================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
------------------------------------------------
Washington, D.C. 20549
FORM 10-K
---------
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from
_________________________ to ____________________________
Commission file number: 0-17007
REPUBLIC FIRST BANCORP, INC.
----------------------------
(Name of Small Business Issuer In Its Charter)
Pennsylvania 23-2486815
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1608 Walnut Street, Suite 1000,
Philadelphia, PA 19103
- ------------------------------- ------------------------------------
(Address of principal (Zip Code)
Executive offices)
Issuer's telephone number, including area code: (215) 735-4422
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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 such filing
requirements for the past 90 days.
YES X NO
------ -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average of the bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$27,598,018 based on the average of the bid and asked prices on the National
Association of Securities Dealers Automated Quotation System on February 29,
2000.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock $0.01 Par Value 6,343,901
---------------------------- ----------------------------
Title of Class Number of Shares Outstanding
as of February 28, 2000.
Documents incorporated by reference:
Part IV incorporates Selected Financial Data by reference from the registrant's
Annual Report to Shareholders for the fiscal year ended December 31, 1999 (the
"Annual Report"). Part III incorporates certain information by reference from
the from the Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders.
REPUBLIC FIRST BANCORP Annual Report 1999 | 11
<PAGE>
REPUBLIC FIRST BANCORP, INC.
Form 10-K
---------------
INDEX
PART I Page
- ------ ----
Item 1 Description of Business..........................................13
Item 2 Description of Properties........................................16
Item 3 Legal Proceedings................................................17
Item 4 Submission of Matters to a Vote of Security Holders .............19
PART II
- -------
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters .............................................20
Item 6 Selected Financial Data..........................................21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................21
Item 8 Financial Statements and Supplementary Data......................39
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..............................39
PART III
- --------
Item 10 Directors and Executive Officers of the Registrant ..............39
Item 11 Executive Compensation ..........................................39
Item 12 Security Ownership of Certain Beneficial Owners and Management ..41
Item 13 Certain Relationships and Related Transactions ..................41
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .42
12 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
PART I
Item 1: Description of Business
Republic First Bancorp, Inc.
Republic First Bancorp, Inc. (the "Company"), is a two-bank holding
company organized and incorporated under the laws of the Commonwealth of
Pennsylvania. Its wholly-owned subsidiaries, First Republic Bank (the "Bank"),
and Republic First Bank of Delaware (the "Delaware Bank"), (together the
"Banks") offer a variety of banking services to individuals and businesses
throughout the Greater Philadelphia, Delaware and South Jersey area through
their offices and branches in Philadelphia and Montgomery Counties and in New
Castle County, Delaware. The Delaware Bank also opened a Loan Production Office
in Wilmington Delaware during 1999 which will serve as a headquarters for the
Delaware Bank's commercial bankers.
As of December 31, 1999, the Company had total assets of approximately
$586,330,000, total shareholders' equity of approximately $35,040,000, total
deposits of approximately $305,793,000 and net loans receivable outstanding of
approximately $359,605,000. The majority of such loans were made for commercial
purposes.
The Company provides banking services through the Banks and does not
presently engage in any activities other than these banking activities. The
principal executive offices of the Company and the Bank are located at 1608
Walnut Street, Suite 1000, Philadelphia, PA 19103. Its telephone number is (215)
735-4422.
The Company and the Bank have a total of 105 employees.
First Republic Bank
The Bank commenced operations on November 3, 1988 as First Executive Bank.
Concurrent with the merger on June 7, 1996 between First Executive and Republic
Bank, its name was changed to First Republic Bank. The Bank is a commercial bank
chartered pursuant to the laws of the Commonwealth of Pennsylvania, is a member
of the Federal Reserve System and its primary federal regulator is the Federal
Reserve Board of Governors. The deposits held by the Bank are insured up to
applicable limits by the Bank Insurance Fund of the Federal Deposit Insurance
Corporation ("FDIC"). It presently conducts its principal banking activities
through its five Philadelphia offices and three suburban offices in Ardmore,
East Norriton and Abington, all of which are located in Montgomery County,
Pennsylvania.
As of December 31, 1999, the Bank had total assets of approximately
$575,373,000 total shareholders' equity of approximately $28,072,000, total
deposits of approximately $305,077,000 and net loans receivable of approximately
$355,494,000. The majority of such loans were made for commercial purposes.
The Bank offers many consumer and commercial banking services, money
orders, travelers' checks and access to an automated teller network, with an
emphasis on serving the needs of individuals, small and medium-sized businesses,
executives, professionals and professional organizations in its service area.
The Bank attempts to offer a high level of personalized service to both
its commercial and consumer customers. The Bank offers both commercial and
consumer deposit accounts, including checking accounts, interest-bearing "NOW"
accounts, insured money market accounts, certificates of deposit, savings
accounts and individual retirement accounts. The Bank actively solicits
non-interest and interest-bearing deposits from its borrowers.
The Bank offers a broad range of loan and credit facilities to the
businesses and residents of its service area, including secured and unsecured
loans, home improvement loans, bridge loans, mortgages, home equity lines of
credit, overdraft lines of credit and loans for tuition and the purchase of
marketable securities.
Management attempts to minimize the Banks' credit risk through loan
application evaluation, approval and monitoring procedures. Since its inception,
the Bank has had a senior officer monitor compliance with the Banks' lending
policies and procedures by the Banks' loan officers.
The Bank also maintains an investment securities portfolio. Investment
securities are purchased by the Bank within strict standards of the Banks'
Investment Policy, which is approved annually by the Banks' board of directors.
The Investment Policy addresses such issues as permissible investment
categories, credit quality of the investment, maturities and concentrations of
investments. At December 31, 1999 and 1998, approximately 90% and 94%,
respectively, of the aggregate dollar amount of the investment securities
consisted of either U.S. Government debt securities or U.S. Government agency
issued mortgage backed securities or collateralized mortgage obligations (CMOs).
Credit risk associated with these U.S. Government debt securities and
REPUBLIC FIRST BANCORP Annual Report 1999 | 13
<PAGE>
the U.S. Government Agency securities is minimal, with risk-based capital
weighting factors of 0% and 20%, respectively. The CMOs are fixed and variable
rate debt securities, with current average lives of approximately ten years.
The Banks' regulatory authorities require the Bank to maintain certain
liquidity ratios to insure that the Bank maintains available funds, or can
obtain available funds at reasonable rates, in order to satisfy commitments to
borrowers and the demands of depositors. In response to these requirements, the
Bank has formed an Asset/Liability Committee, comprised of certain members of
the Banks' board of directors and senior management, which determines such
ratios. The purpose of the committee is, in part, to monitor the Banks'
liquidity and adherence to the ratios in addition to assessing the relative
interest rate risk to the Bank. The Asset/Liability Committee meets at least
quarterly.
The Banks' lending activities are focused on small businesses within the
professional community. Real estate mortgage and commercial loans are the most
significant categories of the Banks' lending activities, representing
approximately 88% and 11% respectively, of total loans outstanding at December
31, 1999. Repayment of these loans is, in part, dependent on general economic
conditions affecting the community and the various businesses within the
community. Although the majority of the Banks' loan portfolio is collateralized
with real estate or other collateral, a portion of the commercial portfolio is
unsecured, representing loans made to borrowers considered to be of sufficient
strength to merit unsecured financing. The unsecured portion of the portfolio
represents the greatest risk of loss to the Bank but is only 2% of the loan
portfolio. Although management continues to follow strict underwriting policies,
and monitors loans through the Banks' loan review officer, credit risk is still
inherent in the portfolio. Management has further mitigated credit risk within
the loan portfolio by focusing on the origination of collateralized loans, which
represent a lower credit risk to the Bank.
Republic First Bank of Delaware
Republic First Bank of Delaware is a Delaware State chartered Bank,
located at Brandywine Commons II, Concord Pike and Rocky Run Parkway in
Brandywine, New Castle, Delaware. The Delaware Bank opened for business on June
1, 1999. The Delaware Bank offers many of the same services and financial
products as First Republic Bank, described above, and will serve to expand the
Company's market penetration into Delaware.
As of December 31, 1999, the Delaware Bank had total assets of
approximately $10,957,000, total shareholders' equity of approximately
$3,000,000, total deposits of approximately $4,032,000 and net loans receivable
of approximately $8,647,000. The majority of such loans were made for commercial
purposes.
Service Area/Market Overview
The Banks' primary market service area consists of the Greater
Philadelphia region, including Center City Philadelphia and the northern and
western suburban communities located principally in Montgomery County. The Banks
also serve the surrounding counties of Bucks, Chester and Delaware in
Pennsylvania, southern New Jersey and northern Delaware.
In 1998, the Bank entered into an alliance with MBM/ATM Group Ltd., to
deploy offsite Automated Teller Machines (ATMs) to provide cash dispensers to
service the greater Philadelphia region and parts of Southern New Jersey,
Delaware and Maryland.
Competition
There is substantial competition among financial institutions in the
Banks' service area. The Banks compete with new and established local commercial
banks, as well as numerous regionally-based and super-regional commercial banks.
In addition to competing with new and established commercial banking
institutions for both deposits and loan customers, the Banks compete directly
with savings banks, savings and loan associations, finance companies, credit
unions, factors, mortgage brokers, insurance companies, securities brokerage
firms, mutual funds, money market funds, private lenders and other institutions
for deposits, mortgages and consumer and commercial loans, as well as other
services. Competition among financial institutions is based upon a number of
factors, including, but not limited to, the quality of services rendered,
interest rates offered on deposit accounts, interest rates charged on loans and
other credit services, service charges, the convenience of banking facilities,
locations and hours of operation and, in the case of loans to larger commercial
borrowers, relative lending limits. It is the view of Management that a
combination of many factors, including, but not limited to, the level of market
interest rates, has increased competition for loans and deposits.
Many of the banks with which the Banks compete have more established
depositor and borrower relationships and greater financial resources than the
Bank, offer a wider range of deposit and lending instruments and possess greater
depth of management than the Bank. The Banks are subject to potential
intensified competition from new branches of established banks in the area as
well as new banks which could open in its market area. Several de novo banks
with business strategies similar to those of the Banks have opened since the
Banks' inception. There are banks and other financial institutions which serve
surrounding areas
14 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
and additional out-of-state financial institutions which currently, or in the
future, may compete in the Banks' market. The Banks compete to attract deposits
and loan applications both from customers of existing institutions and from
customers new to the greater Philadelphia area. The Bank anticipates a continued
increase in competition in its market area.
Operating Strategy
The Company's objective is for the Banks to become the primary alternative
to the large banks that dominate the Greater Philadelphia market. The Company's
management team has developed a business strategy consisting of the following
key elements to achieve this objective:
Providing Attentive and Personalized Service. The Company believes that a
very attractive niche exists serving small-to medium-sized business customers
not adequately served by the Banks' larger competitors. The Company believes
this segment of the market responds very positively to the attentive and highly
personalized service provided by the Banks. The Banks offer individuals and
small to medium-sized businesses a wide array of banking products, informed and
friendly service, extended operating hours, consistently applied credit
policies, and local, timely decision making. The banking industry is
experiencing a period of rapid consolidation and many local branches have been
acquired by large out-of-market institutions. The ensuing changes in these
banking institutions have resulted in a change in their product offerings and
the degree of personal attention they provide to their customers. The Company is
positioned to respond to these dynamics by offering a community banking
alternative and tailoring its product offering to fill voids created as larger
competitors increase the price of products and services or de-emphasize such
products and services.
Maintaining Superior Operating Results. The Company's long-term goal is to
maintain a return on average equity in excess of 17%. To accomplish these goals,
the Company's strategy is for the Banks to maintain sufficient margins on
incremental growth through efficient utilization and leveraging of capital.
Attracting and Retaining Highly Experienced Personnel. The Banks'
executive officers and other personnel have substantial employment experience
with larger banks in the region. When opening new branches, the Banks
extensively screens and trains its employees to ensure the staff has the
necessary ability and contacts in the community to foster rapid growth. The
Company seeks to instill a sales and service oriented culture in its personnel
in order to build customer relationships and maximize cross-selling
opportunities. The Company offers meaningful sales-based incentives to all its
customer contact employees.
Capitalizing on Market Dynamics. In the past two years, banks controlling
nearly half of the deposits in the Banks' primary market areas have been
acquired by large and super-regional bank holding companies. The ensuing
cultural changes in these banking institutions have resulted in a change in
their product offerings and the degree of personal attention they provide. The
Company has sought to capitalize on these changes by offering a community
banking alternative. As a result, the Company believes it has a tremendous
opportunity to increase its market share.
Products and Services
Traditional Banking Products and Services. The Bank offers a range of
commercial and retail banking services to its customers, including commercial
loans, commercial loans secured by real estate, personal and business checking
and savings accounts, certificates of deposit, residential mortgages and
consumer loans. The Banks' commercial loan customers typically borrow between
$250,000 and $1,000,000. The Banks attempt to offer a high level of personalized
service to both its commercial and consumer customers. In addition, the Bank
provides travelers' checks, money orders and other typical banking services. The
Banks are members of the MAC(TM) and PLUS(TM) networks in order to provide
customers with access to automated teller machines worldwide. The Banks
currently have eight proprietary automated teller machines at its branch
locations, and 119 offsite automated teller machines, throughout Pennsylvania,
southern New Jersey, Maryland and Delaware through its affiliation with MBM/ATM
Group Ltd.
Tax Refund Products. The Company had a contractual relationship with
Jackson Hewitt, Inc. ("Jackson Hewitt"), one of the Nation's largest tax
preparation services, to provide tax refund products to consumer taxpayers for
whom Jackson Hewitt prepares and electronically files federal income tax returns
(the "Tax Refund Program"). The Tax Refund Program enabled the Bank to provide
accelerated check refunds ("ACRs") and refund anticipation loans ("RALs")
(collectively, "Tax Refund Products"). There are a limited number of banks that
provide this service nationwide. The Bank generated significant revenue from the
Tax Refund Program in 1999, 1998 and 1997. In April 1998 Jackson Hewitt had
notified the Company that it would not renew the agreement beyond October 31,
1999. The Bank was paid its contractual obligation in 1999 and will not
participate in the program beyond the 1999 tax preparation season.
The Bank participated in the Tax Refund Program in 1998 and 1997. The Tax
Refund Program generated $2.4 million and $2.2 million in net revenue during
1998 and 1997 respectively. In 1999 the Bank was paid $2.7 million under its
contractual obligation with Jackson Hewitt. The Tax Refund Program earnings are
realized primarily in the first quarter of the year. These
REPUBLIC FIRST BANCORP Annual Report 1999 | 15
<PAGE>
pretax earnings constituted approximately 84%, 61% and 70% of the Company's
first quarter 1999, 1998 and 1997 pretax earnings, respectively, and 39%, 42%
and 44% of the Company's pretax earnings for the year ended December 31, 1999,
1998 and 1997, respectively. Revenue generated by the Tax Refund Program
accounted for 6%, 6% and 9% of total revenues in the year ended December 31,
1999, 1998 and 1997, respectively. The Bank will not participate in the Tax
Refund Program beyond the 1999 tax season.
The Bank received a processing fee for each ACR and RAL it provided. When
the Bank provided a RAL, it received an additional fee that is equal to 4% of
the RAL. If the Internal Revenue Service (the "IRS") does not deposit the
expected refund into the bank account established for its receipt because, among
other reasons, the taxpayer owes back taxes, the amount due under a RAL will not
be paid without instituting individual collection actions against the taxpayer.
The risk of RAL default in excess of 4% is apportioned between the Bank and
Jackson Hewitt on a 35%/65% basis, respectively. The default rate was 5.02% in
1998, and did not exceed 4% in 1997 or 1999.
The Bank participates in cross-collection arrangements with other RAL
lenders. Under these arrangements, the banks share information regarding the
identity of, and amounts payable by, delinquent RAL borrowers. By sharing this
information the banks are able to identify these individuals in later tax
seasons should they obtain a RAL from a tax preparation company. RAL borrowers
are advised in advance that should they become identified as owing any portion
of a RAL from a prior tax season, any tax refunds attributable to such borrower
will be offset first against the prior debt.
Branch Expansion Plans and Growth Strategy
The Company plans to achieve growth and market penetration by expanding
the Banks' branch network into markets with a significant number of commercial
businesses. The company expects to open an average of one branch per year for
the next three years. Management's goal when establishing a new branch is to
achieve deposits of at least $35.0 million in three years or less. The Bank
opened its first suburban office in Ardmore, Montgomery County in November 1996.
This was followed by three additional suburban branches on City Line Avenue,
East Norriton and Abington in March 1997, May 1997 and November 1997,
respectively. As of December 31, 1999, these branches had $12.9 million, $14.9
million and $40.0 million in deposits, respectively. In 1998, the Bank opened an
additional branch located at 1818 Market Street in the heart of the Philadelphia
business district, which had $9.8 million in total deposits, at December 31,
1999.
Item 2: Description of Properties
The Company leases approximately 26,961 square feet on the second, tenth
and eleventh floors of 1608 Walnut Street, Philadelphia, Pennsylvania, as its
headquarter facilities. The space is occupied by both the Company and the Bank
and is used as executive offices, Bank operations and commercial bank lending.
Management believes that its present space is adequate but that future staffing
needs may require the Bank to secure additional space. The current term of the
lease on its headquarter facilities expires on July 31, 2007 with annual rent
expense of $388,536 payable monthly. In addition to the base rent and building
operation expenses, the Company is required to pay all real estate taxes,
assessments, and sewer costs, water charges, excess levies, license and permit
fees under its lease and to maintain insurance on the premises.
The Bank leases approximately 1,829 square feet on the ground floor at
1601 Market Street in Center City, Philadelphia. This space contains a banking
area and vault and represents the Banks' main office. The initial ten year term
of the lease expires March 2003 and contains a five year renewal option. The
annual rent for such location is $82,305, payable monthly.
The Bank leases approximately 1,743 square feet of space on the ground
floor at 1601 Walnut Street, Center City Philadelphia, PA. This space contains a
banking area and vault. The initial ten-year term of the lease expires August
2006 and contains one renewal option of five years. The annual rent for such
location is $42,600, payable monthly.
The Bank leases approximately 785 square feet in the lower level of Pepper
Pavilion at Graduate Hospital, 19th and Lombard Streets, Philadelphia,
Pennsylvania. The space contains a banking area, lobby, office, and vault. The
current lease had an initial five year term and one five year renewal option
which expires June 2002. The annual rental at such location is $22,320, payable
monthly.
The Bank leases approximately 798 square feet of space on the ground floor
and 903 square feet on the 2nd floor at 233 East Lancaster Avenue, Ardmore, PA.
The space contains a banking area and business development office. The initial
ten-year term of the lease expires in August 2005, and contains one renewal
option for five years. The annual rental at such location is $31,908, payable
monthly.
16 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
The Bank leases approximately 2,143 square foot building at 4190 City Line
Avenue, Philadelphia, Pennsylvania. The space contains a retail banking
facility. The initial 10 year term of the lease expires January 2007 and
contains a five year renewal options. The annual rent for such location is
$63,996, payable monthly.
The Bank leases an approximately 4,500 square foot building at 75 East
Germantown Avenue, East Norriton, Pennsylvania. The space contains a banking
area and business development office. The initial 10 year term contains two five
year renewal options and the lease expires in December 2006. The annual rent for
such location is $64,224, payable monthly.
The Bank purchased an approximately 2,800 square foot facility for its
Abington, Montgomery County office at 1480 York Road, Abington, Pennsylvania.
This space contains a banking area and additional space for a possible loan
administration office.
The Bank leases approximately 1,850 square feet on the ground floor at
1818 Market St. Philadelphia, Pennsylvania. The space contains a banking area
and a vault. The initial 10 year term of the lease expires in December 2008 and
contains two five year renewal options. The annual rent for such location is
$63,770, payable monthly.
The Delaware Bank has a land lease on approximately 2,000 sq. feet of
ground at Concord Pike and Rocky Run Pkwy, Brandywine Hundred, Delaware for its
branch operations and headquarters. The Delaware Bank opened for business on
June 1, 1999. The initial 10 year term of the lease expires June 2008 and
contains two five year options to renew the lease. The annual rent for such
location is $69,279, payable monthly.
The Delaware Bank leases approximately 2,220 sq. feet on the ground floor
of a building at 824 Market Street, Wilmington, DE. The space contains a loan
production office. The initial five year term of the lease expires in October
2004. The annual rent for such location is $38,844, payable monthly.
Item 3: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
Supervision and Regulation
Various requirements and restrictions under the laws of the United States
and the Commonwealth of Pennsylvania affect the Company and the Banks.
