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 Bank's
category.
The Bank's ability to maintain the required levels of capital is
substantially dependent upon the success of the Bank's capital and business
plans, the impact of future economic events on the Bank's loan customers, the
Bank`s ability to manage its interest rate risk and control its growth and other
operating expenses.
In addition to the above minimum capital requirements, the Federal
Reserve Bank approved a rule that became effective on December 19, 1992
implementing a statutory requirement that federal banking regulators take
specified "prompt corrective action" when an insured institution's capital level
falls below certain levels. The rule defines five capital categories based on
several of the above capital ratios. The Bank currently exceeds the levels
required for a bank to be classified as "well capitalized". However, the Federal
Reserve Bank may consider other criteria when determining such classifications,
which consideration could result in a downgrading in such classifications.
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.
21
<PAGE>
The Company's liquid assets totaled $10.0 million at March 31, 1999
compared to $18.3 million at December 31, 1998. Maturing and repaying loans are
another source of asset liquidity. At March 31, 1999, the Bank estimated that an
additional $20.4 million of loans will mature or repay in the next six-month
period ending September 30, 1999.
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 March 31, 1999, the Bank had $35.0
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 Bank to purchase funds for short-term needs at
current market rates.
At March 31, 1999, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $24.5 million. Certificates of
deposit which are scheduled to mature within one year totaled $153.2 million at
March 31, 1999, and borrowings that are scheduled to mature within the same
period amounted to $46.0 million. The Company anticipates that it will have
sufficient funds available to meet its current commitments.
The Bank's target and actual liquidity levels are determined and
managed based on Management's comparison of the maturities and marketability of
the Bank's interest-earning assets with its projected future maturities of
deposits and other liabilities. Management currently believes that floating rate
commercial loans, short-term market instruments, such as 2-year United States
Treasury Notes, adjustable rate mortgage-backed securities issued by government
agencies, and federal funds, are the most appropriate approach to satisfy the
Bank's liquidity needs. The Bank has established collateralized lines of credit
from correspondents to assist in managing the Bank's liquidity position. Such
lines of credit total $12.5 million in the aggregate. Additionally, the Bank has
established a line of credit with the Federal Home Loan Bank of Pittsburgh with
a maximum borrowing capacity of approximately $234.0 million. As of March 31,
1999 and December 31, 1998, the Company had borrowed $214.2 and $180.5,
respectively, under its line of credit with the FHLB. The Company's Board of
Directors has appointed an Asset/Liability Committee to assist Management in
establishing parameters for investments.
The Bank's Asset/Liability Committee is responsible for managing the
liquidity position and interest sensitivity of the Bank. Such committee's
primary objective is to maximize net interest margin in an ever changing rate
environment, while balancing the Bank's interest-sensitive assets and
liabilities and providing adequate liquidity for projected needs.
Management presently believes that the effect on the Bank of any future
rise in interest rates, reflected in higher cost of funds, would be detrimental
since the amount of the Bank's interest bearing liabilities which would reprice,
are greater than the Bank's 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 Bank, due again to the timing difference between
repricing the Bank's liabilities, primarily certificates of deposit, and the
largely automatic repricing of its existing interest-earning assets. As of March
31, 1999, 23.2% of the Bank's interest-bearing deposits were to mature, and be
repriceable, within three months, and an additional 22.3% were to mature, and be
repriceable, within three to six months. Therefore, management believes that
such an effect would be minimal.
Since the assets and liabilities of the Company have diverse repricing
characteristics that influence net interest income, management analyzes interest
sensitivity through the use of gap analysis and simulation models. Interest rate
sensitivity management seeks to minimize the effect of interest rate changes on
net interest margins and interest rate spreads, and to provide growth in net
interest income through periods of changing interest rates. The Asset/Liability
Management Committee (ALCO) is responsible for managing interest rate risk and
for evaluating the impact of changing interest rate conditions on net interest
income.
22
<PAGE>
Securities Portfolio
At March 31, 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 $186.4 million and $184.8 million as of
March 31, 1999. The net unrealized loss on securities available-for-sale, as of
this date, was $1.5 million.
