UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2000
Commission File Number: 0-17007
Republic First Bancorp, Inc.
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(Exact name of small business issuer as specified in its charter)
Pennsylvania 23-2486815
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(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip code)
215-735-4422
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
------- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
6,343,838 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of July 31, 2000
Page 1 of 39
Exhibit index appears on page 38
1
<PAGE>
TABLE OF CONTENTS
Page
Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 24
Part II: Other Information
Item 1: Legal Proceedings 37
Item 2: Changes in Securities and Use of Proceeds 37
Item 3: Defaults Upon Senior Securities 37
Item 4: Submission of Matters to a Vote of Security Holders 37
Item 5: Other Information 37
Item 6: Exhibits and Reports on Form 8-K 37
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
<TABLE>
<CAPTION>
Page Number
<S> <C> <C>
(1) Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999......................... 4
(2) Consolidated Statements of Operations for three and six months ended
June 30, 2000 and 1999........................................................................ 5
(3) Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999........................................................................ 7
(4) Notes to Consolidated Financial Statements.................................................... 8
</TABLE>
3
<PAGE>
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of June 30, 2000 and December 31, 1999
Dollars in Thousands, Except Share Data
(unaudited)
<TABLE>
<CAPTION>
ASSETS: June 30, 2000 December 31, 1999
------------------------- -------------------------
<S> <C> <C>
Cash and due from banks $22,102 $20,789
Interest bearing deposits with banks 1,020 321
Federal funds sold 9,119 --
------------------------- -------------------------
Total cash and cash equivalents 32,241 21,110
Securities available for sale, at fair value 158,276 169,285
Securities held to maturity at amortized cost
(Fair value of $17,839 and $18,038, respectively) 17,861 18,023
Loans receivable (net of allowance for loan losses of
$3,644 and $3,208, respectively) 386,553 354,748
Loans held for sale -- 4,857
Premises and equipment, net 4,913 5,013
Real estate owned, net 643 643
Accrued income and other assets 13,211 12,651
------------------------- -------------------------
Total Assets $613,698 $586,330
========================= =========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $43,657 $35,053
Demand - interest-bearing 24,763 19,174
Money market and savings 62,155 49,667
Time under $100,000 165,674 141,445
Time over $100,000 82,548 60,454
------------------------- -------------------------
Total Deposits 378,797 305,793
Other borrowed funds 189,000 236,640
Accrued expenses and other liabilities 9,406 8,857
------------------------- -------------------------
Total Liabilities 577,203 551,290
------------------------- -------------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares authorized; shares
issued and outstanding 6,343,838 and 6,343,901 as of June 30, 2000 and
December 31, 1999, respectively 63 63
Additional paid in capital 32,083 32,083
Retained earnings 12,969 11,082
Treasury stock at cost (175,172 shares
at June 30, 2000 and December 31, 1999) (1,541) (1,541)
Accumulated other comprehensive loss (7,079) (6,647)
------------------------- -------------------------
Total Shareholders' Equity 36,495 35,040
------------------------- -------------------------
Total Liabilities and Shareholders' Equity $613,698 $586,330
========================= =========================
</TABLE>
(See notes to consolidated financial statements)
4
<PAGE>
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three and Six Months Ended June 30,
Dollars in Thousands, Except Per Share Data
(unaudited)
<TABLE>
<CAPTION>
Quarter to Date Year to Date
June 30, June 30,
2000 1999 2000 1999
------------------- ----------------- ------------- -------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $8,127 $6,540 $15,628 $12,815
Interest on federal funds sold 59 1 67 2
Interest on investments 3,063 3,210 6,267 6,068
------------------- ----------------- ------------- -------------
Total interest income 11,249 9,751 21,962 18,885
------------------- ----------------- ------------- -------------
Interest expense:
Demand interest-bearing 146 42 198 112
Money market and savings 614 430 1,141 800
Time over $100,000 1,149 308 2,047 653
Time under $100,000 2,430 2,370 4,438 4,833
Other borrowings 2,783 2,852 6,003 5,280
------------------- ----------------- ------------- -------------
Total interest expense 7,122 6,002 13,827 11,678
------------------- ----------------- ------------- -------------