General
The Company is a bank holding company subject to supervision and
regulation by the Federal Reserve Bank of Philadelphia ("FRB") under the Bank
Holding Company Act of 1956, as amended. As a bank holding company, the
Company's activities and those of the Banks are limited to the business of
banking and activities closely related or incidental to banking, and the Company
may not directly or indirectly acquire the ownership or control of more than 5%
of any class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the FRB.
The Banks are subject to supervision and examination by applicable federal
and state banking agencies. The Banks are members of the Federal Reserve System
and subject to the regulations of the FRB. First Republic Bank is also a
Pennsylvania-chartered bank subject to supervision and regulation by the
Pennsylvania Department of Banking. The Delaware Bank is a Delaware-chartered
bank subject to the supervision and regulation of the Delaware Department of
Banking.
In addition, because the FDIC insures the deposits of the Banks, the Banks
are subject to regulation by the FDIC. The Banks are also subject to
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the FRB in
attempting to control the money supply and credit availability in order to
influence interest rates and the economy.
REPUBLIC FIRST BANCORP Annual Report 1999 | 17
<PAGE>
Holding Company Structure
The Banks are subject to restrictions under federal law which limit their
ability to transfer funds to the Company, whether in the form of loans, other
extensions of credit, investments or asset purchases. Such transfers by the
Banks to the Company are generally limited in amount to 10% of the Banks'
capital and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specific amounts, and all transactions are required to
be on an arm's length basis. The Banks have never made any loan or extension of
credit to the Company nor have they purchased any assets from the Company.
Under FRB policy, the Company is expected to act as a source of financial
strength to the Banks and to commit resources to support the Banks, i.e., to
downstream funds to the Banks. This support may be required at times when,
absent such policy, the Company might not otherwise provide such support. Any
capital loans by the Company to the Banks are subordinate in right of payment to
deposits and to certain other indebtedness of the Banks. In the event of the
Company's bankruptcy, any commitment by the Company to a federal bank regulatory
agency to maintain the capital of the Banks will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Regulatory Restrictions on Dividends
Dividend payments by the Banks to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no
dividends may be paid except from "accumulated net earnings" (generally,
undivided profits). Under the FRB's regulations, the Banks cannot pay dividends
that exceed its net income from the current year and the preceding two years.
Under the FDIA, an insured bank may pay no dividends if the bank is in arrears
in the payment of any insurance assessment due to the FDIC. Under current
banking laws, the Bank would be limited to $12.0 million of dividends in 1999
plus an additional amount equal to the Banks' net profit for 2000, up to the
date of any such dividend declaration.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Banks to pay dividends to the Company.
Other regulatory requirements and policies may also affect the payment of
dividends to the Company by the Banks. If, in the opinion of the FRB, the Bank
is engaged in, or is about to engage in, an unsafe or unsound practice (which,
depending on the financial condition of the Banks, could include the payment of
dividends), the FRB may require, after notice and hearing, that the Banks cease
and desist from such practice. The FRB has formal and informal policies
providing that insured banks and bank holding companies should generally pay
dividends only out of current operating earnings.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual basis,
assigns each institution to one of three capital groups (well capitalized,
adequately capitalized or under capitalized) and further assigns such
institution to one of three subgroups within a capital group corresponding to
the FDIC's judgment of the institution's strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.00% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.0% or greater and a
Tier 1 leverage ratio of 5.0% or greater, are assigned to the well capitalized
group.
Over the last two years, FDIC insurance assessments have seen several
changes for both Bank Insurance Fund ("BIF") and Savings Association Insurance
Fund ("SAIF") institutions. The most recent change occurred on March 31, 1997,
when the President signed into law a bill designed to remedy the disparity
between BIF and SAIF deposit premiums. The first part of the bill called for the
SAIF to be capitalized by a one-time assessment on all SAIF insured deposits
held as of December 31, 1996. This assessment, which was 65.7 cents per $100 in
deposits, raised $4.7 billion to bring the SAIF up to its required 1.25% reserve
ratio. This special assessment, paid on November 30, 1998, had no effect on the
Bank. The second part of the bill remedied the future anticipated shortfall with
respect to the payment of FDIC interest. For 1998 through 1999, the banking
industry will help pay the FDIC interest payments at an assessment rate that is
one-fifth the rate paid by thrifts. The FDIC assessment on BIF insured deposits
is 1.29 cents per $100 in deposits; for SAIF insured deposits it is 6.44 cents
per $100 in deposits. Beginning January 1, 2000, the FDIC interest payments will
be paid pro-rata by banks and thrifts based on deposits. The Company estimated
the FDIC interest assessment to be $36,000 for the year ending December 31,
2000. For the year ended December 31, 1999, the Company paid FDIC expenses of
approximately $31,000.
18 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Capital Adequacy
The FRB adopted risk-based capital guidelines for bank holding companies,
such as the Company. The required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) is 8.0%. At least half of the total capital is required to be
Tier 1 capital, consisting principally of common shareholders' equity,
non-cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder, Tier 2
capital, may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a leverage
ratio of at least 1% to 2% above the 3% stated minimum. The Company is in
compliance with these guidelines. The FRB subjects the Bank to similar capital
requirements.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
As a denovo bank, the Delaware Bank is subject to certain capital
requirements and guidelines imposed by the FRB and Delaware State Department of
Banking. These guidelines provide for a minimum leveraged ratio of 9.00% and
total shareholders' equity of at least $3,000,000 during the period in which the
Delaware Bank is considered a denovo bank. Management expects that the Delaware
Bank will be considered a denovo bank for a period of three years. After that
time period, the Delaware Bank would then be subject to the same risk-based
capital and leveraged capital guidelines as the Company. At December 31, 1999
the Delaware Bank had a tier one leveraged ratio of 40.70% and shareholders
equity of $3,000,000.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995
(the "Interstate Banking Law"), amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The interstate banking provisions allow for the acquisition by a bank
holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
were allowed effective September 1, 1998; however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting a law that
specifically prohibits such interstate transactions. States could, in the
alternative, enact legislation to allow interstate merger and purchase and
assumption transactions prior to September 1, 1999. States could also enact
legislation to allow for de novo interstate branching by out of state banks. In
July 1997, Pennsylvania adopted "opt-in" legislation which allows such
transactions.
Profitability, Monetary Policy and Economic Conditions
The Banks' profitability is principally dependent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and other borrowings and the interest received by a bank on loans
and securities held in its investment portfolio comprise the major portion of a
Banks' earnings. Thus, the earnings and growth of the Banks will be subject to
the influence of economic conditions, both domestic and foreign, on the levels
of and changes in interest rates. In addition to being affected by general
economic conditions, the earnings and growth of the Bank will be affected by the
policies of regulatory authorities, including the Pennsylvania Department of
Banking, the FRB and the FDIC. An important function of the FRB is to regulate
the supply of money and other credit conditions in order to manage interest
rates. The monetary policies and regulations of the FRB have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future. The effects of such policies upon the future
business, earnings and growth of the Bank cannot be determined. See
"Management's Discussion and Analysis of Financial Condition" and "Results of
Operations".
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
REPUBLIC FIRST BANCORP Annual Report 1999 | 19
<PAGE>
PART II
Item 5: Market Registrants for Common Equity and Related Stockholder Matters
Market Information
Shares of the Common Stock are traded in the over-the-counter market and
are quoted on the Nasdaq/NMS under the symbol "FRBK." The Common Stock began
trading on Nasdaq/NMS on December 4, 1997. Prior to that date, the Common Stock
was quoted on the Nasdaq SmallCap Market. The table below presents the range of
high and low trade prices reported for the Common Stock on Nasdaq/NMS or on the
Nasdaq SmallCap Market, as the case may be, for the periods indicated. Market
quotations reflect inter-dealer prices, without retail mark-up, markdown, or
commission, and may not necessarily reflect actual transactions. All price
information in the following table has been adjusted retroactively to reflect
the recent 10% stock dividend for distribution on March 18, 1999, as well as two
six-for-five stock splits effected in the form of 20% stock dividends
distributed on March 27, 1999 and April 15, 1998. As of December 31, 1999, there
were approximately 300 holders of record of the Common Stock. On February 29,
2000, the closing price of a share of Common Stock on the Nasdaq/NMS was $5.50.
Year Quarter High Low
---- ------- ---- ---
1999............... 4th $ 7.75 $ 5.06
3rd 8.88 6.25
2nd 9.13 7.06
1st 11.94 8.19
1998............... 4th $ 9.89 $ 7.85
3rd 10.28 7.62
2nd 12.05 9.55
1st 12.12 9.56
1997............... 4th $10.42 $ 8.34
3rd 8.90 8.05
2nd 9.09 6.44
1st 7.76 5.91
Stock Repurchase Program
Effective June 21, 1999, the Company's stock repurchase program,
originally announced on August 24, 1998 and established for the period through
and including June 30, 1999 has been extended to December 31, 1999. The
aggregate amount of stock to be repurchased will be determined by market
conditions, but will not exceed 4.9% of the Company's issued and outstanding
stock, or approximately 297,000 shares. As of December 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 158,832 options was funded
from such block transaction purchases.
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. At the
present time, the Company does not foresee paying cash dividends to shareholders
and intends to retain all earnings to fund the growth of the Company and the
Banks. The Company paid a 10% Stock Dividend on March 18, 1999 as well as 20%
stock dividends on March 27, 1998 and April 15, 1997. The payment of dividends
in the future, if any, will depend upon earnings, capital levels, cash
requirements, the financial condition of the Company and the Banks, applicable
government regulations and policies and other factors deemed relevant by the
Company's Board of Directors, including the amount of cash dividends payable to
the Company by the Banks. The principal source of income and cash flow for the
Company, including cash flow to pay cash dividends on the Common Stock, is
dividends from the Banks. Various federal and state laws, regulations and
policies limit the ability of the Banks to pay cash dividends to the Company.
For certain limitations on the Banks' ability to pay cash dividends to the
Company, see item 3 "Supervision and Regulation".
20 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Item 6: Selected Financial Data
The information required by this Item is incorporated by reference from
the Company's 1999 Annual Report to Shareholders.
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is management's discussion and analysis of the significant
changes in the Company's results of operations, financial condition and capital
resources presented in the accompanying consolidated financial statements of
Republic First Bancorp, Inc. This discussion should be read in conjunction with
the accompanying notes to the consolidated financial statements.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may", "believes", "expect", "estimate", "project", "anticipate",
"should", "intend", "probability", "risk", "target", "objective" and similar
expressions or variations on such expressions. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. For example, risks and uncertainties can arise with changes in:
general economic conditions, including their impact on capital expenditures;
business conditions in the financial services industry; the regulatory
environment, including evolving banking industry standards; rapidly changing
technology and competition with community, regional and national financial
institutions; new service and product offerings by competitors and price
pressures; the inability of the Company to accurately estimate the cost of
systems preparation for Year 2000 compliance; and similar items. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise or update these forward-looking statements to
reflect events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the year ended December 31, 1998,
Quarterly Reports on Form 10-Q filed by the Company in 1999, and any Current
Reports on Form 8-K filed by the Company, as well as similar filings in 2000.
Results of Operations for the years ended December 31, 1999 and 1998
Overview
The Company's net income increased $836,000, or 22%, to $4.6 million for
the year ended December 31, 1999, from $3.8 million for the year ended December
31, 1998. The earnings increased primarily due to an increase in net interest
income and higher non-interest income, partially offset by higher recurring
non-interest expenses. Diluted earnings per share for the year ended December
31, 1999 were $0.74 compared to $0.59, for the year ended December 31, 1998 due
to higher net income during 1999 compared to 1998.
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily upon the
Banks' net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is affected by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities. The following table
provides an analysis of net interest income on an annualized basis, setting
forth for the periods (i) average assets, liabilities, and shareholders' equity,
(ii) interest income earned on interest-earning assets and interest expense paid
on interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and average rates paid on interest-bearing liabilities, and (iv) the
Banks' net interest margin (net interest income as a percentage of average total
interest-earning assets). All averages are computed based on daily balances.
Non-accrual loans are included in average loans receivable. Yields are not
presented on a tax equivalent basis.
REPUBLIC FIRST BANCORP Annual Report 1999 | 21
<PAGE>
<TABLE>
<CAPTION>
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate (1) Balance Expense Rate (1) Balance Expense Rate (1)
------- ------- -------- ------- ------- -------- ------- ------- --------
For the Year For the Year For the Year
Ended Ended Ended
(Dollars in thousands) December 31, 1999 December 31, 1998 December 31, 1997
-------------------------------- ------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold ......... $ 640 $ 33 5.16% $ 3,948 $ 216 5.47% $ 5,452 $ 304 5.58%
Securities ................. 197,026 12,518 6.35% 185,976 12,348 6.64% 94,047 6,360 6.76%
Loans receivable (3) ....... 325,544 26,897 8.26% 248,479 21,840 8.79% 183,246 16,869 9.21%
-------- -------- -------- -------- -------- --------
Total interest-earning assets . 523,210 39,448 7.54% 438,403 34,404 7.85% 282,745 23,533 8.32%
Other assets .................. 19,740 28,548 11,440
-------- -------- --------
Total assets .................. $542,950 $466,951 $294,185
======== ======== ========
Interest-bearing liabilities:
Demand - non-interest
bearing .................. $ 30,507 $ 0 N/A $ 31,260 $ 0 N/A $ 25,551 $ 0 N/A
Demand - interest-bearing .. 13,752 186 1.35% 13,727 343 2.50% 8,428 211 2.50%
Money market & savings ..... 45,547 1,714 3.76% 41,157 1,173 2.85% 34,141 982 2.88%
Time deposits .............. 193,430 11,296 5.84% 191,829 11,687 6.09% 174,887 10,349 5.92%
-------- -------- -------- -------- -------- --------
Total deposits ................ 283,236 13,196 4.66% 277,973 13,203 4.75% 243,007 11,542 4.75%
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 252,729 13,196 5.22% 246,713 13,203 5.35% 217,456 11,542 5.31%
-------- -------- -------- -------- -------- --------
Other borrowings .............. 214,975 11,316 5.26% 143,094 7,642 5.34% 23,832 1,370 5.75%
-------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities ................ 467,704 24,512 5.24% 389,807 20,845 5.35% 241,288 12,912 5.35%
-------- -------- -------- -------- -------- --------
Total deposits and
other borrowings ........... 498,211 24,512 4.92% 421,067 20,845 4.95% 266,839 12,912 4.84%
-------- -------- -------- -------- -------- --------
Non-interest-bearing
liabilities ................ 8,380 8,666 6,255
Shareholders' equity .......... 36,359 37,218 21,091
-------- -------- --------
Total liabilities and
shareholders' equity ....... $542,950 $466,951 $294,185
======== ======== ========
Net interest income .......... $ 14,936 $ 13,559 $ 10,621
======== ======== ========
Net interest spread ........... 2.62% 2.90% 3.48%
==== ==== ====
Net interest margin (2) ....... 2.85% 3.09% 3.76%
==== ==== ====
<FN>
(1) Yields on investments are calculated based on amortized cost.
(2) Represents the difference between interest earned and interest paid, divided
by average total interest earning assets.
(3) Includes loans held for sale.
</FN>
</TABLE>
The Company's net interest margin decreased 24 basis points to 2.85% for
the year ended December 31, 1999 from 3.09% for the year ended December 31,
1998. This decease was primarily due to a decrease in the yield on
interest-earning assets. The average yield on interest-earning assets decreased
31 basis points to 7.54% for the year ended December 31, 1999 from 7.85% for the
year ended December 31, 1998. The average rate on interest-bearing liabilities
decreased 11 basis points from 5.35% from the year ended December 31, 1998 to
5.24% for the year ended December 31, 1999.
The Company's net interest income increased $1.4 million, or 10.2%, to
$14.9 million for the year ended December 31, 1999 from $13.6 million for the
year ended December 31, 1998. The increase in net interest income was primarily
due to an increase in average interest-earning assets as a result of increased
business development. The Company's total interest income increased $5.0
million, or 14.7%, to $39.4 million for the year ended December 31, 1999 from
$34.4 million for the year ended December 31, 1998. Interest and fees on loans
increased $5.1 million, or 23.2%, to $26.9 million for the year ended December
31, 1999 from $21.8 million for the year ended December 31, 1998, largely as a
result of an increase in average loan balances of $77.1 million, or 31.0%, to
$325.5 million for the year ended December 31, 1999 from $248.5 million for the
year ended
22 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
December 31, 1998. The yield on the loan portfolio decreased 53 basis points to
8.26% for the year ended December 31, 1999 from 8.79% for the year ended
December 31, 1998. This decrease was due primarily to the Banks residential
mortgage portfolios increasing approximately $40.0 million on average during
1999. These loans generally have a lower yield than the existing loan portfolio,
therefore, incremental growth in the residential mortgage portfolio has had a
negative impact on the yield on total loans. Interest and dividend income on
securities increased $170,000, or 1.4%, to $12.5 million for the year ended
December 31, 1999. This increase in investment income was the result of a
combination of an increase in the average balance of securities owned of $11.1
million, or 5.9%, to $197.0 million for the year ended December 31, 1999 from
$186.0 million for the year ended December 31, 1998, partially offset by a
decrease in yield on securities of 29 basis points to 6.35% for the year ended
December 31, 1999 from 6.64% for the year ended December 31, 1998. This was due
in part to the sale of certain higher yielding investment securities during the
third and fourth quarters of 1998, as well as accelerated prepayments on higher
yielding mortgage backed securities in early 1999, as a result of the decline in
mortgage interest rates. The sale of these investment securities will have a
negative impact on future security investment yields, if the securities sold are
not replaced with equal or higher yielding securities.
The Company's total interest expense increased $3.7 million, or 17.6%, to
$24.5 million for the year ended December 31, 1999 from $20.8 million the year
ended December 31, 1998. This increase was due to an increase in the volume of
average interest-bearing liabilities of $77.9 million, or 20.0% $467.7 million
for year ended December 31, 1999 from $389.8 million for the year ended December
31, 1998. The average rate paid on interest-bearing liabilities decreased 11
basis points to 5.24% for the year ended December 31, 1999 from 5.35% for the
year ended December 31, 1998. The average rate paid on deposits and other
borrowings decreased slightly from 4.95% for the year ended December 31, 1998,
to 4.92% for the year ended December 31, 1999 as other borrowed funds, which
have a higher cost than the Banks' deposit base, became a greater percentage of
interest bearing liabilities.
Interest expense on time deposits decreased $391,000, or 3.3%, to $11.3
million for the year ended December 31, 1999 from $11.7 million for the year
ended December 31, 1998. This decrease was mainly due to a decrease in the
average rates paid on certificates of deposit from 6.09% for the year ended
December 31, 1998 to 5.85% for the year ended December 31, 1999.
Interest expense on other borrowings, which include federal funds
purchased and FHLB advances increased $3.7 million to $11.3 million for the year
ended December 31, 1999, from $7.6 million for the year ended December 31, 1998.
In 1999, average earning assets increased by $84.8 million of which $71.9
million was funded by other borrowings.
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 Banks' loan
portfolio. The evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans, the results of the most recent regulatory
examination, current economic conditions and trends that may affect the
borrower's ability to pay. The provision for loan losses increased $510,000 to
$880,000 for the year ended December 31, 1999 from $370,000 for the year ended
December 31, 1998 in part due to an increase in total loans outstanding of $53.7
million as of December 31, 1999 compared to the prior year amount.
Non-performing assets were 0.47% of total assets or $2,754,000 at December 31,
1999, compared to 0.36% of total assets or $1,841,000 at December 31, 1998.
Loans past due 30 to 89 days were 0.98% of total loans or $3,572,000 at December
31, 1999, compared to 0.59% of total loans or $1,832,00 at December 31, 1998.
Non-Interest Income
Total other income increased $660,000, or 21.0%, to $3.8 million for the
year ended December 31, 1999 from $3.1 million for the year ended December 31,
1998. The increase was due primarily to a $330,000 increase in Tax Refund
Program income associated with an increase in Tax Refund Product sales in the
1999 tax return season compared to the 1998 tax return season and an increase in
service fees and other income of $518,000 from $572,000 for the year ended
December 31, 1998 to $1,090,000 for the year ended December 31, 1999 as a result
of higher service charges on deposit accounts and prepayment penalty fees on
loans. These increases in 1999 over 1998 amounts are partially offset by gains
the Company realized on the sale of investment securities of $188,000 for the
year ended December 31, 1998.