The following table represents the carrying and estimated fair values
of Investment Securities at March 31, 1999.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Available-for-Sale Cost Gain Loss Fair Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed $183,133,000 $ 88,000 $ 1,595,000 $181,626,000
U.S. Government Agencies 3,250,000 5,000 39,000 3,216,000
------------ ------------ ------------ ------------
Total Available-for-Sale $186,383,000 $ 93,000 $ 1,634,000 $184,842,000
------------ ------------ ------------ ------------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Cost Gain Loss Fair Value
---------------------------------------------------------------
Mortgage-backed $ 944,000 $ 23,000 $ 0 $ 967,000
US Government Agencies 534,000 0 6,000 528,000
Other 13,050,000 0 0 13,050,000
------------ ------------ ------------ ------------
Total Held-to-Maturity $ 14,528,000 $ 23,000 $ 6,000 $ 14,545,000
------------ ------------ ------------ ------------
</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
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 $5.8 million, or 1.9%, to $312.6
million at March 31, 1999 from $306.8 million at December 31, 1998, which were
primarily funded by an increase in other borrowed funds.
23
<PAGE>
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
(dollars in thousands) As of March 31, 1999 As of December 31, 1998
------------------------------------- --------------------------------------
Balance % of Total Balance % of Total
-------------------- ---------------- -------------------- -----------------
Real Estate:
1-4 Family $139,403 44.2% $133,158 43.1%
Multi-Family 20,652 6.6 21,800 7.0
Commercial Real Estate 112,738 35.8 110,385 35.7
-------------------- ---------------- -------------------- -----------------
Total Real Estate 272,793 86.6 265,343 85.8
Commercial 39,730 12.6 42,644 13.8
Other 2,712 0.8 1,176 0.4
-------------------- ---------------- -------------------- -----------------
Total Loans (1) 315,235 100.0% 309,163 100.0%
Less allowance for loan losses (2,653) (2,395)
-------------------- --------------------
Net loans $312,582 $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
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.
24
<PAGE>
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------------------------------------
<S> <C> <C>
Loans accruing, but past due 90 days or more $176,000 $121,000
Non-accrual loans 1,015,000 1,002,000
---------------------------------------------
Total non-performing loans (1) 1,191,000 1,123,000
Foreclosed real estate 643,000 718,000
---------------------------------------------
Total non-performing assets (2) $1,834,000 $1,841,000
=============================================
Non-performing loans as a percentage of total
loans net of unearned
income (3) 0.39% 0.36%
Non-performing assets as a percentage of total
assets 0.34% 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 $68,000 to 1,191,000 at March 31,
1999 from $1,123,000 at December 31, 1998. Total non performing assets decreased
$7,000 at March 31, 1999 to $1,834,000 from $1,841,000 at December 31, 1998.
At March 31, 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 $81.0 million, which
represented 25.7% 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.
25
<PAGE>
Potential problem loans consist of loans that are included in
performing loans, but for which potential credit problems of the borrowers have
caused management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At March 31, 1999, all
identified potential problem loans are included in the preceding table.
The Company had no credit exposure to "highly leveraged transactions"
at March 31, 1999, as defined by the FRB.
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for the
three months ended March 31, 1999, and 1998 and the twelve months ended December
31, 1998:
<TABLE>
<CAPTION>
For the three For the twelve For the three
months ended months ended months ended
March 31,1999 December 31, 1998 March 31,1998
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of period ........ $ 2,395,000 $ 2,028,000 $ 2,208,000
Charge-offs:
Commercial ......................... 12,000 76,000 53,000
Real estate ........................ 1,000 0 0
Consumer ........................... 0 34,000 0
------------- ------------- -------------
Total charge-offs ............... 13,000 110,000 53,000
------------- ------------- -------------
Recoveries:
Commercial ......................... 20,000 13,000 10,000
Real estate ........................ 0 0 0
Consumer ........................... 1,000 94,000 13,000
------------- ------------- -------------
Total recoveries ................ 21,000 107,000 23,000
------------- ------------- -------------
Net charge-offs ....................... (8,000) 3,000 30,000
------------- ------------- -------------
Provision for loan losses ............. 250,000 370,000 130,000
------------- ------------- -------------
Balance at end of period ........... $ 2,653,000 $ 2,395,000 $ 2,128,000
============= ============= =============
Average loans outstanding(1)........ $ 309,771,000 $ 248,479,000 $ 216,420,000
============= ============= =============
As a percent of average loans (1):
Net charge-offs .................... (2.58%) 0.00% 0.02%
Provision for loan losses .......... 0.08 0.15 0.06
Allowance for loan losses .......... 0.86 0.96 0.98
Allowance for possible loan losses to:
Total loans, net of unearned income 0.84% 0.77% 1.23%
Total non-performing loans ......... 144.66% 213.27% 113.01%
(1) Includes nonaccruing loans.