Net interest income 4,127 3,749 8,135 7,207
------------------- ----------------- ------------- -------------
Provision for loan losses 200 210 400 460
------------------- ----------------- ------------- -------------
Net interest income after provision
for loan losses 3,927 3,539 7,735 6,747
------------------- ----------------- ------------- -------------
Non-interest income:
Service fees 333 172 635 328
Tax Refund Program revenue - - 181 2,715
Other income 26 26 58 51
------------------- ----------------- ------------- -------------
359 198 874 3,094
Non-interest expenses:
Salaries and benefits 1,636 1,251 3,179 2,682
Occupancy/equipment 459 427 918 845
Other expenses 873 943 1,696 1,948
------------------- ----------------- ------------- -------------
2,968 2,621 5,793 5,475
------------------- ----------------- ------------- -------------
Income before income taxes 1,318 1,116 2,816 4,366
Provision for income taxes 435 366 929 1,436
------------------- ----------------- ------------- -------------
Income before cumulative effect of a
change in accounting principle 883 750 1,887 2,930
Cumulative effect of a change in
accounting principle (Note 4) - - - (63)
------------------- ----------------- ------------- -------------
Net income $883 $750 $1,887 $2,867
=================== ================= ============= =============
Net income per share-basic:
Income before cumulative effect of a
change in accounting principle $0.14 $0.13 $0.31 $0.49
Cumulative effect of a change in
accounting principle (Note 4) - - - (0.01)
------------------- ----------------- ------------- -------------
Net Income $0.14 $0.13 $0.31 $0.48
=================== ================= ============= =============
5
<PAGE>
Quarter to Date Year to Date
June 30, June 30,
2000 1999 2000 1999
------------------- ----------------- ------------- -------------
Net income per share-diluted:
Income before cumulative effect of a
change in accounting principle $0.14 $0.12 $0.30 $0.47
Cumulative effect of a change in
accounting principle (Note 4) - - - (0.01)
------------------- ----------------- ------------- -------------
Net Income $0.14 $0.12 $0.30 $0.46
=================== ================= ============= =============
(See notes to consolidated financial statements)
</TABLE>
6
<PAGE>
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
Dollars in thousands
(unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,887 $ 2,867
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 400 460
Write down of other real estate owned -- 75
Depreciation and amortization 281 458
Decrease in loans held for sale 4,857 6,595
Increase in accrued income
and other assets (561) (545)
Increase in accrued expenses
and other 549 1,715
liabilities
Net increase in deferred fees 19 100
-------- --------
Net cash provided by operating activities 7,432 11,725
-------- --------
Cash flows from investing activities:
Purchase of securities:
Available for Sale -- (44,978)
Held to Maturity -- (3,987)
Proceeds from principal receipts, sales, and
Maturities of securities 10,347 19,853
Net increase in loans (31,824) (21,996)
Premises and equipment expenditures (188) (939)
-------- --------
Net cash used in investing activities (21,665) (52,047)
-------- --------
Cash flows from financing activities:
Net increase (decrease) in demand, Money
Market, and savings deposits 26,682 (1,874)
Net increase/(decrease) in borrowed funds less than (22,640) 22,014
90 days
Net increase/(decrease) in borrowed funds greater than (25,000) 27,600
90 days
Net increase (decrease) in time deposits 46,322 (11,350)
Purchase of treasury stock -- (1,028)
Net proceeds from exercise of stock options -- 913
-------- --------
Net cash provided by financing activities 25,364 36,275
-------- --------
Increase/(decrease) in cash and cash equivalents 11,131 (4,047)
Cash and cash equivalents, beginning of period 21,110 18,295
-------- --------
Cash and cash equivalents, end of period $ 32,241 $ 14,248
======== ========
Supplemental disclosure:
Interest paid $ 13,921 $ 10,740
======== ========
Taxes paid $ 500 $ 875
======== ========
Non-cash transactions:
Change in unrealized gain/(loss) on securities available
for sale, net of tax $ (432) $ (3,329)
Change in deferred tax liability due to change in unrealized
Loss on securities available for sale 214 1,639
======== ========
</TABLE>
(See notes to consolidated financial statements)
7
<PAGE>
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Republic First Bancorp, Inc. (the "Company"), is a two-bank holding
company organized and incorporated under the laws of the Commonwealth of
Pennsylvania. Its wholly-owned subsidiary, First Republic Bank (the "Bank"),
offers a variety of banking services to individuals and businesses throughout
the Greater Philadelphia and South Jersey area through its offices and branches
in Philadelphia and Montgomery Counties.