Non-Interest Expenses
Total other expenses decreased $440,000, or 3.9%, to $10.9 million for the
year ended December 31, 1999 from $11.3 million for the year ended December 31,
1998. Non interest expenses were higher in 1998 then 1999 due primarily to the
loss the Company recorded on its mortgage banking affiliate of $1,617,000. This
loss was primarily due to the devaluation of the affiliate mortgage banking
company's mortgage servicing portfolio as a result of significant prepayment of
the underlying
REPUBLIC FIRST BANCORP Annual Report 1999 | 23
<PAGE>
loans. There was no such loss during 1999. Offsetting this reduction in expense,
during 1999 the Company recorded $233,000 in legal expenses as settlement of a
legal matter and wrote down its only OREO property by $75,000. Salaries and
benefits increased $564,000 or 11.3%, to $5.5 million for the year ended
December 31, 1999 from $5.0 million for the year ended December 31, 1998. The
increase was due primarily to an increase in staff associated with business
development efforts. Occupancy and equipment expenses increased a combined
$219,000, or 14.6%, to $1.7 million for the year ended December 31, 1999 from
$1.5 million for the year ended December 31, 1998. Other operating expenses
encompass all expenses not otherwise categorized, and include items such as data
processing costs, advertising costs, printing and supplies, insurance and other
miscellaneous expenses. The increases in other operating expenses of $331,000
(after adjusting for the items mentioned above) was due to overall growth of the
Company.
Provision for Income Taxes
The provision for income taxes increased $647,000, or 39.1%, to $2.3
million for the year ended December 31, 1999 from $1.7 million for the year
ended December 31, 1998. This increase is mainly the result of the increase in
pre-tax income from 1998 to 1999. The Company also recorded for 1999 and 1998,
$31,000 of tax benefit and $207,000 of tax expense in connection with the
cumulative effect of a change in accounting principle upon the adoption of SOP
98-5 on January 1, 1999 and SFAS No. 133, respectively.
Results of Operations for the Years ended December 31, 1998 and 1997
The Company's net interest margin decreased 67 basis points to 3.09% for
the year ended December 31, 1998 from 3.76% for the year ended December 31,
1997. This decease was primarily due to a decrease in the yield on
interest-earning assets. The average yield on interest-earning assets decreased
47 basis points to 7.85% for the year ended December 31, 1998 from 8.32% for the
year ended December 31, 1997. The average rate on interest-bearing liabilities
remained unchanged at 5.35% from the year ended December 31, 1997 to December
31, 1998.
The Company's net interest income increased $2.9 million, or 27.7%, to
$13.6 million for the year ended December 31, 1998 from $10.6 million for the
year ended December 31, 1997. The increase in net interest income was primarily
due to an increase in average interest-earning assets due, in part, to a series
of structured leveraged investment securities transactions amounting to $100
million and also as a result of increased business development. These securities
transactions were made possible through borrowings at the Federal Home Loan Bank
of Pittsburgh. The Bank continues to be well capitalized, from the leveraged and
risk based capital guidelines. The Company's total interest income increased
$10.9 million, or 46.2%, to $34.4 million for the year ended December 31, 1998
from $23.5 million for the year ended December 31, 1997. Interest and fees on
loans increased $5.0 million, or 29.5%, to $21.8 million for the year ended
December 31, 1998 from $16.9 million for the year ended December 31, 1997,
largely as a result of an increase in average loan balances of $65.2 million, or
35.6%, to $248.5 million for the year ended December 31, 1998 from $183.2
million for the year ended December 31, 1997. The yield on the loan portfolio
decreased 42 basis points to 8.79% for the year ended December 31, 1998 from
9.21% for the year ended December 31, 1997. This decrease was due primarily to
the decrease in the prime rate of 75 basis points. Additionally, the Banks
residential mortgage portfolio increased approximately $68.0 million during
1998. These loans generally have a lower yield than the existing loan portfolio,
therefore, incremental growth in the residential mortgage portfolio has had a
negative impact on the yield on total loans. Also contributing to the increase
in total interest income was an increase in interest and dividend income on
securities of $6.0 million, or 94.1%, to $12.3 million for the year ended
December 31, 1998 from $6.4 million for the year ended December 31, 1997. This
increase in investment income was the result of a combination of an increase in
the average balance of securities owned of $91.9 million, or 97.8%, to $186.0
million for the year ended December 31, 1998 from $94.0 million for the year
ended December 31, 1997, partially offset by a decrease in yield on securities
held of 12 basis points to 6.64% for the year ended December 31, 1998 from 6.76%
for the year ended December 31, 1997. This was due in part to the sale of
certain higher yielding investment securities during the third and fourth
quarters of 1998, as well as accelerated prepayments on higher yielding mortgage
backed securities throughout 1998, as a result of the decline in mortgage
interest rates. The sale of these investment securities will have a negative
impact on future security investment yields, if the securities sold are not
replaced with equal or higher yielding securities.
The increase in the average balance of securities is the result of
leveraged funding programs employed by the Company that used Federal Home Loan
Bank ("FHLB") advances to fund securities purchases. The purpose of these
programs is to target growth in net interest income while managing liquidity,
credit, market and interest rate risk. From time to time, a specific leveraged
funding program may attempt to achieve current earnings benefits by funding
security portfolio increases partially with short-term FHLB advances with the
expectation that future growth in deposits will replace the FHLB advances at
maturity.
The Company's total interest expense increased $7.9 million, or 61.4%, to
$20.8 million for the year ended December 31, 1998 from $12.9 million for the
year ended December 31, 1997. This increase was due to an increase in the volume
of average
24 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
interest-bearing liabilities of $148.5 million, or 61.6%, to $389.8 million for
the year ended December 31, 1998 from $241.3 million for the year ended December
31, 1997. The average rate paid on interest-bearing liabilities remained
unchanged at 5.35% for the year ended December 31, 1998 and 1997. The average
rate paid on deposits and other borrowings increased slightly from 4.84% for the
year ended December 31, 1997, to 4.95% for the year ended December 31, 1998 as
other borrowed funds, which have a higher cost than the Banks' deposit base,
became a greater percentage of interest bearing liabilities.
Interest expense on time deposits increased $1.3 million, or 12.8%, to
$11.7 million for the year ended December 31, 1998 from $10.3 million for the
year ended December 31, 1997. This increase was due to an increase in the
average volume of certificates of deposit in the amount of $16.9 million, or
9.7%, to $191.8 million for the year ended December 31, 1998 from $174.9 million
for the year ended December 31, 1997.
Interest expense on other borrowings, which include federal funds
purchased and FHLB advances increased $6.3 million to $7.6 million for the year
ended December 31, 1998, from $1.4 million for the year ended December 31, 1997.
In 1998, $94.6 million of FHLB advances funded purchases of securities and
origination of loans as part of an ongoing leveraged funding program designed to
increase earnings while also managing interest rate risk and liquidity.
Additionally, the Company utilized FHLB borrowings to fund the Tax Refund
Program in 1998 and 1997. The Company used brokered certificates of deposit to
fund the Tax Refund Program in 1997.
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 Banks' loan
portfolio. The evaluations take into consideration such factors as changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans, the results of the most recent regulatory
examination, current economic conditions and trends that may affect the
borrower's ability to pay. The provision for loan losses increased $50,000, or
15.6%, to $370,000 for the year ended December 31, 1998 from $320,000 for the
year ended December 31, 1997 due to an increase in total loans outstanding of
$97.1 million as of December 31, 1998 compared to the prior year amount.
Non-performing assets were 0.36% of total assets or $1,841,000 at December 31,
1998, compared to 1.03% of total assets or $3,857,000 at December 31, 1997.
Loans past due 30 to 89 days were 0.59% of total loans or $1,832,000 at December
31, 1998, compared to 1.43% of total loans or $3,032,000 at December 31, 1997.
Non-Interest Income
Total other income increased $520,000, or 19.8%, to $3.1 million for the
year ended December 31, 1998 from $2.6 million for the year ended December 31,
1997. The increase was due primarily to a $148,000 increase in Tax Refund
Program income associated with an increase in Tax Refund Product sales in the
1998 tax return season compared to the 1997 tax return season and an increase in
service fees and other income of $184,000 from $388,000 for the year ended
December 31, 1997 to $572,000 for the year ended December 31, 1998 as a result
of higher service charges on deposit accounts and prepayment penalty fees on
loans. Additionally, the Company realized gains on the sale of investment
securities of $188,000 for the year ended December 31, 1998, not including gains
of $628,000 realized during the third quarter of 1998, which are presented as a
cumulative effect of a change in accounting principle, upon the adoption of
Statement of Financial Accounting Standards No. 133. There were no gains
realized during 1997.
Non-Interest Expenses
Total other expenses increased $3.5 million, or 45.0%, to $11.3 million
for the year ended December 31, 1998 from $7.8 million for the year ended
December 31, 1997. The Company recorded a loss on its mortgage banking affiliate
of $1,617,000. This loss was primarily due to the devaluation of the affiliate
mortgage banking company's mortgage servicing portfolio as a result of
significant prepayment of the underlying loans. Salaries and benefits increased
$898,000 or 22.0%, to $5.0 million for the year ended December 31, 1998 from
$4.1 million for the year ended December 31, 1997. The increase was due
primarily to an increase in staff associated with the expansion of the branches
and business development staff, as well as the accrual of severance for the
Company's former Chief Executive Officer. Occupancy expenses increased $322,000,
or 45.9%, to $1.0 million for the year ended December 31, 1998 from $702,000 for
the year ended December 31, 1997 as a result of opening an additional branch
office, and the relocation of the Banks' main office during 1998. Other
operating expenses encompass all expenses not otherwise categorized, and include
items such as data processing costs, advertising costs, printing and supplies,
insurance and other miscellaneous expenses. The increases in other operating
expenses of $433,000 was due to overall growth of the Bank and increased
expenses related to the operations of new branch offices. Professional fees
increased $273,000 from $503,000 for the year ended December 31, 1997 to
$776,000 for the year ended December 31, 1998. This was primarily due to legal
expenses associated with credit workouts and certain fraud and branch robbery
expenses.
REPUBLIC FIRST BANCORP Annual Report 1999 | 25
<PAGE>
Provision for Income Taxes
The provision for income taxes increased $72,000, or 4.5%, to $1.7 million
for the year ended December 31, 1998 from $1.6 million for the year ended
December 31, 1997. This increase is mainly the result of the increase in pre-tax
income from 1997 to 1998. The Company also recorded $207,000 of tax expense in
connection with the cumulative effect of a change in accounting principle upon
the adoption of SFAS No. 133.
Financial Condition
December 31, 1999 Compared to December 31, 1998
Total assets increased $70 million, or 13.6%, to $586.3 million at
December 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 net increases in borrowings and deposits in the year ended December
31, 1999. Net loans, including loans held for sale, increased $52.8 million, or
17.2%, to $359.6 million at December 31, 1999 from $306.8 million at December
31, 1998. Net investment securities increased $9.8 million, or 5.5%, to $187.3
million at December 31, 1999 from $177.6 million at December 31, 1998. The
increase was due primarily to the purchase of $25 million in securities as part
of the Company's leveraged funding strategy which is intended to increase
earnings.
Cash and due from banks, interest-bearing deposits which are held at the
Federal Home Loan Bank of Pittsburgh, and federal funds sold are all liquid
funds. The aggregate amount in these three categories increased by $2.8 million,
to $21.1 million at December 31, 1999 from $18.3 million at December 31, 1998.
Bank premises and equipment, net of accumulated depreciation, increased
$1.0 million to $5.0 million at December 31, 1999 from $4.0 million at December
31, 1998. The increase was mainly attributable to the new branch office for the
Delaware Bank.
Total liabilities increased $71.6 million, or 14.9%, to $551.3 million at
December 31, 1999 from $479.7 million at December 31, 1998. During the year
ended December 31, 1999, deposits, the Company's primary source of funds,
increased $22.7 million, or 8.0%, to $305.8 million at December 31, 1999 from
$283.1 million at December 31, 1998. The aggregate of transaction accounts,
which include demand, money market and savings accounts, increased $16.0
million, or 18.1%, to $103.9 million at December 31, 1999 from $87.9 million at
December 31, 1998. Certificates of deposit increased by $6.8 million, or 3.5%,
to $201.9 million at December 31, 1999 from $195.1 million at December 31, 1998.
Other borrowings increased $48.6 million, to $236.6 million at December
31, 1999 from $188.0 million at December 31, 1998. The increase was primarily
the result of the Company's funding balance sheet growth, particularly in loans.
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Company typically defines interest-sensitive assets and interest-sensitive
liabilities as those that reprice within one year or less. Maintaining an
appropriate match is a method of avoiding wide fluctuations in net interest
margin during periods of changing interest rates.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods, and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP ratio suggests that a financial institution
may be better positioned to take advantage of declining interest rates rather
than increasing interest rates, and a positive GAP ratio suggests the converse.
Static gap analysis describes interest rate sensitivity at a point in
time. However, it alone does not accurately measure the magnitude of changes in
net interest income since changes in interest rates do not impact all categories
of assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also involves assumptions on certain categories of assets and deposits.
For purposes of interest rate sensitivity analysis, assets and liabilities are
stated at either their contractual maturity, estimated likely call date, or
earliest repricing opportunity. Mortgage-backed securities and amortizing loans
are scheduled based on their anticipated cash flow which also considers
prepayments based on historical data and current market trends. Savings
accounts, including passbook, statement savings, money market, and NOW accounts,
do not have a stated maturity or repricing term and can be withdrawn or repriced
at any time. This may impact the Company's margin if more expensive alternative
sources of deposits are required to fund loans or deposit runoff. Management
projects the repricing characteristics of these accounts based on historical
performance and assumptions that it believes reflect their rate sensitivity.
Therefore, for purposes of the gap analysis, these deposits are not considered
to reprice simultaneously. Accordingly, a portion of the deposits are moved into
time brackets exceeding one year.
26 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
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 Company 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 Company's interest rate
sensitivity GAP at December 31, 1999. For purposes of these tables, the Company
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.
Republic First Bancorp
Interest Sensitive Gap
At December 31, 1999
<TABLE>
<CAPTION>
More Financial
0-90 91-180 181-365 1-2 2-3 3-4 4-5 than 5 Statement Fair
Days Days Days Years Years Years Years Years Total Value
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Sensitive Assets:
Securities and interest
bearing balances due
from banks........... $ 26,092 $ 6,362 $ 13,379 $ 20,895 $ 19,448 $ 18,142 $ 16,973 $ 66,016 $187,308 $187,323
Average interest rate. 6.12% 6.39% 6.44% 6.44% 6.43% 6.42% 6.42% 7.51%
Loans receivable (1)..... 121,659 10,706 22,091 36,426 33,367 28,941 31,092 75,323 359,605 359,376
Average interest rate. 8.91% 8.44% 8.36% 8.30% 8.35% 8.32% 8.16% 7.36%
Total ................ 147,751 17,068 35,470 57,321 52,815 47,083 48,065 141,339 546,913 546,699
-------- -------- -------- --------- --------- --------- -------- -------- -------- --------
Cumulative Totals $147,751 $164,819 $200,289 $ 257,611 $ 310,426 $ 357,509 $405,574 $546,913
======== ======== ======== ========= ========= ========= ======== ========
Interest Sensitive
Liabilities:
Demand Interest Bearing.. $ 405 $ 406 $ 819 $ 1,665 $ 1,703 $ 1,742 $ 1,781 $ 10,652 $ 19,174 $ 19,174
Average interest rate. 1.09% 1.09% 1.09% 1.09% 1.09% 1.09% 1.09% 1.09%
Savings Accounts......... 101 103 208 422 432 442 452 2,702 4,863 4,863
Average interest rate. 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% 1.93% 1.93%
Money Market Accounts.... 28,118 361 728 1,480 1,514 1,548 1,584 9,470 44,804 44,804
Average interest rate. 3.70% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10% 4.10%
Time Deposits............ 40,209 30,439 58,263 67,076 1,657 3,894 359 2 201,899 202,286
Average interest rate. 5.68% 5.50% 5.64% 5.74% 5.68% 5.85% 4.90% 5.83%
FHLB Borrowings.......... 76,640 -- 25,000 117,500 17,500 -- -- -- 236,640 233,511
Average interest rate. 5.50% 0.00% 4.82% 5.97% 5.58% 0.00% 0.00% 0.00%
-------- -------- -------- --------- --------- --------- -------- -------- -------- --------
Total ................ 145,474 31,309 85,018 188,144 22,806 7,626 4,176 22,827 507,380 504,638
-------- -------- -------- --------- --------- --------- -------- -------- -------- --------
Cumulative Totals........ $145,474 $176,783 $261,801 $ 449,945 $ 472,751 $ 480,377 $484,553 $507,380
======== ======== ======== ========= ========= ========= ======== ========
Interest Rate
sensitivity GAP....... $ 2,277 $(14,241) $(49,548) $(130,823) $ 30,009 $ 39,457 $ 43,889 $118,512
Cumulative GAP........... $ 2,277 $(11,964) $(61,512) $(192,334) $(162,325) $(122,868) $(78,979) $ 39,533
Interest Sensitive Assets/
Interest Sensitive
Liabilities........... 101.57% 54.51% 41.72% 30.47% 231.58% 617.40% 1150.98% 619.17%
Cumulative GAP/
Total Earning Assets.. 0% -2% -11% -35% -30% -22% -14% 7%
Total Earning Assets.. $546,913
========
Off balance sheet items
notional value:
Commitments to
extend credit....... $ 141 $ 17,359
-------- --------
Average interest rate. 7.75% 8.25%
<FN>
(1) Includes loans held for sale.
</FN>
</TABLE>
REPUBLIC FIRST BANCORP Annual Report 1999 | 27
<PAGE>
In addition to the GAP analysis, the Company utilizes income simulation
modeling in measuring its interest rate risk and managing its interest rate
sensitivity. Income simulation considers not only the impact of changing market
interest rates on forecasted net interest income, but also other factors such a
yield curve relationships, the volume and mix of assets and liabilities and
general market conditions.
Through the use of income simulation modeling the Company has calculated
an estimate of net interest income for the year ending December 31, 2000, based
upon the assets, liabilities and off-balance sheet financial instruments in
existence at December 31, 1999. The Company has also estimated changes to that
estimated net interest income based upon immediate and sustained changes in the
interest rates ("rate shocks"). Rate shocks assume that all of the interest rate
increases or decreases occur on the first day of the period modeled and remain
at that level for the entire period. The following tables reflects the estimated
percentage change in estimated net interest income for the years ending December
31:
Percent change
-------------------------
Rate shocks to interest rates 1999 1998
----------------------------- ---- ----
+2% (1.9%) (2.0%)
+1% (1.2) (2.0)
-1% 0.1 0.0
-2% 1.0 0.0
The Company's management believes that the assumptions utilized in
evaluating the Company's estimated net interest income are reasonable; however,
the interest rate sensitivity of the Company's assets, liabilities and
off-balance sheet financial instruments as well as the estimated effect of
changes in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from the experience on which the assumptions were based.
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 14.17% and 12.54% at December 31,
1999 and 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 December 31, 1999 and 1998 was 13.15% and
11.76%, respectively. At December 31, 1999, and 1998, 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 December 31, 1999 and
1998, the Company's leverage ratio was 7.30% and 7.50%, respectively.
Accordingly, at December 31, 1999 and 1998, the Company was considered "well
capitalized" under FRB and FDIC regulations.
The shareholders' equity of the Company as of December 31, 1999 totaled
approximately $35,040,000 compared to approximately $36,622,000 as of December
31, 1998. This decrease of $1,582,000 was mainly attributable to the change in
the unrealized loss on securities of $6,631,000 partially offset by net income
for the year of approximately $4,634,000.
Book value per share of the Company's common stock decreased from $6.22 as
of December 31, 1998 to $5.68 as of December 31, 1999 based upon 6,168,729 and
5,883,188 shares outstanding, respectively. The decrease was primarily
attributable to the change in unrealized losses on securities partially offset
by net income for the year.