</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.
26
<PAGE>
The Company has an existing loan review program, which monitors the
loan portfolio on an ongoing basis. Loan review is conducted by a loan review
officer and is reported quarterly to the Board of Directors. The Board of
Directors reviews the finding of the loan review program on a monthly basis.
Determining the appropriate level of the allowance for loan losses at
any given date is difficult, particularly in a continually changing economy.
However, there can be no assurance that, if asset quality deteriorates in future
periods, additions to the allowance for loan losses will not be required.
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 March 31, 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 $1,695,000 54.92% $1,638,000 56.33%
Residential real estate 419,000 44.23 391,000 43.07
Consumer and other... 71,000 0.86 71,000 0.60
Unallocated 468,000 295,000
------------------ ---------------
Total 2,653,000 100.00% $2,395,000 100.00%
================== ===============
</TABLE>
The unallocated allowance increased $173,000 to $468,000 at March 31,
1999 from $295,000 at December 31, 1998, mainly due to a decrease in substandard
loans.
(1) Included loans held for sale
The Company had delinquent loans as of March 31, 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 $4.7 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 $295,000 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 March 31, 1999 and December 31, 1998, substandard loans totaled
approximately $972,000 and $1,382,000 respectively; and doubtful loans totaled
approximately $43,000 and $0 respectively.
27
<PAGE>
Deposit Structure
Total deposits at March 31, 1999 consisted of approximately $29.4
million in non-interest-bearing demand deposits, approximately $14.7 million in
interest-bearing demand deposits, approximately $44.4 million in savings
deposits and money market accounts, approximately $145.3 million in time
deposits under $100,000, and approximately $42.9 million in time deposits
greater than $100,000. In general, the Bank pays higher interest rates on time
deposits over $100,000 in principal amount. Due to the nature of time deposits
and changes in the interest rate market generally, it should be expected that
the 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 three months
ended March 31, 1999 and the year ended December 31, 1998.
<TABLE>
<CAPTION>
Average Deposit Table
For the three months ended For the three months ended
March 31, 1999 March 31, 1998
---------------------------------------------------------------------
Balance Rate Balance Rate
<S> <C> <C> <C> <C>
Non-interest-bearing balances (1) $28,850,000 0.00% $40,361,000 0.00%
=====================================================================
Money market and savings deposits $40,883,000 3.67% $33,612,000 2.76%
Time deposits 191,939,000 5.93 184,106,000 6.03
Demand deposits, interest-bearing 15,255,000 1.87 8,922,000 2.46
---------------------------------------------------------------------
Total interest-bearing deposits 248,077,000 5.31% $226,640,000 5.48%
=====================================================================
</TABLE>
(1) Note that approximately $17.9 million and $0 of these balances during the
three months ended March 31, 1998 and 1999, respectively, were related to
the Tax Refund Program.
The following is a breakdown, by contractual maturities, of the
Company's time deposits issued in denominations of $100,000 or more as of March
31, 1999 and December 31, 1998.
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------------------------------
Maturing in:
<S> <C> <C>
Three months or less $10,062,000 $14,229,000
Over three months through six months 14,039,000 7,756,000
Over six months through twelve months 11,849,000 3,365,000
Over twelve months 6,965,000 0
---------------------------------------
Total $42,915,000 $25,350,000
=======================================
</TABLE>
28
<PAGE>
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
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 March 31, 1999 and December 31, 1998, firm loan commitments
approximated $24.1 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.
29
<PAGE>
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
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. 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 or is in the process of preparing 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 system. All such
plans will be completed by the second quarter 1999.
30
<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 is required
for all fiscal years beginning after June 15, 1999, 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 this statement
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, and 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.
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.