The Company opened a second wholly-owned banking subsidiary on June 1,
1999 in the state of Delaware. 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 offers many of the same services and financial products as
First Republic Bank, described in Part I, Item I of the Company's 1999 Form
10-K. The Delaware Bank also has a Loan Production Office in Wilmington,
Delaware, which serves as a headquarters for the Delaware Bank's commercial
bankers.
In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (including normal recurring accruals)
necessary to present fairly the financial position as of June 30, 2000, the
results of operations for the three months and six months ended June 30, 2000
and 1999, and the cash flows for the six months ended June 30, 2000 and 1999 and
are intended to represent a full set of consolidated financial statements in
accordance with GAAP. These interim financial statements have been prepared in
accordance with instructions to Form 10-Q. The interim results of operations may
not be indicative of the results of operations for the full year. The
accompanying unaudited financial statements should be read in conjunction with
the Company's audited financial statements, and the notes thereto, included in
the Company's 1999 Form 10-K filed with the Securities and Exchange Commission.
Note 2: Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements of the Company include the
accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries,
First Republic Bank and Republic First Bank of Delaware, (the "Banks"). Such
statements have been presented in accordance with generally accepted accounting
principles as applicable to 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 heavily dependent 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.
8
<PAGE>
Additionally, the Company had derived income from First Republic Bank's
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
earned on these loans during the six months ended June 30, 1999. The Bank
terminated its participation in the program after 1999, and therefore did not
participate in the tax refund program during 2000. However, the Bank earned
$181,000 in 2000, representing recoveries of delinquent receivables from prior
years.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make significant estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the
allowance for loan losses, carrying values of real estate owned and deferred tax
assets. Consideration is given to a variety of factors in establishing the
allowance for loan losses, including current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. Since the allowance for loan
losses and carrying value of real estate owned is dependent, to a great extent,
on the general economy and other conditions that may be beyond the Banks'
control, it is at least reasonably possible that the estimates of the allowance
for loan losses and the carrying values of the real estate owned could differ
materially in the near term.
Note 3: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
Note 4: Cumulative Effect of a Change in Accounting Principle
During the first quarter of 1999, the Company expensed $94,000 which represented
all of its business start-up costs, upon the adoption of the Statement of
Position 98-5 "Reporting on the Costs of Startup Activities", on January 1,
1999. This statement requires costs of startup activities, including
organization costs, to be expensed as incurred. This resulted in a $63,000
charge or $0.01 per diluted share, net of an income tax benefit of $31,000,
which was recorded as a cumulative effect of a change in accounting principle.
9
<PAGE>
Note 5: Segment Reporting
The Company's reportable segments represent strategic businesses that
offer different products and services. The segments are managed separately
because each segment has unique operating characteristics, management
requirements and marketing strategies.
Republic First Bancorp has three reportable segments; two community
banking segments and the Tax Refund Program. The community banking segments are
primarily comprised of the results of operations and financial condition of the
Company's wholly owned banking subsidiaries, First Republic Bank and Republic
First Bank of Delaware. 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 accounting policies of the segments are the same as those described
in the notes to consolidated financial statements from the Company's Form 10-K.