28 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Regulatory Capital Requirements
Federal banking agencies impose three minimum capital requirements on the
Company's risk-based capital ratios based on total capital, "Tier 1 capital, and
a leverage capital ratio. The risk-based capital ratios measure the adequacy of
a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level or
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
The following table presents the Company's regulatory capital ratios at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
To be well
For Capital capitalized under
Actual Adequacy Purposes FRB capital guidelines
------------------ ------------------- ----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1999
Total risk based capital
First Republic Bank.............. 37,591 11.75% 25,593 8.00% 31,992 10.00%
Republic First Bank of DE.............. 3,086 34.52% 715 8.00% 894 10.00%
Republic First Bancorp, Inc............ 44,646 14.17% 25,202 8.00% 31,503 10.00%
Tier one risk based capital
First Republic Bank.............. 34,469 10.77% 12,797 4.00% 19,195 6.00%
Republic First Bank of DE........ 3,000 33.55% 358 4.00% 536 6.00%
Republic First Bancorp, Inc...... 41,438 13.15% 12,601 4.00% 18,902 6.00%
Tier one leveraged capital
First Republic Bank.............. 34,469 6.14% 28,049 5.00% 28,049 5.00%
Republic First Bank of DE........ 3,000 40.70% 369 5.00% 369 5.00%
Republic First Bancorp, Inc...... 41,438 7.30% 28,369 5.00% 28,369 5.00%
At December 31, 1998
Total risk based capital
First Republic Bank.............. 31,904 10.32% 24,725 8.00% 30,906 10.00%
Republic First Bancorp, Inc...... 38,784 12.54% 24,746 8.00% 30,932 10.00%
Tier one risk based capital
First Republic Bank.............. 29,509 9.55% 12,363 4.00% 18,544 6.00%
Republic First Bancorp, Inc...... 36,389 11.76% 12,373 4.00% 18,559 6.00%
Tier one leveraged capital
First Republic Bank.............. 29,509 6.08% 24,263 5.00% 24,263 5.00%
Republic First Bancorp, Inc...... 36,389 7.50% 24,263 5.00% 24,263 5.00%
</TABLE>
Management believes that the Company and Banks meet as of December 31,
1999 and 1998, all capital adequacy requirements to which they are subject. As
of December 31, 1999 and 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 Banks' category.
The Company and the Banks' ability to maintain the required levels of
capital is substantially dependent upon the success of their capital and
business plans, the impact of future economic events on the Banks' loan
customers and the Banks' ability to manage its interest rate risk and control
its growth and other operating expenses.
In addition to the above minimum capital requirements, the Federal Reserve
Bank approved a rule that became effective on December 19, 1992 implementing a
statutory requirement that federal banking regulators take specified "prompt
corrective action" when an insured institution's capital level falls below
certain levels. The rule defines five capital categories based on several of the
above capital ratios. The Banks currently exceed the levels required for a bank
to be classified as "well capitalized". However, the Federal Reserve Bank may
consider other criteria when determining such classifications, which
consideration could result in a downgrading in such classifications.
REPUBLIC FIRST BANCORP Annual Report 1999 | 29
<PAGE>
The Company's equity-to-assets ratio decreased from 7.09% as of December
31, 1998 to 5.98% as of December 31, 1999. The Company's daily average
equity-to-assets ratio for calendar year 1999 was 6.70% compared to 7.97% for
the same period in 1998. Management anticipates that its equity-to-assets ratio
will be maintained at approximately the current level. The Company's average
return on equity for 1999, 1998 and 1997 was 11.8%, 10.2% and 16.8%,
respectively; and its average return on assets for 1999, 1998 and 1997 was
0.85%, 0.81% and 1.21%, respectively.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, take advantage of market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. Sources of asset
liquidity are provided by cash and amounts due from banks, interest-bearing
deposits with banks, and federal funds sold.
The Company's liquid assets totaled $21.1 million at December 31, 1999
compared to $18.3 million at December 31, 1998. Maturing and repaying loans are
another source of asset liquidity. At December 31, 1999, the Bank estimated that
an additional $38.4 million of loans will mature or repay in the next six-month
period ended June 30, 2000.
Liquidity can be met by attracting deposits with competitive rates, buying
federal funds or utilizing the facilities of the Federal Reserve System or the
Federal Home Loan Bank System. At December 31, 1999, the Bank had $27.4 million
in unused lines of credit available to it under 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 December 31, 1999, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $19.5 million. Certificates of
deposit which are scheduled to mature within one year totaled $128.9 million at
December 31, 1999, and borrowings that are scheduled to mature within the same
period amounted to $26.6 million. The Company anticipates that it will have
sufficient funds available to meet its current commitments.
The Banks' target and actual liquidity levels are determined and managed
based on Management's comparison of the maturities and marketability of the
Banks' 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
Banks' liquidity needs. The Bank has established a line of credit from its
correspondent to assist in managing the Banks' liquidity position. Such line of
credit totaled $5.0 million at December 31, 1999. Additionally, the Bank has
established a line of credit with the Federal Home Loan Bank of Pittsburgh with
a maximum borrowing capacity of approximately $259.1 million. As of December 31,
1999 and 1998, the Company had borrowed $236.6 and $180.5, respectively, under
its lines of credit. The Company's Board of Directors has appointed an
Asset/Liability Committee to assist Management in establishing parameters for
investments.
Cash flows from operations have provided a source of liquidity to the
Company for the last two years. Operating cash flows are primarily derived from
cash provided from net income during the year. Cash used in investment
activities for the years ended December 31, 1999, 1998, and 1997 were primarily
due to the investing of excess and borrowed funds into investment securities.
Cash was provided by financing activities during 1999, 1998 and 1997, as the
Bank has grown its deposit base and increased its borrowings to fund anticipated
loan growth.
The Banks' 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 Banks' 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 Bank does not have the ability to quickly increase yield on its
interest earning assets, primarily investment securities and fixed rate
commercial loans. An increase in interest rates generally could have a negative
effect on the Bank, due to the timing difference between repricing the Banks'
liabilities, primarily short term certificates of deposit, fed funds purchased
and money market accounts. As of December 31, 1999, 28.7% of the Banks'
interest-bearing liabilities were to mature, and be repriceable, within three
months, and an additional 6.2% were to mature and be repriceable, within three
to six months.
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.
30 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Securities Portfolio
The Company's securities portfolio is intended to provide liquidity,
reduce interest rate risk and contribute to earnings while reducing the
Company's exposure credit risk. The securities portfolio has grown substantially
through the use of leverage provided by FHLB advances.
A summary of securities available for sale and securities held to maturity
at December 31, 1999, 1998, and 1997 follows.
<TABLE>
<CAPTION>
Securities Available for Sale at December 31,
---------------------------------------------
(Dollars in thousands)
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
U.S. Government Agencies........................... $ 2,662 $ 3,000 $ 2,943
CMOs/Mortgage Back Securities (1).................. 176,694 157,579 0
-------- -------- -------
Total amortized cost of securities................. $179,356 $160,579 $ 2,943
-------- -------- -------
Total fair value of securities..................... $169,285 $160,554 $ 2,950
-------- -------- -------
Securities Held to Maturity at December 31,
(Dollars in thousands)
1999 1998 1997
-------- -------- -------
U.S. Government Agencies........................... $ 1,621 $ 1,300 $ 56,331
CMOs/Mortgage Back Securities (1).................. 1,747 5,601 83,028
Other securities (2)............................... 14,655 10,097 5,671
-------- -------- --------
Total amortized cost of securities................. $ 18,023 $ 16,998 $145,030
-------- -------- --------
Total fair value of securities..................... $ 18,038 $ 16,982 $145,908
-------- -------- --------
<FN>
(1) All of these obligations consist of U.S. Government Agency issued
securities.
(2) Comprised mostly of FHLB stock and Federal Reserve Bank stock.
</FN>
</TABLE>
The following table presents the contractual maturity distribution and
weighted average yield of the securities portfolio of the Company at December
31, 1999. Mortgage backed securities are presented without consideration of
amortization or prepayments.
<TABLE>
<CAPTION>
Securities Available for Sale at December 31, 1999
----------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years Past 10 Years Total
--------------- ----------------- ----------------- --------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agencies...... $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00% $ 0 0.00%
CMOs / Mortgage-backed
securities................. 0 0.00% 1,733 5.18% 0 0.00% 174,961 6.92% 176,694 6.90%
Other securities.............. 0 0.00% 0 0.00% 2,662 6.47% 0 0.00% 2,662 6.47%
---- ---- ------ ---- ------ ---- -------- ---- -------- ----
Total AFS securities.......... $ 0 0.00% $1,733 5.18% $2,662 6.47% $174,961 6.92% $179,356 6.45%
==== ==== ====== ==== ====== ==== ======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
Securities Held to Maturity at December 31, 1999
----------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years Past 10 Years Total
--------------- ----------------- ----------------- --------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agencies......$1,251 4.65% $ 343 8.73% $ 0 0.00% $ 27 6.63% $ 1,621 5.55%
CMOs / Mortgage-backed
securities................. 0 0.00% 0 0.00% 0 0.00% 1,747 7.47% 1,747 7.47%
Other securities.............. 0 0.00% 761 6.27% 200 6.24% 13,694 7.16% 14,655 7.10%
------ ---- ------ ---- ------ ---- -------- ---- -------- ----
Total HTM securities..........$1,251 4.65% $ 761 7.03% $ 200 6.24% $ 15,811 7.20% $ 18,023 7.00%
====== ==== ====== ==== ====== ==== ======== ==== ======== ====
</TABLE>
REPUBLIC FIRST BANCORP Annual Report 1999 | 31
<PAGE>
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 Banks' commercial loans average from
$250,000 to $1,000,000 in amount.
The Company's net loans increased $52.8 million, or 17.2%, to $359.6
million at December 31, 1999 from $306.8 million at December 31, 1998, which
were primary funded by an increase in borrowed funds.
The following table sets forth the Company's gross loans by major
categories for the periods indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------
(Dollars in thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial:
Real estate secured (1).......................... $183,783 $132,185 $ 87,701 $ 62,016 $34,353
Non-real estate secured/unsecured................ 41,067 41,980 42,519 45,007 23,183
-------- -------- -------- -------- -------
Total commercial........................... 224,850 174,165 130,220 107,023 57,536
Residential real estate.......................... 136,129 133,158 78,366 61,240 26,781
Consumer and other............................... 1,834 1,840 3,441 3,831 1,546
-------- -------- -------- -------- -------
Total loans, net of unearned income........ $362,813 $309,163 $212,027 $172,094 $85,863
======== ======== ======== ======== =======
<FN>
____________
(1) Includes loans held for sale
</FN>
</TABLE>
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of the dates indicated,
which are due in (i) one year or less, (ii) more than one year through five
years and (iii) over five years, is shown in the following table. Loan balances
are also categorized according to their sensitivity to changes in interest
rates: (dollars in thousands).
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------
(Dollars in thousands)
One Year More Than One Year Over Total
or Less Through Five Years Five Years Loans
------- ------------------ ---------- -----
<S> <C> <C> <C> <C>
Total Commercial................................. $80,757 $ 94,070 $ 50,023 $224,850
Total Residential................................ 12,844 31,601 91,684 136,129
Total Other...................................... 267 1,567 -- 1,834
------- -------- -------- --------
Total (1).............................. $93,868 $127,238 $141,707 $362,813
======= ======== ======== ========
Loans with Fixed Rate............................ 38,146 95,077 121,563 254,786
Loans with Floating Rate......................... 55,722 32,161 20,144 108,027
------- -------- -------- --------
Total (1)............................. $93,868 $127,238 $141,707 $362,813
======= ======== ======== ========
Percent Comp by Maturity......................... 25.87% 35.07% 39.06% 100.00%
Fixed Loans as Percent of Total.................. 40.64 74.73 85.78 70.22
Float Loans as Percent of Total.................. 59.36 25.27 14.22 29.78
<FN>
____________
(1) Includes loans held for sale
</FN>
</TABLE>
32 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
In the ordinary course of business, loans maturing within one year may be
renewed, in whole or in part, as to principal amount, at interest rates
prevailing at the date of renewal.
At December 31, 1999, 70.2% of total loans were fixed rate compared to
72.6% at December 31, 1998.
Credit Quality
The Banks' 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 bi-monthly to ensure that proper standards
are maintained.
Loans, including impaired loans, are generally classified as non-accrual
if they are past due as to maturity or payment of interest or principal 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) 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.
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accruing, but past due 90 days or more........... $ 333 $ 121 $ 113 $ 27 $ 11
Non-accrual loans...................................... 1,778 1,002 1,800 1,892 526
Total non-performing loans............................. 2,111 1,123 1,913 1,919 537
Foreclosed real estate................................. 643 718 1,944 295 295
------ ------ ------ ------ -----
Total non-performing assets(1)................... $2,754 $1,841 $3,857 $2,214 $ 832
====== ====== ====== ====== =====
Non-performing loans as a percentage of total
loans, net of unearned income (1)(2)................ 0.58% 0.36% 0.90% 1.12% 0.63%
Non-performing assets as a percentage of total assets.. 0.47% 0.36% 1.03% 0.81% 0.63%
<FN>
____________
(1) Non-performing loans are comprised of (i) loans that are on a non-accrual
basis, (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans. Non-performing assets are composed of non-performing
loans and foreclosed real estate (assets acquired in foreclosure).
(2) Includes loans held for sale.
</FN>
</TABLE>
Potential problem loans consist of loans that are included in performing
loans, but for which potential credit problems of the borrowers have caused
management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At December 31, 1999, all
identified potential problem loans are included in the preceding table.
REPUBLIC FIRST BANCORP Annual Report 1999 | 33
<PAGE>
The following summary shows the impact on interest income of
non-performing loans for the periods indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income that would have been recorded
had the loans been in accordance with their
original terms ................................... $189,000 $79,000 $279,000 $135,000 $48,000
Interest income included in net income ............. $ 0 $55,000 $ 0 $60,000 $ 0
</TABLE>
At December 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 $80.6 million, which
represented 22.2% of gross loans receivable. Loan concentrations are considered
to exist when there are amounts loaned to a multiple number of borrowers engaged
in similar activities that would cause them to be similarly impacted by economic
or other conditions.
Foreclosed real estate is initially recorded at the lower of cost or fair
value, net of estimated selling costs at the date of foreclosure, thereby
establishing a new carrying basis. After foreclosure, valuations are
periodically performed by management and, if necessary, the carrying value of
assets is further adjusted based on the lower of cost or fair value, less
estimated costs to sell. Revenues and expenses from operations and changes in
the valuation allowance are included in other expenses.
The Bank had no credit exposure to "highly leveraged transactions" at
December 31, 1999, as defined by the FRB.
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for the
years ended December 31, 1999, 1998, 1997, 1996, and 1995 is as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ..................... $ 2,395 $ 2,028 $ 2,092 $ 680 $ 650
Charge-offs:
Commercial ....................................... 91 76 383 293 162
Real estate ...................................... 0 0 67 0 50
Consumer ......................................... 117 34 31 98 0
-------- -------- -------- -------- --------
Total charge-offs .............................. 208 110 481 391 212
-------- -------- -------- -------- --------
Recoveries:
Commercial ....................................... 124 13 18 101 16
Real estate ...................................... 0 0 67 0 2
Consumer ......................................... 17 94 12 19 1
-------- -------- -------- -------- --------
Total recoveries ............................... 141 107 97 120 19
-------- -------- -------- -------- --------
Net charge-offs .................................... 67 3 384 271 193
-------- -------- -------- -------- --------
Acquisition of ExecuFirst .......................... 0 0 0 1,528 0
Provision for loan losses .......................... 880 370 320 155 233
-------- -------- -------- -------- --------
Balance at end of period ......................... $ 3,208 $ 2,395 $ 2,028 $ 2,092 $ 680
======== ======== ======== ======== ========
Average loans outstanding(1) ..................... $322,363 $246,678 $183,246 $132,294 $ 78,489
As a percent of average loans(1):
Net charge-offs .................................. 0.02% 0.00% 0.21% 0.20% 0.25%
Provision for loan losses ........................ 0.27 0.15 0.17 0.12 0.28
Allowance for loan losses ........................ 1.00 0.97 1.11 1.58 0.87
Allowance for loan losses to:
Total loans, net of unearned income .............. 0.90% 0.79% 0.96% 1.22% 0.79%
Total non-performing loans ....................... 151.97% 213.27% 106.01% 109.02% 126.63%
<FN>
____________
(1) Includes non-accruing loans.
</FN>
</TABLE>
34 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Management makes a monthly determination as to an appropriate provision
from earnings necessary to maintain an allowance for loan losses that is
adequate for known and inherent losses. The Company's Board of Directors
periodically reviews the status of all non-accrual and impaired loans and loans
criticized by the Banks' regulators or internal loan review officer, who reviews
both the loan portfolio and the overall adequacy of the allowance for loan loss.
During the review of the allowance for loan losses, the Board of Directors
considers specific loans, pools of similar loans, historical charge-off
activity, and a reserve allocation to provide for imperfections in the
methodology used by management in determining the loan loss reserve
requirements. The sum of these components is compared to the loan loss reserve
balance. Any additions deemed necessary to the loan loss reserve balance are
charged to operating expenses.
The Company has an existing loan review program which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
and is reported quarterly to the Board of Directors. The Board of Directors
reviews the findings of the loan review program on a monthly basis. Based on the
recommendations of this program, past performance of the Banks' loan portfolio
and general economic conditions, Management believes that the reserve for loan
losses is reasonable and would be adequate to absorb known and inherent losses.
Determining the appropriate level of the allowance for loan losses at any
given date is difficult, particularly in a continually changing economy. In
Management's opinion, the allowance for loan losses was adequate at December 31,
1999. 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 Banks' management is unable to determine in what loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for loan losses among various categories. At
December 31, 1999, approximately 81.8% of the allowance for loan losses is
allocated to protect the Bank against known and inherent losses. The allocation
is based upon historical experience. The entire allowance for loan losses is
available to absorb loan losses in any loan category (dollars in thousands):
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ----------------- ---------------- ----------------- ------------------
Percent Percent Percent Percent Percent
Of Loans Of Loans Of Loans Of Loans Of Loans
In Each In Each In Each In Each In Each
Category to Category to Category to Category to Category to
Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1)
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocation of allowance
for loan losses:
Commercial (2) .........$2,119 61.98% $1,638 56.33% $1,595 61.42% $1,573 62.19% $161 67.01%
Residential real estate 423 37.54 391 43.07 41 36.96 21 35.59 40 31.19
Consumer and other ..... 84 0.51 71 0.60 58 1.62 90 2.22 9 1.80
Unallocated ............ 582 295 334 408 470
------ ------ ------ ------ ----
Total ...............$3,208 $2,395 $2,028 $2,092 $680
====== ====== ====== ====== ====
<FN>
____________
(1) Gross loans net of unearned income and allowance for loan loss.
(2) Includes loans held for sale.
</FN>
</TABLE>
The unallocated allowance increased $287,000 to $582,000 at December 31,
1999 from $295,000 at December 31, 1998. Management determined a higher level of
unallocated allowance at December 31, 1999 was required primarily as the result
of the increase in non-performing loans.
The recorded investment in loans for which impairment has been recognized
in accordance with SFAS 114 totaled $1,778,000, 1,002,000 and $1,800,000 at
December 31, 1999 and 1998 and 1997 respectively, of which $1,425,000, $576,000,
and $764,000 respectively, related to loans with no valuation allowance because
the loans have been partially written down through charge-offs. Loans with
valuation allowances at December 31, 1999, 1998 and 1997 were $353,000,
$426,000, and $1,152,000 respectively, and the amount of such valuation
allowance was $104,000, $143,000, and $231,000, respectively. For the years
ended December 31, 1999, 1998 and 1997, the average recorded investment in
impaired loans was approximately $1,390,000, $1,441,000, and $1,809,000,
respectively. During 1999 and 1998, the Bank recognized interest income of $0
and $55,000, respectively on impaired loans. The Bank did not recognize any
interest income on impaired loans during 1997. There were no commitments to
extend credit to any borrowers with impaired loans as of the end of the periods
presented herein.
REPUBLIC FIRST BANCORP Annual Report 1999 | 35
<PAGE>
The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at
December 31, 1999 and 1998, in the aggregate principal amount of $3,403,000 and
$1,297,000 respectively; and (ii) 60 to 89 days past due, at December 31, 1999
and 1998 in the aggregate principal amount of $169,000 and $386,000
respectively.
In addition, the Bank has classified certain loans as substandard and
doubtful, in accordance with definitions used by banking regulatory agencies. At
December 31, 1999 and 1998, substandard loans totaled approximately $2,172,000
and $1,382,000 respectively; and doubtful loans totaled approximately $274,000
and $0 respectively.
The following table is an analysis of the change in Other Real Estate
Owned for the years ended December 31, 1999 and 1998.