31
<PAGE>
Part II Other Information
Item 1: Legal Proceedings
The Bank, along with a number of other financial institutions, has been
made a party to a lawsuit brought by a New Jersey bank claiming damages of
approximately $200,000 arising out of a series of mortgage loans made to a
borrower who apparently procured one or more of these loans fraudulently. In
addition, one of these loans was sold by the Bank to a mortgage banker who is
now alleging that the Bank breached its warranty obligations when it sold this
loan to the mortgage banker because the lien of the loan is possibly inferior to
other mortgages, and as a result, has asserted a claim of $800,000 against the
Bank. The Company has since reached a tentative settlement to the suit, and has
been advised that all parties involved have consented with the terms set forth
in the settlement agreement. As a result of this agreement, the Company has
recorded a liability for $233,000, which is reflected in the results of
operation for the quarter ended March 31, 1999.
The Company and the Bank are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Bank, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Bank.
Item 2: Changes in Securities
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of Republic First Bancorp, Inc., to
take action upon the re-election of certain directors of the Company was held on
the 27th day of April, 1999 at 4:00 p.m., at the Pyramid Club, 1735 Market
Street, Philadelphia, Pennsylvania, after written notice of said meeting,
according to law, was mailed to each shareholder of record entitled to received
notice of said meeting, 33 days prior thereto. As of the record date for said
meeting of shareholders, the number of shares then issued and outstanding was
5,547,993 shares of common stock, of which 5,547,993 shares were entitled to
vote. A total of 4,718,598 shares were voted. No nominee received less than
88.5% of the voted shares. Therefore, pursuant to such approval, the following
Directors were re-elected to the Company:
William W. Batoff
Sheldon E. Goldberg
Kenneth J. Adelberg
The following directors continue to serve on the board of the Company:
Daniel S. Berman Neal I. Rodin
Michael J. Bradley James E. Schleif
John F. D'Aprix Steven J. Shotz
Harry D. Madonna Harris Wildstein
Eustace W. Mita
32
<PAGE>
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) Agreement and Plan of Merger by and between the Company and
Republic Bancorporation, Inc. dated November 17, 1996.*
11 Computation of Per Share Earnings See footnote No. 2 to
Notes to Consolidated Financial Statements under Earnings
per Share.
21 Subsidiaries of the Company.
First Republic Bank (the "Bank"), 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, and is expected to commence
operations in May 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
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
*Incorporated by reference from the Registration Statement on Form S-4
of the Company, as amended, Registration No. 333-673 filed April 29, 1996.
Reports on Form 8-K
None
33
<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
President and Chief Executive Officer
/s/ George S. Rapp
Executive Vice President and Chief Financial Officer
Dated: May 12, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000834285
<NAME> REPUBLIC FIRST BANCORP INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,977,000
<INT-BEARING-DEPOSITS> 125,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 184,842,000
<INVESTMENTS-CARRYING> 14,528,000
<INVESTMENTS-MARKET> 0
<LOANS> 312,448,000
<ALLOWANCE> 2,653,000
<TOTAL-ASSETS> 536,570,000
<DEPOSITS> 276,729,000
<SHORT-TERM> 49,175,000
<LIABILITIES-OTHER> 8,643,000
<LONG-TERM> 165,000,000
0
0
<COMMON> 59,000
<OTHER-SE> 36,965,000
<TOTAL-LIABILITIES-AND-EQUITY> 536,570,000
<INTEREST-LOAN> 6,275,000
<INTEREST-INVEST> 2,858,000
<INTEREST-OTHER> 1,000
<INTEREST-TOTAL> 9,134,000
<INTEREST-DEPOSIT> 3,249,000
<INTEREST-EXPENSE> 5,675,000
<INTEREST-INCOME-NET> 3,459,000
<LOAN-LOSSES> 250,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,854,000
<INCOME-PRETAX> 3,251,000
<INCOME-PRE-EXTRAORDINARY> 2,180,000
<EXTRAORDINARY> 0
<CHANGES> (63,000)
<NET-INCOME> 2,117,000
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 7.50
<LOANS-NON> 1,191,000
<LOANS-PAST> 5,171,000
<LOANS-TROUBLED> 1,191,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,395,000
<CHARGE-OFFS> 13,000
<RECOVERIES> 21,000
<ALLOWANCE-CLOSE> 2,653,000
<ALLOWANCE-DOMESTIC> 2,653,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 468,000
</TABLE>