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 Tax Refund Program is evaluated based upon income before
provision for income taxes.
The Tax Refund Program was developed as a business segment to further
expand the Company's products and services offered to consumers and businesses.
Effective after 1999, the Company will no longer participate in the Tax Refund
program with Jackson Hewitt.
10
<PAGE>
The segment information presented below reflects that the Delaware Bank
began operations in June 1999, and therefore 1999 amounts are not comparable.
<TABLE>
<CAPTION>
As of and for the six months ended June 30,
(dollars in thousands)
2000 1999
---- ----
First Tax First Tax
Republic Delaware Refund Republic Delaware Refund
Bank Bank Program Total Bank Bank Program Total
-------------------------------------------- --------------------------------------------
External customer revenues:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income $21,461 $501 $ - $21,962 $18,851 $34 $0 $18,885
Other Income 627 66 181 874 379 - 2,715 3,094
--- -- --- --- --- ----- -----
Total external customer
revenues 22,088 567 181 22,836 19,230 34 2,715 21,979
------ --- --- ------ ------ -- ----- ------
Intersegment revenues:
Interest Income 69 - - 69 - - - -
Other Income 38 - - 38 6 - - 6
-- - - -- - -
Total intersegement revenues 107 - - 107 6 - - 6
--- - - --- - -
Total Revenue 22,195 567 181 22,943 19,236 34 2,715 21,985
------ --- --- ------ ------ -- ----- ------
Depreciation and
amortization 235 46 - 281 455 3 - 458
Other operating expenses -
external 19,011 728 - 19,739 16,810 195 150 17,155
Intersegment Expense:
Other operating expense - 38 - 38 - 6 - 6
Interest Expense - 69 - 69 - - - -
- -- - --
Segment expenses 19,246 881 - 20,127 17,265 204 150 17,619
------ --- - ------ ------ --- --- ------
Segment income before taxes
and extraordinary items $2,949 ($314) $181 $2,816 $1,971 $(170) $2,565 $4,366
====== ====== ==== ====== ====== ====== ====== ======
Segment assets $595,697 $18,001 $ - $613,698 $550,232 $3,654 $ - $553,886
-------- ------- --- -------- -------- ------ --- --------
Capital expenditures $151 $37 $ - $188 $102 $837 - $939
---- --- --- ---- ---- ---- ----
11
<PAGE>
As of and for the three months ended June 30,
(dollars in thousands)
2000 1999
---- ----
First Tax First Tax
Republic Delaware Refund Republic Delaware Refund
Bank Bank Program Total Bank Bank Program Total
--------------------------------------------- ---------------------------------------------
External customer revenues:
Interest Income $ 10,979 $ 270 $ -- $ 11,249 $ 9,717 $ 34 $ -- $ 9,751
Other Income 311 48 -- 359 198 -- -- 198
-------- -------- -------- -------- -------- -------- ------- --------
Total external customer revenues
11,290 318 -- 11,608 9,915 34 -- 9,949
-------- -------- -------- -------- -------- -------- ------- --------
Intersegment revenues:
Interest Income -- -- -- -- -- -- -- --
Other Income 19 -- -- 19 6 -- -- 6
-------- -------- -------- -------- -------- -------- ------- --------
Total intersegement revenues 19 -- -- 19 6 -- -- 6
-------- -------- -------- -------- -------- -------- ------- --------
Total Revenue 11,309 318 -- 11,627 9,921 34 -- 9,955
-------- -------- -------- -------- -------- -------- ------- --------
Depreciation and amortization
122 23 -- 145 149 3 -- 152
Other operating expenses -
external 9,702 443 -- 10,145 8,486 195 -- 8,681
Intersegment Expense:
Other operating expense -- 19 -- 19 -- 6 -- 6
Interest Expense -- -- -- -- -- -- -- --
Segment expenses 9,824 485 -- 10,309 8,635 204 -- 8,839
-------- -------- -------- -------- -------- -------- ------- --------
Segment income before taxes and
extraordinary items $ 1,485 ($ 167) -- $ 1,318 $1,286 ($ 170) -- $ 1,116
======== ======== ======== ======== ====== ======== ======= ========
Segment assets $595,697 $ 18,001 $ -- $613,698 550,232 $ 3,654 -- $563,886
-------- -------- -------- -------- -------- -------- ------- --------
Capital expenditures $ 42 $ 13 $ -- $ 55 $ 48 $ 631 -- $ 679
-------- -------- -------- -------- -------- -------- ------- --------
</TABLE>
12
<PAGE>
Note 6: 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 or otherwise. The following table is a
reconciliation of the numerator and denominator used in calculating basic and
diluted EPS. Common stock equivalents which are anti-dilutive are not included
for purposes of this calculation. At June 30, 2000 and 1999, there were 298,970
and 104,610 CSEs that were antidilutive, respectively. These options may be
dilutive in the future.