1999 1998
--------- -----------
Balance at January 1, .............. $ 718,000 $ 1,944,000
Additions, net ..................... 0 718,000
Sales .............................. 0 (1,944,000)
Write Downs ........................ (75,000) 0
--------- -----------
Balance at December 31, ............ $ 643,000 $ 718,000
========= ===========
Deposit Structure
Of the total daily average deposits of approximately $283.2 million held
by the Bank during the year ended December 31, 1999, approximately $30.5
million, or 10.7%, represented non-interest bearing deposits, compared to
approximately $31.3 million, or 11.3%, of approximately $278.0 million total
daily average deposits during 1998. Total deposits at December 31, 1999
consisted of approximately $35.0 million in non-interest-bearing demand
deposits, approximately $19.2 million in interest-bearing demand deposits,
approximately $49.7 million in savings deposits and money market accounts,
approximately $141.4 million in time deposits under $100,000, and approximately
$60.5 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 Banks' deposit liabilities may fluctuate from
period-to-period.
The following table is a distribution of the average balances of the
Banks' deposits and the average rates paid thereon, for the twelve month periods
ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
(Dollars in thousands)
1999 1998 1997
------------------- ------------------------ ---------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Money market & savings deposits .......... $ 45,547 3.77% $ 41,157 2.85% $ 34,141 2.88%
Time deposits ............................ 193,430 5.84% 191,928 6.09% 174,886 5.92%
Demand deposits, interest-bearing ........ 13,752 1.35% 13,727 2.50% 8,428 2.50%
Total interest-bearing deposits .......... $252,730 5.22% $246,713 5.35% $217,455 5.31%
</TABLE>
The following is a breakdown, by contractual maturities, of the Company's
time certificates of deposit issued in denominations of $100,000 or more as of
December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
Certificates of Deposit
------------------------------------------
(Dollars in thousands)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Maturing in:
Three months or less .............................. $11,575 $14,229 $ 9,896
Over three months through six months .............. 10,695 7,756 8,726
Over six months through twelve months ............. 24,135 3,365 7,233
Over twelve months ................................ 14,049 0 2,719
------- ------- -------
TOTAL ........................................... $60,454 $25,350 $28,574
======= ======= =======
</TABLE>
36 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
The following is a breakdown, by contractual maturities of the Company's
time certificate of deposits for the years 2000 through 2004 and beyond (dollars
in thousands).
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Totals
---- ---- ---- ---- ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Time certificates of deposit $128,911 $67,076 $1,657 $3,894 $361 $201,899
======== ======= ====== ====== ==== ========
</TABLE>
Commitments
In the normal course of their business, the Banks make commitments to
extend credit and issue standby letters of credit. Generally, such commitments
are provided as a service to 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
requirements. 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 December 31, 1999 and 1998, firm loan commitments approximated
$17.5 million and $20.1 million respectively and commitments of standby letters
of credit approximated $2,394,000 and $1,912,000, respectively.
Year 2000 Issue
The Year 2000 challenge faces all users of automated systems, including
information systems. Many computer systems process data using only two digits to
represent the year of a transaction, rather than storing the full four-digit
year. If renovations were not done to these systems, they may not operate
properly when the last two digits become "00", which occurred on January 1,
2000. The problem could affect a wide variety of automated systems, including
mainframe systems, personal computers, application processing systems, resource
allocation systems, communication systems, environmental systems, and other
information systems. These potential shortcomings could result in system failure
or miscalculations causing disruptions of operations.
While lingering concern exists about certain dates during Year 2000, the
most significant date, January 1, 2000 has passed without incident. As of the
date of this filing The Company has not experienced any significant Year 2000
problems relating to its internal or third party computer systems. Nor has the
Company experienced any issues regarding the ability of commercial customers to
meet debt service as a result of Year 2000 issues. The Company will continue to
monitor systems for problems in the future, however the cost related to that
process are not expected to be significant. The total anticipated cost for Year
2000 compliance is under $100,000.
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.
The following tables are summary unaudited income statement information
for each of the quarters ended during 1999 and 1998.
REPUBLIC FIRST BANCORP Annual Report 1999 | 37
<PAGE>
Summary Selected Consolidated Financial Data
<TABLE>
<CAPTION>
For the Quarter Ended, 1999
----------------------------------------------------
Dollars in thousands, except per share data Fourth Third Second First
------ ----- ------ -----
<S> <C> <C> <C> <C>
Income Statement Data:
Total interest income .............................................. $10,449 $10,114 $ 9,751 $ 9,134
Total interest expense ............................................. 6,583 6,252 6,002 5,675
------- ------- ------- -------
Net interest income ................................................ 3,866 3,862 3,749 3,459
Provision for loan losses .......................................... 210 210 210 250
Net non-interest income/(expense) .................................. (2,242) (2,434) (2,423) 42
Federal income tax expense ......................................... 462 403 366 1,071
------- ------- ------- -------
Net income before a cumulative change in accounting principle ...... 952 815 750 2,180
Cumulative effect of a change in accounting principle (net of tax) . 0 0 0 (63)
------- ------- ------- -------
Net income ......................................................... $ 952 $ 815 $ 750 $ 2,117
======= ======= ======= =======
Per Share Data:
Basic:
Income before cumulative change in accounting principle ............ $0.15 $0.13 $0.13 $0.37
Cumulative effect of change in accounting principle ................ $0.00 $0.00 $0.00 ($0.01)
------- ------- ------- -------
Net income ......................................................... $0.15 $0.13 $0.13 $0.36
===== ===== ===== =======
Diluted:
Income before cumulative change in accounting principle ............ $0.15 $0.13 $0.12 $0.35
Cumulative effect of change in accounting principle ................ $0.00 $0.00 $0.00 ($0.01)
------- ------- ------- -------
Net income ......................................................... $0.15 $0.13 $0.12 $0.34
===== ===== ===== =======
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended, 1998
------------------------------------------------
Dollars in thousands, except per share data Fourth Third Second First
------ ----- ------ -----
<S> <C> <C> <C> <C>
Income Statement Data:
Total interest income .............................................. $8,723 $8,814 $8,791 $8,076
Total interest expense ............................................. 5,456 5,419 5,401 4,569
------ ------ ------ ------
Net interest income ................................................ 3,267 3,395 3,390 3,507
Provision for loan losses .......................................... 80 80 80 130
Net non-interest income/(expense) .................................. (2,554) (3,675) (2,110) 182
Federal income tax expense/(benefit) ............................... 199 (119) 396 1,179
Net income/(loss) before a cumulative change in
accounting principle ............................................. 434 (241) 804 2,380
------ ------ ------ ------
Cumulative effect of a change in accounting principle (net of tax) . 0 421 0 0
------ ------ ------ ------
Net income ......................................................... $ 434 $ 180 $ 804 $2,380
====== ====== ====== ======
Per Share Data:
Basic:
Income/(loss) before cumulative change in accounting principle ..... $0.07 $(0.04) $0.14 $0.39
Cumulative effect of change in accounting principle ................ 0.00 0.07 0.00 0.00
----- ------ ----- -----
Net income ......................................................... $0.07 $ 0.03 $0.14 $0.39
===== ====== ===== =====
Diluted:
Income/(loss) before cumulative change in accounting principle ..... $0.07 $(0.04) $0.13 $0.37
Cumulative effect of change in accounting principle ................ 0.00 0.07 0.00 0.00
----- ------ ----- -----
Net income ......................................................... $0.07 $ 0.03 $0.13 $0.37
===== ====== ===== =====
</TABLE>
38 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Item 8: Financial Statements
The financial statements of the Company begin on Page 44.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable.
PART III
Item 10: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from
the definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 1999 annual meeting of shareholders scheduled for
April 25, 2000.
Item 11: Executive Compensation
The following table shows the annual compensation of the Chief Executive
Officer of the Company and the Bank and the Banks' most highly compensated
executive officers for the fiscal years 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Restricted Securities
Other Stock Underlying LTIP All Other
Annual Awards Options Payouts Annual
Name & Principal Position Year Salary Bonus Comp Options ($) SARs (#) ($) Comp
- ------------------------- ---- ------ ----- ---- ------- --- -------- --- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Robert D. Davis 1999 $154,807 $ $ 0 44,000 $ 0 0
Chief Executive Officer 1998 N/A N/A N/A N/A N/A N/A
and President of the Bank 1997 N/A N/A N/A N/A N/A N/A
James V. Schermerhorn 1999 $ 92,307 $ $ 0 40,000 $ 0 0
Executive Vice President and 1998 N/A N/A N/A N/A N/A N/A
Chief Lending Officer of the 1997 N/A N/A N/A N/A N/A N/A
Company and the Bank
Jerome D. McTiernan 1999 $110,000 $ 0 $ 0 0 $ 0 0
Executive Vice President of 1998 110,000 15,000 0 2,640 0 0
the Company and the Bank 1997 100,000 10,000 0 0 0 0
George S. Rapp 1999 $125,000 $25,000 $ 0 5,500 $ 0 0
Executive Vice President and 1998 125,000 30,000 0 6,600 0 0
Chief Financial Officer of the 1997 112,500 25,000 0 0 0 0
Company and the Bank
Jere A. Young 1999 $125,000 $25,000 $ 0 0 $ 0 0
Chief Executive Officer and 1998 68,750 N/A 0 41,250 0 0
President of the Company 1997 N/A N/A 0 N/A N/A N/A
Robert Mazzei 1999 $ 89,597 $26,002 $ 0 0 $ 0 0
Vice Chairman of the Bank 1998 126,800 34,245 0 0 0 0
1997 120,750 8,087 0 0 0 0
</TABLE>
George S. Rapp currently serves as Executive Vice President and Chief
Financial and Administrative Officer of the Company and the Bank under the terms
of an employment agreement (the "Rapp Agreement"). The Rapp Agreement provides
that Mr. Rapp is employed as Executive Vice President and Chief Financial and
Administrative Officer of the Company and the Bank at an annual base salary of
$125,000. The Company and the Bank may terminate the Rapp Agreement on one
year's notice, and Mr. Rapp
REPUBLIC FIRST BANCORP Annual Report 1999 | 39
<PAGE>
may terminate this Agreement upon 30 days' notice. Mr. Rapp is also eligible to
receive an annual bonus at the discretion of the Board of Directors and to
participate in any executive or employee stock option, bonus or other
compensation plan and all other employee benefit plans. The Company provides Mr.
Rapp with an automobile allowance and the reimbursement of certain expenses
related to the use of such automobile in connection with his employment.
Jerome D. McTiernan currently serves as Executive Vice President of the
Bank under the terms of an employment agreement (the "McTiernan Agreement"). The
McTiernan Agreement provides that Mr. McTiernan is employed as Executive Vice
President at an annual base salary of $110,000, until terminated by the Bank or
Mr. McTiernan. The Agreement may be terminated by the Bank on twelve months'
written notice or by Mr. McTiernan on 30 days' notice. Mr. McTiernan is also
eligible to receive an annual bonus at the discretion of the Board of Directors
and to participate in the Company's Stock Option Plan and all other employee
benefit plans. The Company maintains a life insurance policy for the benefit of
Mr. McTiernan's designated beneficiaries and provides him with use of an
automobile and the reimbursement of certain expenses related to the use of such
automobile in connection with his employment.
Jere A. Young currently serves as President and Chief Executive Officer of
the Company under the terms of an employment agreement (the "Young Agreement").
The Young Agreement provides that Mr. Young is employed as President and Chief
Executive Officer at an annual base salary of $125,000, until terminated by the
Company or Mr. Young. The Agreement may be terminated by the Company or by Mr.
Young on six months' written notice or by Mr. Young on 30 days' notice. In
addition, Mr. Young is entitled to: (i) reimbursement for entertainment and
travel expenses in connection with his duties, (ii) participate in any bonus,
stock purchase or grant, stock option, deferred compensation or other
compensation plans maintained by the Company or for its senior executives; (iii)
receive such basic medical, hospitalization and major medical insurance coverage
for himself and his dependents as the Bank or the Company maintains for its
executives; and (iv) a monthly automobile allowance. Mr. Young is also eligible
to receive an annual bonus at the discretion of the Board of Directors. The
Company maintains a life insurance policy for the benefit of Mr. Young's
designated beneficiaries. If Mr. Young's employment is terminated for reasons
other than for engaging in conduct detrimental to the Bank, Mr. Young will be
entitled to receive his annual salary for six months and benefits for certain
specified periods of time. The Young Agreement provides for the non-disclosure
by Mr. Young of confidential information acquired by him in the context of his
employment
Harry D. Madonna currently serves as Chairman of the Board and the
Executive Committee of both the Company and the Bank, under the terms of an
Agreement, as amended December 22, 1998, (the "Madonna Agreement"). The Madonna
Agreement provides that Mr. Madonna will serve as the Chairman of the Board and
the Executive Committee of both the Company and the Bank, respectively, for a
term equal to the lesser of three (3) years or his current term as a director of
the Company, or until terminated by the Company or Mr. Madonna. In addition,
under the terms of the Madonna Agreement, Mr. Madonna is entitled to
reimbursement of certain fees and expenses relating to the discharge of his
responsibilities as Chairman of the Company and to participate in any bonus,
stock option, compensation or other benefit plans now or hereafter available for
any other member of the Board or previously granted to Mr. Madonna. Upon the
occurrence of certain fundamental changes in the Company, as set forth in the
Madonna Agreement, Mr. Madonna will have the right for a period of ninety (90)
days following the date the fundamental changes occur to terminate the Madonna
Agreement. Such termination will be effective ten (10) days after such
notification, at which time Mr. Madonna will be entitled to receive a payment of
$250,000, to be paid within fifteen (15) days of such notification, together
with the transfer of the automobile then made available to Mr. Madonna, free of
all liabilities, liens and encumbrances. In addition, all stock options
previously granted to Mr. Madonna will become fully vested on the date of such
termination. The Madonna Agreement provides for the non-disclosure by Mr.
Madonna of confidential information acquired by him in the context of his
services to the Company and the Bank.
Robert D. Davis currently serves as President and Chief Executive Officer
of First Republic Bank, under the terms of an employment agreement (the "Davis
Agreement"). The Davis Agreement provides that Mr. Davis is employed as
President and Chief Executive Officer at an annual base salary of $175,000,
until terminated by the Company or Mr. Davis. The Agreement may be terminated by
the Company or by Mr. Davis at will. In addition, Mr. Davis is entitled to: (i)
reimbursement for entertainment and travel expenses in connection with his
duties, (ii) participate in any bonus, stock purchase or grant, stock option,
deferred compensation or other compensation plans maintained by the Company or
for its senior executives; (iii) receive such basic medical, hospitalization and
major medical insurance coverage for himself and his dependents as the Bank or
the Company maintains for its executives; and (iv) a monthly automobile
allowance. Mr. Davis is also eligible to receive a one time annual bonus of at
$25,000 upon the completion of one year of service to the Company, plus any
additional bonuses which will be at the discretion of the Board of Directors.
The Company maintains a life insurance policy for the benefit of Mr. Davis's
designated beneficiaries. If Mr. Davis's employment is terminated for reasons
other than for engaging in conduct detrimental to the Bank, Mr. Davis will be
entitled to receive his annual salary for six months and benefits for certain
specified periods of time. The Davis Agreement provides for the non-disclosure
by Mr. Davis of confidential information acquired by him in the context of his
employment
40 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
James V. Schermerhorn currently serves as Executive Vice President, Chief
Lending Officer of First Republic Bank, under the terms of an employment
agreement (the "Schermerhorn Agreement"). The Schermerhorn Agreement provides
that Mr. Schermerhorn is employed as Executive Vice President, Chief Lending
Officer of First Republic Bank at an annual base salary of $150,000. The Bank
may terminate the agreement by giving 90 days written notice to Mr.
Schermerhorn, however, may not terminate the agreement prior to May 23, 2002.
Mr. Schermerhorn is also entitled to receive a guaranteed bonus of no less than
$35,000 under the terms of the Banks' Commercial Incentive Plan. In connection
with Mr. Schermerhorn's exercising his rights under a stock option with his
former employer during 1999, the Bank has agreed to pay to Mr. Schermerhorn an
amount equal to the excess of his 1999 federal income tax liability over the
amount such liability would have been had he not exercised his options. The Bank
has also established a irrevocable grantor trust of $45,000 in connection with
the funding of a deferred compensation plan. In addition, Mr. Schermerhorn is
entitled to: (i) reimbursement for entertainment and travel expenses in
connection with his duties, (ii) participate in any bonus, stock purchase or
grant, stock option, deferred compensation or other compensation plans
maintained by the Company or for its senior executives; (iii) receive such basic
medical, hospitalization and major medical insurance coverage for himself and
his dependents as the Bank or the Company maintains for its executives as well
as long term disability for three years; and (iv) a monthly automobile
allowance. The Company maintains a life insurance policy for the benefit of Mr.
Schermerhorn's designated beneficiaries. If Mr. Schermerhorn's employment is
terminated for reasons of death or disability, Mr. Schermerhorn (or his estate),
will receive the compensation he had been receiving immediately prior to his
termination, for a period 90 days. The Schermerhorn Agreement provides for the
non-disclosure by Mr. Schermerhorn of confidential information acquired by him
in the context of his employment.
Item 12: Security Ownership of Certain Beneficial Owners and Management
AGGREGATED OPTION EXERCISES FOR THE YEAR ENDED DECEMBER 31, 1999
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
(d) # of Securities
Underlying Unexercised
(b) Shares Acquired (c) Value Options at FYI-End (#)
(a) Name on Exercise (#) Realized ($) Exercisable Unexercisable
--------- --------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Eustace Mita 38,120 $ 87,676 1,100 0
Harris Wildstein 80,941 246,753 0 0
Ken Adelberg 33,348 80,740 1,320 0
Michael Bradley 23,760 115,474 0 0
William Batoff 25,412 58,448 1,100 0
</TABLE>
The Company's director compensation plan throughout 1999 provided that
each director would receive $500 for each Board meeting and $250 for each
Committee meeting attended. Pursuant to such plan, a total of $110,100 in
director fees was accrued and a total of $88,000 was paid for services rendered
during 1999; no director received more than $15,200.
Other information required by this Item is incorporated by reference from
the definitive proxy materials of the Company to be filed with the Securities
and Exchange Commission in connection with the Company's 1999 annual meeting of
shareholders scheduled for April 25, 2000.
Item 13: Certain Relationships and Related Transactions
Certain of the directors of the Company and/or their affiliates have loans
outstanding from the Bank. All such loans were made in the ordinary course of
the Banks' business; were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons; and, in the opinion of management, do not
involve more than the normal risk of collectibility or present other unfavorable
features.
REPUBLIC FIRST BANCORP Annual Report 1999 | 41
<PAGE>
Item 14: Exhibits and Reports on Form 8-K
A. Financial Statements .......................................Page 44
(1) Report of Independent Accountants.
(2) Consolidated Balance Sheets as of December 31, 1999 and 1998.
(3) Consolidated Statements of Income for the years ended December
31, 1999, 1998 and 1997.
(4) Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.
(5) Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income/(Loss) for the years ended December 31,
1999, 1998 and 1997.
(6) Notes to Consolidated Financial Statements.
B. Exhibits
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-K for an annual
report on Form 10-K)
Exhibit No.
10(a) Employment agreement between the Company and James V.
Schermerhorn (confidential treatment)
10(b) Employment agreement between the Company and Robert D. Davis
(confidential treatment)
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 commenced operations June 1,
1999. The Delaware Bank is a commercial bank chartered
pursuant to the laws of the State of Delaware. The Bank and
the Delaware Bank are both members of the Federal Reserve
System and their primary federal regulators are the Federal
Reserve Board of Governors.
23.1 Consent of Independent Certified Public Accountants.
(a) Consent of KPMG LLP
27 Financial Data Schedule.
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes thereto.
Reports on Form 8-K
None.
42 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania.
REPUBLIC FIRST BANCORP, INC. [registrant]
Date: March 23, 2000 By: /s/ Jere A. Young
-------------------------------
Jere A. Young
President and
Chief Executive Officer
Date: March 23, 2000 By: /s/ George S. Rapp
-------------------------------
George S. Rapp,
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Date: March 23, 2000 /s/ Eustace W. Mita
--------------------------------
Eustace W. Mita, Director
/s/ Harris Wildstein, Esq.
--------------------------------
Harris Wildstein, Esq., Director
/s/ Neal I. Rodin
--------------------------------
Neal I. Rodin, Director
/s/ James E. Schleif
--------------------------------
James E. Schleif, Director
/s/ Steven J. Shotz
--------------------------------
Steven J. Shotz, Director
/s/ Sheldon E. Goldberg
--------------------------------
Sheldon E. Goldberg, Director
/s/ Harry D. Madonna
--------------------------------
Harry D. Madonna, Director
/s/ Kenneth Adelberg
--------------------------------
Kenneth Adelberg, Director
/s/ William Batoff
--------------------------------
William Batoff, Director
/s/ Michael Bradley
--------------------------------
Michael Bradley, Director
REPUBLIC FIRST BANCORP Annual Report 1999 | 43
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
REPUBLIC FIRST BANCORP, INC.
Page
Report of Independent Accountants ...........................................45
Consolidated Balance Sheets as of December 31, 1999 and 1998 ................46
Consolidated Statements of Income
for the years ended December 31, 1999, 1998 and 1997 ...................47
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 ...................48
Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income/(Loss) for the
years ended December 31, 1999, 1998 and 1997 ...........................50
Notes to Consolidated Financial Statements ..................................51
REPUBLIC FIRST BANCORP Annual Report 1999 | 44
<PAGE>
KPMG
1600 Market Street
Philadelphia, PA 19103-7212
Independent Auditors' Report
The Board of Directors
Republic First Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of Republic First
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income/(loss), and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Republic First
Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
As more fully described in Note 3 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities on July 1, 1998.
/s/ KPMG LLP
Philadelphia, Pennsylvania
January 27, 2000
REPUBLIC FIRST BANCORP Annual Report 1999 | 45
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS:
Cash and due from banks........................................................... $ 20,789 $ 18,169
Interest-- bearing deposits with banks............................................ 321 126
-------- --------
Total cash and cash equivalents............................................. 21,110 18,295
Securities available for sale, at fair value...................................... 169,285 160,554
Securities held to maturity, at amortized cost
(fair value of $18,038 and $16,982, respectively).............................. 18,023 16,998
Loans held for sale............................................................... 4,857 7,204
Loans receivable, (net of allowance for loan losses of $3,208 and
$2,395, respectively).......................................................... 354,748 299,564
Premises and equipment, net....................................................... 5,013 3,990
Real estate owned, net............................................................ 643 718
Accrued income and other assets................................................... 12,651 9,038
-------- --------
Total Assets................................................................ $586,330 $516,361
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand-- non-interest-bearing..................................................... $ 35,053 $ 32,537
Demand-- interest-bearing......................................................... 19,174 20,155
Money market and savings.......................................................... 49,667 35,250
Time.............................................................................. 141,445 169,792
Time over $100,000................................................................ 60,454 25,350
-------- --------
Total Deposits.............................................................. 305,793 283,084
Other borrowings.................................................................. 236,640 188,009
Accrued expenses and other liabilities............................................ 8,857 8,646
-------- --------
Total Liabilities........................................................... 551,290 479,739
-------- --------
Commitments and contingencies
Shareholders' Equity:
Common stock, par value $0.01 per share; 20,000,000 shares authorized; shares
issued and outstanding 6,343,901 and 6,102,792 as of
December 31, 1999 and 1998, respectively....................................... 63 61
Additional paid in capital........................................................ 32,083 26,510
Retained earnings................................................................. 11,082 11,996
Treasury stock at cost (175,172 and 219,604 shares, respectively)................. (1,541) (1,929)
Accumulated other comprehensive (loss)............................................ (6,647) (16)
-------- --------
Total Shareholders' Equity.................................................. 35,040 36,622
-------- --------
Total Liabilities and Shareholders' Equity.................................. $586,330 $516,361
======== ========
</TABLE>
(See notes to consolidated financial statements)
46 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1999, 1998 and 1997
(dollars in thousands, except for per share data)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans ......................................... $26,897 $21,840 $16,869
Interest on federal funds sold ..................................... 33 216 304
Interest on deposits in banks ...................................... 4 3 0
Interest and dividends on investments .............................. 12,514 12,345 6,360
------- ------- -------
39,448 34,404 23,533
------- ------- -------
Interest expense:
Demand - interest bearing .......................................... 186 343 211
Money market and savings ........................................... 1,714 1,173 982
Time ............................................................... 9,177 10,165 8,708
Time over $100,000 ................................................. 2,119 1,522 1,641
Other borrowings ................................................... 11,316 7,642 1,370
------- ------- -------
24,512 20,845 12,912
------- ------- -------
Net interest income ..................................................... 14,936 13,559 10,621
Provision for loan losses ............................................... 880 370 320
------- ------- -------
Net interest income after provision for loan losses ..................... 14,056 13,189 10,301
------- ------- -------
Non-interest income:
Service fees ....................................................... 984 238 220
Gain on securities sold ............................................ 0 188 0
Tax Refund Program revenue ......................................... 2,715 2,385 2,237
Other income ....................................................... 106 334 168
------- ------- -------
3,805 3,145 2,625
------- ------- -------
Non-interest expenses:
Salaries and employee benefits ..................................... 5,543 4,979 4,081
Occupancy expenses ................................................. 1,085 1,024 702
Equipment .......................................................... 638 480 513
Professional fees .................................................. 531 776 503
Loss on Mortgage banking affiliate ................................. 0 1,617 0
Other operating expenses ........................................... 3,065 2,426 1,993
------- ------- -------
10,862 11,302 7,792
------- ------- -------
Income before income taxes .............................................. 6,999 5,032 5,134
Provision for income taxes .............................................. 2,302 1,655 1,583
------- ------- -------
Income before cumulative effect of a change in accounting principle ..... 4,697 3,377 3,551
Cumulative effect of a change in accounting principle (Notes 2 and 3) ... (63) 421 0
------- ------- -------
Net Income .............................................................. $ 4,634 $ 3,798 $ 3,551
======= ======= =======
Net income per share:
Basic:
Income before cumulative effect of a change in accounting principle. $0.78 $0.56 $0.75
Cumulative effect of a change in accounting principle (Notes 2 and 3) (0.01) 0.07 0.00
----- ----- -----
Net Income $0.77 $0.63 $0.75
===== ===== =====
Diluted:
Income before cumulative effect of a change in accounting principle $0.75 $0.52 $0.69
Cumulative effect of a change in accounting principle Notes 2 and 3) (0.01) 0.07 0.00
----- ----- -----
Net income ............................................................. $0.74 $0.59 $0.69
===== ===== =====
</TABLE>
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP Annual Report 1999 | 47
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................... $ 4,634 $ 3,798 $ 3,551
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses ............................................. 880 370 320
Write down of other real estate owned ................................. 75 0 0
Depreciation and amortization ......................................... 584 432 285
Proceeds from sale of trading securities .............................. 0 46,108 0
Gain on sale of securities sold ....................................... 0 (816) 0
Amortization of securities ............................................ 206 192 140
Increase in loans held for sale ....................................... (4,857) (7,204) (6,690)
Sales of loans held for sale .......................................... 7,204 6,690 0
Loss on mortgage affiliate ............................................ 0 1,617 0
Increase in accrued income and other assets ........................... (197) (2,359) (762)
Increase (decrease) in accrued expenses and other liabilities ......... 492 2,601 1,160
------- ------- -------
Net cash provided by (used in) operating activities ................... 9,021 51,429 (1,996)
------- ------- -------
Cash flows from investing activities:
Purchase of securities:
Available for sale .................................................... (44,978) (112,097) 0
Held to maturity ...................................................... (7,476) (74,386) (101,385)
Proceeds from maturities and calls of securities:
Available for sale .................................................... 2,000 0 0
Held to maturity ...................................................... 2,500 56,192 14,334
Proceeds from sale of securities:
Available for sale .................................................... 0 25,402 0
Principal collected on MBS's and CMO's:
Available for sale .................................................... 23,995 19,732 2,950
Held to maturity ...................................................... 3,951 10,083 16,619
Net increase in loans .................................................... (56,069) (97,737) (34,170)
Net increase in deferred fees ............................................ 4 333 307
Net proceeds (investment) from sale (acquisition) of real estate owned ... 0 1,585 (1,093)
Investment in mortgage affiliate ......................................... 0 (1,617) 0
Premises and equipment expenditures ...................................... (1,607) (1,888) (2,108)
------- ------- -------
Net cash used in investing activities .................................... (77,680) (174,398) (104,546)
------- ------- -------
Cash flows from financing activities:
Net proceeds from exercise of stock options .............................. 1,162 87 105
Net proceeds from stock offering ......................................... 0 0 12,593
Purchases of treasury stock .............................................. (1,028) (1,929) 0
Net increase (decrease) in demand, money market and savings .............. 15,952 20,129 (1,799)
Net increase in time deposits ............................................ 6,757 14,554 561
Net increase (decrease) in borrowed funds less than 90 days .............. (13,969) 297 37,187
Increase in borrowed funds greater than 90 days .......................... 62,600 103,125 48,725
Repayment of borrowed funds .............................................. 0 (1,325) 0
------- ------- -------
Net cash provided by financing activities ................................ 71,474 134,938 97,372
------- ------- -------
</TABLE>
48 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS (Continued)
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- --------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents ................................ $ 2,815 $ 11,969 $ (9,170)
------- -------- --------
Cash and cash equivalents, beginning of year .................................... 18,295 6,326 15,496
Cash and cash equivalents, end of year .......................................... 21,110 18,295 6,326
------- -------- --------
Supplemental disclosures:
Interest paid ................................................................ 13,356 12,342 12,393
Income taxes paid ............................................................ 2,475 1,500 1,183
Change in income tax payable due to exercise of stock options ................ (281) (107) 0
Change in unrealized gain/(loss) on securities available for sale ............ (10,046) (25) 3
Change in deferred taxes due to change in unrealized gain/(loss)
on securities available for sale .......................................... 3,415 10 (1)
Transfer of securities from held to maturity to available for sale and trading 0 136,143 0
Non-monetary transfers from loans to real estate owned ....................... $ 0 $ 718 $ 839
</TABLE>
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP Annual Report 1999 | 49
<PAGE>
REPUBLIC FIRST BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME/(LOSS)
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Comprehensive Common Paid in Retained Treasury Comprehensive Shareholders'
Income Stock Capital Earnings Stock Income Equity
------ ----- ------- -------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996........................ $ 47 $13,674 $ 4,647 $ 0 $ 3 $18,371
---- ------- ------- ------- ------- -------
Comprehensive income:
Other comprehensive income, net of tax:
Unrealized losses on securities....... $ 2 2 2
Less: Reclassification adjustment
for losses included in net income.... 0
Total other comprehensive income......... 2 0 0 0 0 0 0
Net income for the year.................. 3,551 0 0 3,551 0 0 3,551
------- ---- ------- ------- ------- ------- -------
Total comprehensive income............... 3,553
=======
Sale of common stock..................... 14 12,578 12,592
Options exercised........................ 0 106 106
---- ------- ------- ------- ------- -------
Balance December 31, 1997................ 61 26,358 8,198 0 5 34,622
- ----------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Other comprehensive income, net of tax:
Unrealized losses on securities.... (32)
Less: Reclassification adjustment
for losses included in net income. 11
Total other comprehensive loss........... (21) 0 0 0 0 (21) (21)
Net income for the year.................. 3,798 0 0 3,798 0 0 3,798
-------
Total comprehensive income............... 3,777
=======
Treasury stock purchases................. 0 0 0 (1,929) (1,929)
Options exercised........................ 0 152 0 0 0 152
---- ------- ------- ------- ------- -------
Balance December 31, 1998................ 61 26,510 11,996 (1,929) (16) 36,622
- ----------------------------------------------------------------------------------------------------------------------------
Comprehensive income:
Other comprehensive income, net of tax:
Unrealized losses on securities.... (6,631)
Less: Reclassification adjustment
for losses included in net income. 0
Total other comprehensive loss........... (6,631) 0 0 0 0 (6,631) (6,631)
Net income for the year.................. 4,634 0 0 4,634 0 0 4,634
-------
Total comprehensive loss................. $(1,997)
=======
Stock dividend........................... 0 5,548 (5,548) 0 0 0
Treasury stock purchases................. 0 0 0 (1,028) 0 (1,028)
Options exercised........................ 2 25 0 1,416 0 1,443
---- ------- ------- ------- ------- -------
Balance December 31, 1999................ $ 63 $32,083 $11,082 $(1,541) $(6,647) $35,040
==== ======= ======= ======= ======= =======
</TABLE>
(See notes to consolidated financial statements)
50 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
Republic First Bancorp, Inc. (formerly known as "Republic Bancorporation")
is a two-bank holding company organized and incorporated under the laws of the
Commonwealth of Pennsylvania. Its wholly-owned subsidiary, First Republic Bank
(the "Bank"), offers a variety of banking services to individuals and businesses
throughout the Greater Philadelphia and South Jersey area through its offices
and branches in Philadelphia and Montgomery Counties.
During 1999, the Company opened a second wholly-owned banking subsidiary
in the State of Delaware. The newly formed Bank, Republic First Bank of Delaware
(the "Delaware Bank") is a Delaware State chartered Bank, located at Brandywine
Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County
Delaware. The Delaware Bank opened for business on June 1, 1999 and offers many
of the same services and financial products as First Republic Bank.
2. Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements of the Company include the accounts
of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, First
Republic Bank and Republic First Bank of Delaware, (the "Banks"). Such
statements have been presented in accordance with generally accepted accounting
principles and general practice within the banking industry. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Additionally, through 1999 the Company derived fee income from the Banks'
participation in a program (the "Tax Refund Program") which indirectly funded
consumer loans collateralized by federal income tax refunds, and provided
accelerated check refunds. Approximately $2.7 million in gross revenues were
recognized from the Tax Refund Program in 1999. As a result of its contract
termination with Jackson Hewitt Tax Services Inc., the Company will not
participate in this program beyond 1999.
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 these estimates.
In estimating the allowance for loan losses, management considers 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 are
dependent, to a great extent, on the general economy and other conditions that
may be beyond the Banks' control, it is at least reasonably possible that the
estimates of the allowance for loan losses and the carrying values of the real
estate owned could differ materially in the near term.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
cash and due from banks, interest-bearing deposits with an original maturity of
ninety days or less and federal funds sold to be cash and cash equivalents. The
Banks are 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 December 31, 1999 and 1998 were $867,000 and
$872,000, respectively. These requirements were satisfied through the
restriction of vault cash and a balance at the Federal Reserve Bank of
Philadelphia.
REPUBLIC FIRST BANCORP Annual Report 1999 | 51
<PAGE>
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 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. Securities are adjusted for
amortization of premiums and accretion of discounts over the life of the related
security on a level yield method. Realized gains and losses on the sale of
investment securities are recognized using the specific identification method.
As described in Note 3, the Company transferred $106.4 million of securities
from held to maturity to available for sale and $32.5 million of securities from
held to maturity to the trading category during the third quarter of 1998. The
Company sold the securities transferred to the trading category during the third
quarter and realized a gain on the sale of these securities of $421,000, net of
income taxes, as a cumulative effect of a change in accounting. The Company did
not realize any gains on trading securities prior to or after the third quarter
of 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.
Loans, including impaired loans, are generally classified as non-accrual
if they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance (generally a minimum of six months) of interest and principal by the
borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case where a
non-accrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
Loans Held for Sale:
Loans held for sale are carried at the lower of aggregate cost or market
value. The Company currently services all loans classified as held for sale and
servicing is released when such loans are sold. Market values were estimated
using the present value of the estimated cash flows, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. Gains and losses on loans held for sale are included in
non-interest income. The Company did not realize any gains or losses during any
period reported herein.
Allowance for Loan Losses:
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loans are charged against the allowance when
management believes that the collectibility of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the allowance.
The allowance is an amount that management believes will be adequate to
absorb loan losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, the results of the most recent regulatory examination, current
economic conditions and trends that may affect the borrower's ability to pay.
52 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
The Company considers residential mortgage loans with balances less than
$250,000 and consumer loans, including home equity lines of credit, to be small
balance homogeneous loans. These loan categories are collectively evaluated for
impairment. Jumbo mortgage loans, those with balances greater than $250,000,
commercial business loans and commercial real estate loans are individually
measured for impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all collateral
dependent loans are measured for impairment based on the fair market value of
the collateral.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of furniture and equipment is calculated over the
estimated useful life of the asset using the straight-line method. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
terms of their respective leases, using the straight-line method.
Repairs and maintenance are charged to current operations as incurred, and
renewals and betterments are capitalized.
Real Estate Owned:
Real estate owned consists of foreclosed assets and is stated at the lower
of cost or estimated fair market value less estimated costs to sell the
property. Costs to maintain other real estate owned, or deterioration in value
of the properties are recognized as period expenses. There is no valuation
allowance associated with the Company's other real estate portfolio for the
periods presented.
Income Taxes:
Deferred income taxes are established for the temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities at the tax rates expected to be in effect when the temporary
differences are realized or settled. In addition, a deferred tax asset is
recorded to reflect the future benefit of net operating loss carryforwards. The
deferred tax assets may be reduced by a valuation allowance if it is probable
that some portion or all of the deferred tax assets will not be realized.
Earnings Per Share:
Earnings per share ("EPS") consists of two separate components, basic EPS
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents ("CSE"). Common
stock equivalents consist of dilutive stock options granted through the
Company's stock option plan. The following table is a reconciliation of the
numerator and denominator used in calculating basic and diluted EPS. Common
stock equivalents which are antidilutive are not included for purposes of this
calculation. At December 31, 1999 and 1998, there were 243,964 and 59,730 CSEs
which were antidilutive, respectively. These shares may be dilutive in the
future. There were no antidilutive shares as of December 31, 1997.
REPUBLIC FIRST BANCORP Annual Report 1999 | 53
<PAGE>
The Company paid a 10% Stock Dividend on March 18, 1999 as well as two
six-for-five stock splits effected in the form of a 20% stock dividend on March
27, 1998 and April 15, 1997. All relevant financial data contained herein has
been restated as if the dividend and splits had occurred at the beginning of
each period presented.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income before cumulative effect of a change in accounting principle
(numerator for basic and diluted earnings per share) ............... $4,697,000 $3,377,000 $3,551,000
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Per Per Per
Shares Share Shares Share Shares Share
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares outstanding for the period
(denominator for basic earnings per share) ....... 6,017,053 6,059,572 4,722,884
Earnings per share-- basic .......................... $0.78 $0.56 $0.75
Add common stock equivalents (CSE)
representing diluted stock options ............... 243,964 402,192 390,774
--------- --------- ---------
Effect on basic earnings per share of CSE ........... (0.03) (0.04) (0.06)
----- ----- -----
Equals total weighted average shares and CSE
(denominator for diluted earnings per share) ..... 6,261,017 6,461,764 5,113,658
========= ========= =========
Earnings per share-- diluted ........................ $0.75 $0.52 $0.69
===== ===== =====
</TABLE>
Reclassifications:
Certain items in the 1998 and 1997 financial statements and accompanying
notes have been reclassified to conform to the 1999 presentation format. There
was no effect on net income for the periods presented herein as a result of
reclassifications.
Accounting for Assets with Premiums and Discounts:
The Company accounts for amortization of premiums and accretion of
discounts related to loans purchased and investment securities based upon the
effective interest method. If a loan prepays in full before the contractual
maturity date, any unamortized premium, discount or fees are recognized
immediately as interest income.
Investments in Affiliate
Investment in affiliates not controlled, are recorded at cost, adjusted
for the Company's share in the earnings or losses of the affiliate, net of any
distributions received. At December 31, 1998, the Company had a 47% equity
investment in Fidelity Bond and Mortgage Company. The investment had an original
cost basis of $1,617,000. During 1998, the Company wrote the investment down to
$0, as the value of the mortgage affiliate's servicing rights was reduced due to
the accelerated prepayments of the underlying loans.
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 start-up 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 $63,000, net of tax, of costs of start-up
activities in the first quarter of 1999.
54 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
3. Investment Securities:
Investment securities available for sale as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Agencies .................... $ 2,662,000 $ 2,000 $ (62,000) $ 2,602,000
CMOs and Mortgage Backed Securities ......... 176,694,000 26,000 (10,037,000) 166,683,000
------------ -------- ------------ ------------
Total .................................. $179,356,000 $ 28,000 $(10,099,000) $169,285,000
============ ======== ============ ============
</TABLE>
Investment securities held to maturity as of December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
------------ -------- -------- ------------
<S> <C> <C> <C> <C>
U.S. Government Agencies ....................... $ 1,621,000 $ 1,000 $ (1,000) $ 1,621,000
CMOs and Mortgage Backed Securities ............ 1,747,000 22,000 0 1,769,000
Other Investment Securities .................... 14,655,000 0 (7,000) 14,648,000
------------ -------- -------- ------------
Total ..................................... $ 18,023,000 $ 23,000 $ (8,000) $ 18,038,000
============ ======== ======== ============
</TABLE>
Investment securities available for sale as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Agencies ........................ $ 3,000,000 $ 23,000 $ (0) $ 3,023,000
------------ -------- ---------- ------------
157,579,000 246,000 (294,000) 157,531,000
------------ -------- ---------- ------------
Total ...................................... $160,579,000 $269,000 $ (294,000) $160,554,000
============ ======== ========== ============
</TABLE>
Investment securities held to maturity as of December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government Agencies ........................ $ 1,300,000 $ 0 $ (3,000) $ 1,297,000
CMOs and Mortgage Backed Securities ............. 5,601,000 17,000 (30,000) 5,588,000
Other Investment Securities ..................... 10,097,000 0 0 10,097,000
------------ -------- --------- ------------
Total ...................................... $ 16,998,000 $ 17,000 $ (33,000) $ 16,982,000
============ ======== ========= ============
</TABLE>
In accordance with regulatory requirements, the Company held an investment
in stock of the Federal Reserve Bank with a carrying value of $643,000 and
$541,000 as of December 31, 1999 and 1998, respectively, which is included in
other investment securities. Also included in other investment securities are
investments in the stock of the Federal Home Loan Bank of Pittsburgh of $13.0
million and $9.2 million at December 31, 1999 and 1998, respectively. Both the
Federal Reserve Bank stock and the Federal Home Loan Bank Stock are recorded at
cost, which approximates liquidation value.
REPUBLIC FIRST BANCORP Annual Report 1999 | 55
<PAGE>
The maturity distribution of the amortized cost and estimated market value
of investment securities by contractual maturity at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
------------------------------ -----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Due in 1 year or less .......................... $ 0 $ 0 $ 1,251,000 $ 1,252,000
After 1 year to 5 years ........................ 1,733,000 1,724,000 761,000 754,000
After 5 years to 10 years ...................... 2,662,000 2,602,000 200,000 200,000
After 10 years or no maturity .................. 174,961,000 164,959,000 15,811,000 15,832,000
------------ ------------ ----------- -----------
Total....................................... $179,356,000 $169,285,000 $18,023,000 $18,038,000
============ ============ =========== ===========
</TABLE>
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without
prepayment penalties.
The Company adopted SFAS Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" on July 1, 1998. As permitted by SFAS
Statement No. 133, the Company transferred $90.6 million of securities from held
to maturity to available for sale and $45.5 million of securities from held to
maturity to the trading category. The amortized cost of securities transferred
from held to maturity to available for sale and trading was $136.1 million,
which had gross unrealized gains of $115,000 and $533,000, respectively on the
date transferred. The Company sold the securities transferred to the trading
category during the third quarter of 1998 and realized a gain on the sale of
these securities of $421,000, net of income taxes of $207,000, as a cumulative
effect of a change in accounting principle. There were no gains recognized in
1999 or 1997. Additionally, no securities were sold at a loss for any of the
periods presented herein. The Company sold the securities during 1998 as part of
a portfolio-restructuring program, which reduced the Company's risk of
prepayment on its mortgage-backed securities portfolio due to the sharp decline
in interest rates during the third quarter.
Realized gains and losses on the sale of investment securities are
recognized using the specific identification method. The Company realized gains
on the sale of securities of approximately of $816,000 in 1998, $628,000 of
which was accounted for as a cumulative effect of a change in accounting
principle. The Company did not realize any gains or losses on the sale of
securities during 1999 or 1997.
At December 31, 1999, investment securities in the amount of approximately
$5.5 million were pledged as collateral for public deposits and certain other
deposits as required by law. Additionally, $157.3 million of investment
securities were pledged as collateral for advances with the Federal Home Loan
Bank of Pittsburgh.
4. Loans Receivable:
Loans receivable at December 31, consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Commercial and Industrial ............................. $ 41,067,000 $ 41,980,000
Real Estate - commercial .............................. 178,926,000 124,981,000
Real Estate - residential ............................. 136,129,000 133,158,000
Consumer and other .................................... 1,834,000 1,840,000
------------ ------------
Loans receivable ...................................... 357,956,000 301,959,000
Less allowance for loan losses ........................ (3,208,000) (2,395,000)
------------ ------------
354,748,000 299,564,000
Loans held for sale ................................... 4,857,000 7,204,000
------------ ------------
Total loans receivable, net (1)(2) .................... $359,605,000 $306,768,000
============ ============
<FN>
____________
(1) Includes loans held for sale.
(2) Net of deferred loan fees of $635,000 and $631,000 at December 31, 1999 and
1998, respectively.
</FN>
</TABLE>
56 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
The recorded investment in loans for which impairment has been recognized
in accordance with SFAS 114 totaled $1,778,000, $1,002,000 and 1,800,000 at
December 31, 1999, 1998 and 1997, respectively, of which $1,425,000, $576,000,
and $764,000, respectively, related to loans with no valuation allowance because
the loans have been partially written down through charge-offs. Loans with
valuation allowances at December 31, 1999, 1998 and 1997 were $353,000,
$426,000, and $1,152,000 respectively, and the amount of such valuation
allowance was $104,000, $143,000, and $231,000, respectively. For the years
ended December 31, 1999, 1998 and 1997, the average recorded investment in
impaired loans was approximately $1,390,000, $1,441,000, and $1,809,000,
respectively. During 1998, the Bank recognized interest income of $55,000 on
impaired loans. The Bank did not recognize any interest income on impaired loans
during 1999 or 1997. There were no commitments to extend credit to any borrowers
with impaired loans as of the end of the periods presented herein.
As of December 31, 1999, 1998 and 1997, there were loans of approximately
$1,778,000, $1,002,000, and $1,800,000, respectively, which were classified as
non-accrual. If these loans were performing under their original contractual
rate, interest income on such loans would have increased approximately $189,000,
$79,000, and $279,000 for 1999, 1998 and 1997, respectively.
The majority of loans are with borrowers in the Company's marketplace,
Philadelphia and surrounding suburbs, including southern New Jersey. In addition
the Company has loans to customers whose assets and businesses are concentrated
in real estate. Repayment of the Company's loans is in part dependent upon
general economic conditions affecting the Company's market place and specific
industries. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained is based on management's
credit evaluation of the customer. Collateral varies but primarily includes
residential and income-producing properties. The Company had loan concentrations
exceeding 10% of total loans extended to real estate agents and managers in the
aggregate amount of $80.6 million, which represented 22.2% of gross loans
receivable.
Included in loans are loans due from directors and other related parties
of $5,057,000 and $3,909,000 at December 31, 1999 and 1998, respectively. All
loans made to directors have substantially the same terms and interest rates as
other Bank borrowers. The following presents the activity in amounts due from
directors and other related parties for the year ended December 31, 1999.
1999
----------
Balance at beginning of year....................... $3,909,000
Additions.......................................... 1,795,000
Repayments......................................... (647,000)
----------
Balance at end of year............................. $5,057,000
==========
5. Allowance for Loan Losses:
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year......................... $2,395,000 $2,028,000 $2,092,000
Charge-offs.......................................... (208,000) (110,000) (481,000)
Recoveries........................................... 141,000 107,000 97,000
Provision for loan losses............................ 880,000 370,000 320,000
---------- ---------- ----------
Balance at end of year............................... $3,208,000 $2,395,000 $2,028,000
========== ========== ==========
</TABLE>
6. Premises and Equipment:
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Furniture and equipment................................. $3,692,000 $2,984,000
Bank building........................................... 1,864,000 971,000
Leasehold improvements.................................. 1,573,000 1,567,000
---------- ----------
7,129,000 5,522,000
Less accumulated depreciation........................... (2,116,000) (1,532,000)
---------- ----------
Net premises and equipment.............................. $5,013,000 $3,990,000
========== ==========
</TABLE>
REPUBLIC FIRST BANCORP Annual Report 1999 | 57
<PAGE>
Depreciation expense on premises, equipment and leasehold improvements
amounted to $584,000, $432,000 and $285,000 in 1999, 1998 and 1997,
respectively.
The range of depreciable lives for leasehold improvements is five to ten
years. The depreciable lives of the Banks' building and furniture/equipment is
twenty years and, five to seven years, respectively.
During 1999, the Company has entered into non-cancelable lease agreements
for its operations center, seven First Republic Bank branch facilities and one
Republic First Bank of Delaware branch, expiring through August 31, 2008. The
leases are accounted for as operating leases. The minimum annual rental payments
required under these leases are as follows:
Year Ended Amount
---------- ------
2000............................................... $ 770,000
2001............................................... 761,000
2002............................................... 750,000
2003............................................... 770,000
2004............................................... 690,000
beyond 5 years..................................... 1,568,000
----------
Total.............................................. $5,309,000
==========
The Company incurred rent expense of $764,000, $747,000 and $667,000 in
1999, 1998 and 1997, respectively.
The Company and MBM/ATM Group Ltd. have entered into non-cancelable lease
agreements for its offsite automated teller cash dispenser machines, expiring
through January 2005, whereas the Company is responsible for 50% of the lease
expenses and MBM/ATM Group Ltd. (an unrelated third party), is responsible for
the remaining 50% of the lease payments. The leases are accounted for as
operating leases. The total minimum annual rental payments required under these
leases for both the Company and MBM/ATM Group Ltd. are as follows:
Year Ended Amount
---------- ------
2000................................................. $ 494,000
2001................................................. 494,000
2002................................................. 494,000
2003................................................. 349,000
2004................................................. 81,000
----------
Total................................................ $1,912,000
==========
The Company incurred rent expense on these leases of $210,000 and $136,000
during 1999 and 1998, respectively. There was no rent incurred during 1997.
7. Other Borrowings:
The Company has a line of credit totaling $5.0 million available for the
purchase of federal funds from its corresponding bank relationships. In
addition, the Company has a collateralized line of credit with the Federal Home
Loan Bank of Pittsburgh with a maximum borrowing capacity of $264.0 million as
of December 31, 1999. This maximum borrowing capacity is subject to change on a
monthly basis. As of December 31, 1999 and 1998, there were $236.6 million and
$180.5 million, respectively outstanding on these lines of credit. The
contractual maturity of the borrowings through the Federal Home Loan Bank range
from overnight to ten years. With a portion of these borrowings, the Federal
Home Loan Bank has the option to convert the borrowings from a fixed rate to a
variable rate. The following table represents the contractual maturity of the
Company's borrowings at December 31, 1999.
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
------ ------------
<S> <C> <C>
Maturing in:
Three months or less.................................... $ 26,640,000 4.56%
1 - 2 years............................................. 17,500,000 5.47%
2 - 3 years............................................. 42,500,000 5.66%
3 - 4 years............................................. 25,000,000 4.82%
4 - 5 years............................................. 100,000,000 6.06%
5 years and beyond...................................... 25,000,000 5.29%
------------ ----
Totals..................................................... $236,640,000 5.56%
============ ====
</TABLE>
58 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
8. Deposits
The following is a breakdown, by contractual maturities of the Company's
time certificate of deposits for the years 2000 through 2004 and beyond, which
include brokered certificates of deposit of approximately $25.6 million with
original terms ranging from six months to two years.
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Totals
-------- ------- ------ ------ ---- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Time Certificates of Deposit $128,911 $67,076 $1,657 $3,894 $361 $201,899
======== ======= ====== ====== ==== ========
</TABLE>
9. Income Taxes:
The following table accounts for the difference between the actual tax
provision and the amount obtained by applying the statutory federal income tax
rate of 34.0% to income before income taxes for the years ended December 31,
1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax provision computed at statutory rate................... $2,380,000 $1,711,000 $1,745,000
Amortization of negative goodwill.......................... (103,000) (103,000) (103,000)
Other...................................................... 25,000 47,000 (59,000)
---------- ---------- ----------
Total provision for income taxes............... $2,302,000 $1,655,000 $1,583,000
========== ========== ==========
</TABLE>
The approximate tax effect of each type of temporary difference and
carryforward that gives rise to net deferred tax assets included in the accrued
income and other assets in the accompanying consolidated balance sheets at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Allowance for loan losses.................................. $ 794,000 $ 485,000
Net operating loss carryforward............................ -- 158,000
Deferred compensation...................................... 444,000 403,000
Depreciation............................................... 50,000 31,000
Real estate owned.......................................... 26,000 52,000
Other...................................................... 10,000 70,000
Unrealized loss on securities available for sale........... 3,423,000 8,000
Investment mortgage banking affiliate...................... 0 493,000
Start-up expenditures...................................... 0 57,000
---------- ---------
Deferred tax asset......................................... 4,747,000 1,757,000
---------- ---------
Negative goodwill allocated to deferred tax asset,
net of amortization.................................... (206,000) (309,000)
---------- ---------
Adjusted deferred tax assets............................... $4,541,000 $1,448,000
---------- ---------
Deferred tax liabilities:
Deferred loan costs..................................... (277,000) (260,000)
Prepaid expenses........................................ (61,000) (61,000)
Tax refund program...................................... 0 (205,000)
---------- ---------
Deferred tax liabilities................................... (338,000) (526,000)
---------- ---------
Net deferred tax asset..................................... $4,203,000 $ 922,000
========== =========
</TABLE>
During 1999 and 1998, the Company recorded $31,000 of tax benefit and
$207,000 of tax expense, respectively, in connection with the cumulative effect
of a change in accounting principle upon the adoption of SOP 98-5 and SFAS No.
133, respectively.
REPUBLIC FIRST BANCORP Annual Report 1999 | 59
<PAGE>
The realizability of the deferred tax asset is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes
that it is more likely than not that the Company will realize the benefits of
these deferred tax assets.
The reverse acquisition of ExecuFirst by Republic on June 7, 1996
generated negative goodwill of $1,045,000, of which $685,000 was applied against
the deferred tax assets. During 1999, 1998 and 1997, the negative goodwill
allocated to the deferred tax assets was amortized by an amount of $103,000,
$103,000, and $103,000, respectively, thereby resulting in a corresponding
reduction to the provision for income taxes. The amortization of negative
goodwill is being recorded based upon the estimated reversal period of the
underlying components of the deferred tax assets.
The following represents the components of income tax expense (benefit)
for the years ended December 31, 1999, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Current provision
Federal................................................. $2,167,000 $2,004,000 $1,289,000
Deferred provision - Federal............................... 135,000 (349,000) 294,000
---------- ---------- ----------
Total provision for income taxes........................... $2,302,000 $1,655,000 $1,583,000
========== ========== ==========
</TABLE>
10. Directors and Officers Annuity Plan:
The Bank has an agreement with an insurance company to provide for an
annuity payment upon the retirement or death of certain of the Banks' Directors
and officers, ranging from $15,000 to $25,000 per year for ten years. After five
years of service, certain Directors or officers shall be 50% vested in their
accrued benefit. For each additional year of service over five years, the
Director or officer will be vested an additional 10% per year until he is 100%
vested. The accrued benefits under the plan at December 31, 1999, 1998 and 1997
totaled $431,000, $355,000 and $287,000, respectively. The expense for the years
ended December 31, 1999, 1998 and 1997 was $69,000, $68,000 and $63,000,
respectively. The Bank has elected to fund the plan through the purchase of
certain life insurance contracts. The cash surrender value of these contracts
(owned by the Bank) aggregated $1,442,000, $1,391,000 and $1,328,000 at December
31, 1999, 1998 and 1997, respectively, which is included in accrued income and
other assets.
11. Commitments and Contingencies:
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
standby letters of credit. These instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same underwriting
standards and policies in making credit commitments as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit
risk are commitments to extend credit of approximately $17.5 and $20.1 million
and standby letters of credit of approximately $2,394,000 and $1,912,000 at
December 31, 1999 and 1998, respectively. Of the $17.5 million commitments to
extend credit at December 31, 1999, $17.4 million were variable rate and 141,000
were fixed rate commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
60 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Standby letters of credit are conditional commitments issued that
guarantee the performance of a customer to a third party. The credit risk and
collateral policy involved in issuing letters of credit is essentially the same
as that involved in extending loan commitments. The amount of collateral
obtained is based on management's credit evaluation of the customer. Collateral
held varies but may include real estate, marketable securities, pledged
deposits, equipment and accounts receivable.
The Company has entered into employment agreements with the President of
the Company, the President of the Bank and the Chief Operating Officer, the
Chief Financial Officer and the Chief Lending Officer of the subsidiary Bank,
which provide for the payment of base salary and certain benefits through the
year 2000. The aggregate commitment for future salaries and benefits under these
employment agreements at December 31, 1999 is approximately $685,000.
The Bank participates in a partially self-insured health plan (the
"Plan"), for which employees of the Bank receive medical, dental, vision and
pharmaceutical insurance coverage and reimbursements. During 1999, 1998 and
1997, the Bank paid claims under the plan of $426,000, $464,000 and $158,000,
respectively.
The Company and the Bank are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Bank, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Bank.
12. Shareholders' Equity/Regulatory Capital:
During the fourth quarter of 1997, the Company sold 1,150,000 shares of
common stock in a secondary offering. The price per share was $12.00, and the
net proceeds to the Company after commissions and costs were approximately $12.6
million.
Effective June 21, 1999, the Company's stock repurchase program,
originally announced on August 24, 1998 and established for the period through
and including June 30, 1999 has been extended to December 31, 1999. The
aggregate amount of stock to be repurchased will be determined by market
conditions, but will not exceed 4.9% of the Company's outstanding stock, or
approximately 297,000 shares as of June 30, 1999. As of December 31, 1999, there
was 54,916 shares repurchased pursuant to rule 10b-18 of the Securities and
Exchange Commission. There was 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.
Dividend payments by the Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking code, no
cash dividends may be paid except from "accumulated net earnings" (generally,
undivided profits). Under FRB's regulations, the Bank cannot pay dividends that
exceed its net income from the current year and the preceding two years. Under
the FDIA, an insured Bank may pay no dividends if the Bank is in arrears in the
payment of any insurance assessment due to the FDIC. Under current banking law,
the Bank would be limited to 12.0 million of dividends in 1999, plus an
additional amount equal to the Banks' net profit for 2000, up to the date of any
such dividend declaration. At December 31, 1999, there were no cash dividends
declared or paid.
State and Federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. 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.
Management believes that the Bank meets, as of December 31, 1999 and 1998,
all capital adequacy requirements to which it is subject. As of December 31,
1999, 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 have
changed the Banks' category.
The Federal Reserve Board's risk-based capital leverage ratio guidelines
require all state-chartered member banks to maintain total capital equal to at
least 8% of risk-weighted total assets, Tier 1 capital (adjusted for certain
excludable regulatory items) equal to 4% of risk-weighted total assets, and a
Tier 1 leverage ratio of 4%. At December 31, 1999, the aforementioned ratios are
as follows:
REPUBLIC FIRST BANCORP Annual Report 1999 | 61
<PAGE>
The following table presents the Company's capital regulatory ratios at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
To be well
For Capital capitalized under
Actual Adequacy Purposes FRB capital guidelines
----------------- ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
At December 31, 1999 (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk based capital
First Republic Bank.............. $37,591 11.75% $25,593 8.00% $31,992 10.00%
Republic First Bank of DE........ 3,054 34.52% 715 8.00% 894 10.00%
Republic First Bancorp, Inc...... 44,646 14.17% 25,202 8.00% 31,503 10.00%
Tier one risk based capital
First Republic Bank.............. 34,469 10.77% 12,797 4.00% 19,195 6.00%
Republic First Bank of DE........ 3,000 33.55% 358 4.00% 536 6.00%
Republic First Bancorp, Inc...... 41,438 13.15% 12,601 4.00% 18,902 6.00%
Tier one leveraged capital
First Republic Bank.............. 34,469 6.14% 28,049 5.00% 28,049 5.00%
Republic First Bank of DE........ 3,000 40.70% 369 5.00% 369 5.00%
Republic First Bancorp, Inc...... 41,438 7.30% 28,369 5.00% 28,369 5.00%
At December 31, 1998
Total risk based capital
First Republic Bank.............. $31,904 10.32% $24,725 8.00% $30,906 10.00%
Republic First Bancorp, Inc...... 38,784 12.54% 24,746 8.00% 30,932 10.00%
Tier one risk based capital
First Republic Bank.............. 29,509 9.55% 12,363 4.00% 18,544 6.00%
Republic First Bancorp, Inc...... 36,389 11.76% 12,373 4.00% 18,559 6.00%
Tier one leveraged capital
First Republic Bank.............. 29,509 6.08% 24,263 5.00% 24,263 5.00%
Republic First Bancorp, Inc...... 36,389 7.50% 24,263 5.00% 24,263 5.00%
</TABLE>
13. Retirement Plan:
The Company maintains a Supplemental Retirement Plan for its former Chief
Executive Officer which provides for payments of approximately $100,000 a year,
commencing for a ten-year period upon retirement or death. A life insurance
contract has been purchased to insure against all or a portion of the payments
which may be required prior to the anticipated retirement date of the officer.
The Bank has a defined contribution plan pursuant to the provision of
401(k) of the Internal Revenue Code. The Plan covers all full-time employees who
meet age and service requirements. The plan provides for elective employee
contributions with a matching contribution from the Bank, limited to 3%. The
total expense relating to the plan was $117,000, $103,000 and $74,000 in 1999,
1998 and 1997, respectively.
14. Fair Value of Financial Instruments:
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available, fair
values are based on assumptions including future cash flows and discount rates.
Accordingly, the fair value estimates cannot be substantiated, may not be
realized, and do not represent the underlying value of the Company.
The Company uses the following methods and assumptions to estimate the
fair value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents:
The carrying value is a reasonable estimate of fair value.
62 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
Securities Held to Maturity and Securities Available for Sale:
For investment securities with a quoted market price, fair value is equal
to quoted market prices. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Loans (including loans held for sale):
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other categories of
loans such as commercial and industrial loans, real estate mortgage and consumer
loans, fair value is estimated based on using the present value of the estimated
future cash flows using the current rates at which similar loans would be made
to borrowers with similar collateral and credit ratings and for similar
remaining maturities.
Deposit Liabilities:
For checking, savings and money market accounts, fair value is the amount
payable on demand at the reporting date. For time deposits, fair value is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Borrowings:
Fair values on borrowings are based on using the present value of
estimated cash flows, using current rates, at which similar borrowings could be
obtained by the Bank with similar maturities.
Commitments to Extend Credit and Standby Letters of Credit:
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparts. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
arrangements.
At December 31, 1999, the carrying amount and the estimated fair value of
the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Financial Assets:
Cash and cash equivalents .............. $ 21,110,000 $ 21,110,000 $ 18,295,000 $ 18,295,000
Securities available for sale .......... 169,285,000 169,285,000 160,554,000 160,554,000
Securities held to maturity ............ 18,023,000 18,038,000 16,998,000 16,982,000
Loans receivable, net .................. 354,748,000 354,519,000 299,564,000 304,571,000
Loans held for sale .................... 4,857,000 4,857,000 7,204,000 7,204,000
Accrued interest receivable ............ 3,946,000 3,946,000 3,765,000 3,765,000
Financial Liabilities:
Deposits:
Demand, savings and money market ..... $103,894,000 $103,894,000 $ 87,942,000 $ 87,942,000
Time ................................. 201,899,000 202,286,000 195,142,000 197,007,000
Borrowings ........................... 236,640,000 233,511,000 188,009,000 191,684,000
Accrued interest payable ............. 5,639,000 5,639,000 5,661,000 5,661,000
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
Notional Fair Notional Fair
Amount Value Amount Value
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Off Balance Sheet Data:
Commitments to extend credit .............. $ 17,500,000 $ 175,000 $ 20,100,000 $ 201,000
Letters of credit ......................... 2,394,000 24,000 1,912,000 19,000
</TABLE>
REPUBLIC FIRST BANCORP Annual Report 1999 | 63
<PAGE>
15. Parent Company Financial Information
The following financial statements for Republic First Bancorp, Inc. should
be read in conjunction with the consolidated financial statements and the other
notes related to the consolidated financial statements.
BALANCE SHEETS
December 31, 1999 and 1998
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
ASSETS:
Cash.................................................... $ 3,688 $ 6,880
Investment in subsidiaries.............................. 31,041 29,742
Other Assets............................................ 311 0
------- -------
Total Assets...................................... $35,040 $36,622
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Total Liabilities................................. $ 0 $ 0
Shareholders' Equity:
Common stock......................................... 63 61
Additional paid in capital........................... 32,083 26,510
Retained earnings.................................... 11,082 11,996
Treasury Common at cost
(175,172 and 219,604, respectively)............... (1,541) (1,929)
Accumulated other comprehensive income/(loss)........ (6,647) (16)
------- -------
Total Shareholders' Equity........................ 35,040 36,622
------- -------
Total Liabilities and Shareholders' Equity........ $35,040 $36,622
======= =======
</TABLE>
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income..................................................... $ 106 $ 265 $ 44
Expenses................................................... 0 0 0
Equity in undistributed income of subsidiary............... 4,528 3,533 3,507
------- ------- -------
Net income................................................. 4,634 3,798 3,551
------- ------- -------
Shareholders' equity, beginning of year.................... 36,622 34,622 18,371
Exercise of stock options.................................. 1,161 152 106
Proceeds from stock offering............................... 0 12,592
Purchase of treasury stock................................. (1,028) (1,929) 0
Tax effect of stock options exercised...................... 282 0 0
Change in unrealized gain on securities available for sale. (6,631) (21) 2
------- ------- -------
Shareholders' equity, end of year.......................... $35,040 $36,622 $34,622
======= ======= =======
</TABLE>
64 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 4,634 $ 3,798 $ 3,551
Adjustments to reconcile net income to net cash
Provided by operating activities:
Equity in undistributed income of subsidiary...... (4,528) (3,533) (3,507)
------- ------- -------
Net cash provided by operating activities...... 106 265 44
------- ------- -------
Cash flows from investing activities:
Purchase of subsidiary common stock..................... (3,432) 0 (4,392)
------- ------- -------
Net cash provided by investing activities...... (3,432) 0 (4,392)
------- ------- -------
Cash from Financing Activities:
Exercise of stock options............................... 1,162 110 106
Proceeds from stock issuance............................ 0 0 12,592
Purchase of treasury stock.............................. (1,028) (1,929) 0
------- ------- -------
Net cash provided by financing activities...... 134 (1,819) 12,698
------- ------- -------
Increase/(decrease) in cash................................ (3,192) (1,554) 8,350
Cash, beginning of period.................................. 6,880 8,434 84
------- ------- -------
Cash, end of period........................................ $ 3,688 $ 6,880 $ 8,434
======= ======= =======
</TABLE>
16. Stock Options
The Company maintains a Stock Option Plan (the "Plan") under which the
Company grants options to its employees and directors. Under the terms of the
plan, 792,000 shares of common stock are reserved for such options. The Plan
provides that the exercise price of each option granted equals the market price
of the Company's stock on the date of grant. Any option granted vests within one
to five years and has a maximum term of ten years. All options are granted upon
approval of the Stock Option Committee of the Board of Directors, consisting of
three disinterested members (as defined under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended). Stock Options are issued to promote the
interests of the Company by providing incentives to (i) designated officers and
other employees of the Company or a Subsidiary Corporation (as defined herein),
(ii) non-employee members of the Company's Board of Directors and (iii)
independent contractors and consultants who may perform services for the
Company. The Company believes that the Plan causes participants to contribute
materially to the growth of the Company, thereby benefiting the Company's
shareholders.
Prior to the merger of Republic Bancorporation and ExecuFirst Bancorp,
Inc., various grants of stock options were issued pursuant to the then existing
plans of each Corporation.
In addition to the shares reserved under the Plan, 134,669 options were
granted outside of the Plan to a director of the Company, as a result of the
merger between Republic Bancorporation and ExecuFirst Bancorp, Inc. These
options have a grant date of June 7, 1996. These options are fully vested, and
will expire on June 7, 2006.
REPUBLIC FIRST BANCORP Annual Report 1999 | 65
<PAGE>
Shares outstanding under option and option price per share have been
retroactively restated (a recapitalization) for the equivalent number of shares
received in the merger after giving effect to any differences in par value of
the issuer's and acquirer's stock. These options and option prices have also
been restated as a result of the 10% stock dividend paid on March 18, 1999 as
well as two separate six-for-five stock splits effected in the form of 20% stock
dividends. These dividends were paid on April 15, 1999 and March 27, 1998.
Changes in total shares are as follows:
<TABLE>
<CAPTION>
December 31, 1999: Weighted
Average
Weighted Remaining
Range of Average Contractual
Shares Exercise Prices Exercise Price Life (Years)
------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............... 425,649 $1.95 to $2.65 $ 2.50 4.3
236,958 $3.00 to $4.50 $ 3.77 5.1
153,648 $4.85 $ 4.85 7.8
63,030 $9.55 to $10.45 $ 10.26 9.4
Granted during year............................ 123,500 $6.62 to $8.18 $ 7.60
Exercised during year.......................... 399,941 $2.31 to $4.86 $ 2.91
Forfeited during year.......................... 8,404 $5.34 to $10.94 $ 9.18
-------
Outstanding at end of year..................... 184,227 $1.95 to $2.65 $ 2.31 3.3
135,463 $3.00 to $4.02 $ 4.01 6.4
135,040 4.85 to $6.62 $ 5.38 7.6
139,930 $7.63 to $10.45 $ 8.81 8.9
-------
594,660 $ 4.93 6.3
=======
Options exercisable at end of year............. 184,227 $1.95 to $2.65 $ 2.31 3.3
135,463 $3.00 to $4.02 $ 4.01 6.4
135,040 4.85 to $6.62 $ 5.38 7.6
48,038 $8.29 to $10.45 $ 10.16 8.5
-------
502,768 $ 4.36 5.8
=======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998: Weighted
Average
Weighted Remaining
Range of Average Contractual
Shares Exercise Prices Exercise Price Life (Years)
------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............... 478,010 $1.95 to $2.65 $ 2.50 5.3
218,740 $3.00 to $4.50 $ 3.77 6.0
155,232 $4.85 $ 4.85 8.8
Granted during year............................ 63,030 $9.55 to $10.45 $ 10.26
Exercised during year.......................... 35,721 $1.95 to $4.85 $ 2.44
Forfeited during year.......................... 0 N/A N/A
-------
Outstanding at end of year..................... 425,649 $1.95 to $2.65 $ 2.31 4.3
236,958 $3.00 to $4.02 $ 3.68 5.1
153,648 $4.85 $ 4.85 7.8
63,030 $9.55 to $10.45 $ 10.26 9.4
-------
879,285 $ 3.69
=======
Options exercisable at end of year............. 425,649 $1.95 to $2.65 $ 2.31 4.3
236,958 $3.00 to $4.02 $ 3.68 5.1
153,648 $4.85 $ 4.85 7.8
-------
816,255 $ 3.18 5.2
=======
</TABLE>
66 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997: Weighted
Average
Weighted Remaining
Range of Average Contractual
Shares Exercise Prices Exercise Price Life (Years)
------ --------------- -------------- ------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............... 497,018 $1.95 to $2.65 $2.50 6.3
237,748 $3.00 to $4.50 $3.71 7.0
155,232 $4.85 $4.85 9.8
Granted during year............................ 0 N/A N/A
Exercised during year.......................... 38,016 $2.53 to $3.00 $2.76
Forfeited during year.......................... 0 N/A N/A
-------
Outstanding at end of year..................... 851,982 $1.95 to $4.85 $3.14
=======
Options exercisable at end of year............. 478,010 $1.95 to $2.65 $2.50 5.3
218,740 $3.00 to $4.50 $3.77 6.0
155,232 $4.85 $4.85 8.8
-------
851,982 $3.14 6.2
=======
</TABLE>
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, 1999 December 31, 1998 December 31, 1997
-------------------------- ------------------------- ------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income................. $4,634,000 $4,176,000 $3,798,000 $3,675,000 $3,551,000 $3,143,000
Basic earnings per share... $0.77 $0.69 $0.63 $0.61 $0.75 $0.67
Diluted earnings per share. $0.74 $0.67 $0.59 $0.57 $0.69 $0.61
</TABLE>
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS No. 123"), "Accounting for Stock
Based Compensation", but applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees and related Interpretations in accounting for its Plan.
Accordingly, no compensation has been recognized for options granted under the
Plan. If the Company had elected to recognize compensation based on the fair
value at the grant dates for awards under its Plan, consistent with the method
prescribed by SFAS No. 123, net income and earnings per share would have been
changed to the pro forma amounts indicated above:
The proforma compensation expense is based upon the fair value of the
option at grant date. The weighted average fair value of the options granted in
1999 and 1998 were $3.60 and $4.63, respectively. The fair value of each option
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grant in 1999 and 1998,
respectively; dividend yield of 0% for both periods, expected volatility 35% for
both periods, risk-free interest rate of 6.4% and 5.3% and an expected life of
6.3 years for both periods. There were no options granted in 1997.
REPUBLIC FIRST BANCORP Annual Report 1999 | 67
<PAGE>
17. Comprehensive Income
The tax effects allocated to each component of "Comprehensive Income" are
as follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1999
(dollars in thousands)
Before Tax Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gains arising during
the period..................................... $(10,046) $ 3,415 $ (6,631)
Less: Reclassification adjustment for gains
included in net income......................... 0 0 0
-------- ------- --------
Other comprehensive income........................... $(10,046) $ 3,415 $ (6,631)
======== ======= ========
For the year ended December 31, 1998
Tax
Before (Expense) Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during
the period..................................... $ (48) $ 16 $ (32)
Less: Reclassification adjustment for gains
included in net income......................... 16 (5) 11
-------- ------- --------
Other comprehensive income........................... $ (32) $ 11 $ (21)
======== ======= ========
For the year ended December 31, 1997
Tax
Before (Expense) Net of
Tax Amount Benefit Tax Amount
---------- ------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during
the period..................................... $ 3 $ (1) $ 2
Less: Reclassification adjustment for gains
included in net income......................... 0 0 0
-------- ------- --------
Other comprehensive income........................... $ 3 $ (1) $ 2
======== ======= ========
</TABLE>
18. 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.
At December 31, 1999, Republic First Bancorp has three reportable
segments; First Republic Bank, the Delaware Bank and the Tax Refund Program. The
Tax Refund Program enabled 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 mortgage banking segment represented the Company's equity investment
in Fidelity Bond and Mortgage, a mortgage banking operation which serviced and
originated residential mortgage loans. Such investment was accounted for as an
equity investment as the Company did not have control over Fidelity Bond and
Mortgage.
In 1998, the Company also had the mortgage banking segment, and did not
have the Delaware Bank segment.
In 1997, the Company's segment consisted of First Republic Bank and the
Tax Refund Program.
68 | REPUBLIC FIRST BANCORP Annual Report 1999
<PAGE>
The accounting policies of the segments are the same as those described in
Note 1. The Company evaluates the performance of the community banking segments
based upon income before the provision for income taxes, return on equity and
return on average assets. The mortgage banking segment is evaluated based upon
return on average equity and the Tax Refund Program is evaluated based upon
income before provision for taxes.
The Tax Refund Program and the mortgage banking affiliate were developed
as business segments to further expand the Company's products and services
offered to consumers and businesses.
The segment information presented below reflects that the Delaware Bank
originated in 1999, and that the Company's investment in their Mortgage Banking
Affiliate was reduced to $0 as of December 31, 1998. Accordingly, the Mortgage
Banking Affiliate no longer represents a segment in 1999.
Segment information for the years ended December 31, 1999, 1998 and 1997
is as follows:
As of and for the years ended December 31,
(dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------- --------------------------------- ----------------------------
First Tax First Tax Mortgage First Tax
Republic Delaware Refund Republic Refund Bank Republic Refund
Bank Bank Program Total Bank Program Affiliate Total Bank Program Total
-------- -------- ------- ------- -------- ------- --------- ------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
External customer
revenues:
Interest Income..........$39,333 $ 115 $ 0 $39,448 $ 34,404 $ 0 $ 0 $34,404 $ 23,533 $ 0 $ 23,533
Other Income............. 1,057 33 2,715 3,805 760 2,490 0 3,250 388 2,312 2,700
------- ----- ------ ------- -------- ------ ------- ------- -------- ------ --------
Total external
customer revenues........ 40,390 148 2,715 43,253 35,164 2,490 0 37,654 23,921 2,312 26,233
Intersegment revenues:
Interest Income.......... 9 56 0 65 0 0 0 0 0 0 0
Other Income............. 44 0 0 44 0 0 0 0 0 0 0
------- ----- ------ ------- -------- ------ ------- ------- -------- ------ --------
Total intersegment
revenues................. 53 56 0 109 0 0 0 0 0 0 0
------- ----- ------ ------- -------- ------ ------- ------- -------- ------ --------
Total revenue.............. 40,443 204 2,715 43,362 35,164 2,490 0 37,654 23,921 2,312 26,233
------- ----- ------ ------- -------- ------ ------- ------- -------- ------ --------
Depreciation and
amortization............. 540 44 0 584 432 0 0 432 285 0 285
Other operating
expenses - external
(non-interest expense) .. 9,399 649 150 10,198 30,468 105 0 30,573 20,739 75 20,814
Interest expense........... 25,370 102 0 25,472 20,845 0 0 20,845 12,912 0 12,912
Equity interest in
mortgage banking
affiliate................ 0 0 0 0 0 0 1,617 1,617 -- -- --
Interest expense
intersegment............. 56 9 0 65 0 0 0 0 0 0 0
Other operating
expenses intersegment 0 44 0 44 0 0 0 0 0 0 0
------- ----- ------ ------- -------- ------ ------- ------- -------- ------ --------
Segment expenses........... 35,365 848 150 36,363 30,900 105 1,617 32,622 21,024 75 21,099
Segment income before
taxes and extraordinary
items.................... 5,078 (644) 2,565 6,999 4,264 2,385 (1,617) 5,032 2,897 2,237 5,134
======= ===== ====== ======= ======== ====== ======= ======= ======== ====== ========
Segment assets.............575,373 10,957 0 586,330 516,361 0 0 516,361 375,462 0 375,462
Capital expenditures....... 499 1,184 0 1,607 1,888 0 1,617 3,505 2,108 0 2,108
</TABLE>
REPUBLIC FIRST BANCORP Annual Report 1999 | 69
Consent of Independent Certified Public Accountants
The Board of Directors
Republic First Bancorp, Inc.:
We consent to the incorporation by reference in the registration statement on
Form S-8 (No. 333-60265) of Republic First Bancorp, Inc. (the "Company") of our
report dated January 27, 2000, relating to the consolidated balance sheets of
Republic First Bancorp, Inc. and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in shareholders'
equity and comprehensive income/(loss), and cash flows for each of the years in
the three-year period ended December 31, 1999, which report appears in the
December 31, 1999 Form 10-K of Republic First Bancorp, Inc.
Our report references that the Company adopted the provisions of Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities on July 1,
1998.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000834285
<NAME> REPUBLIC FIRST BANCORP INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 20,789,000
<INT-BEARING-DEPOSITS> 321,000
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 169,285,000
<INVESTMENTS-CARRYING> 18,023,000
<INVESTMENTS-MARKET> 0
<LOANS> 362,813,000
<ALLOWANCE> 3,208,000
<TOTAL-ASSETS> 586,330,000
<DEPOSITS> 305,793,000
<SHORT-TERM> 51,640,000
<LIABILITIES-OTHER> 8,857,000
<LONG-TERM> 185,000,000
0
0
<COMMON> 63,000
<OTHER-SE> 34,977,000
<TOTAL-LIABILITIES-AND-EQUITY> 586,330,000
<INTEREST-LOAN> 26,897,000
<INTEREST-INVEST> 12,514,000
<INTEREST-OTHER> 37,000
<INTEREST-TOTAL> 39,448,000
<INTEREST-DEPOSIT> 13,196,000
<INTEREST-EXPENSE> 24,512,000
<INTEREST-INCOME-NET> 14,936,000
<LOAN-LOSSES> 880,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,862,000
<INCOME-PRETAX> 6,999,000
<INCOME-PRE-EXTRAORDINARY> 6,999,000
<EXTRAORDINARY> 0
<CHANGES> (63,000)
<NET-INCOME> 4,634,000
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.74
<YIELD-ACTUAL> 7.54
<LOANS-NON> 1,778,000
<LOANS-PAST> 333,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,395,000
<CHARGE-OFFS> 208,000
<RECOVERIES> 141,000
<ALLOWANCE-CLOSE> 3,208,000
<ALLOWANCE-DOMESTIC> 3,208,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 582,000
</TABLE>