The Company paid a 10% stock dividend on March 18, 1999. All relevant
financial data contained herein has been retroactively restated as if the
dividend had occurred at the beginning of each period presented herein.
13
<PAGE>
The following table is a comparison of EPS for the three and six months
ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Quarter to Date | Year to Date
2000 1999 | 2000 1999
Income before cumulative effect |
of a change in accounting |
principle (numerator for |
both calculations) $883,000 $750,000 | $1,887,000 $2,930,000
|
Shares Per Share Share Per Share | Shares Per Share Share Per Share
------ --------- ----- --------- | ------ --------- ----- ---------
Weighted average shares |
For period 6,168,729 5,937,124 | 6,168,729 5,999,803
Basic EPS $0.14 $0.13 | $0.31 $0.48
Add common stock equivalents |
representing dilutive stock |
options 93,752 270,017 | 128,971 257,217
|
Effect on basic EPS of |
dilutive CSE $(0.00) $(0.01) | $(0.01) $(0.01)
------- | -------
Equals total weighted average |
Shares and CSE (diluted) 6,262,481 6,207,141 | 6,297,700 6,257,020
========= ========= | ========= =========
Diluted EPS $0.14 $0.12 | $0.30 $0.47
----- ===== | ----- =====
</TABLE>
The impact of the cumulative effect of a change in accounting principle
on the year-to-date 1999 EPS was to lower the numerator by $63,000 and the
resulting basic and diluted EPS by $0.01.
Note 7: Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only components of other comprehensive income are those related to SFAS
Statement No. 115 available for sale securities.
<TABLE>
<CAPTION>
(dollar amounts in thousands) Three months ended Six months ended
June 30, June 30,
------------------------------------ -----------------------------------
2000 1999 2000 1999
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $883 $750 $1,887 $ 2,867
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding losses during the period (59) (2,328) (432) (3,329)
Less: Reclassification adjustment for gains
Included in net income
- - - -
---------------- ---------------- --------------- ---------------
Comprehensive (loss)/income $824 ($1,578) $1,455 $(462)
================ ================ =============== ===============
</TABLE>
14
<PAGE>
ITEM 2: 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; new
service and product offerings by competitors and price pressures; 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, 1999, Quarterly Reports on Form 10-Q,
filed by the Company in 2000, and any Current Reports on Form 8-K filed by the
Company, as well as other filings.
Financial Condition:
June 30, 2000 Compared to December 31, 1999
Total assets increased $27.4 million or 4.7%, to $613.7 million at June
30, 2000 from $586.3 million at December 31, 1999. Net loans (including loans
held for sale) increased $26.9 million, or 7.5%, to $386.6 million at June 30,
2000 from $359.6 million at December 31, 1999. The growth was a result of growth
in commercial and industrial loans, commercial construction loans, and the
success of the new construction lending team who were hired in the first quarter
of 2000. In keeping with the companies long-term strategy of changing the mix of
loans to more variable rate loans from fixed rate loans, most of the new loan
originations were variable rate loans. These new loans are generally in the
range of $750,000 to $1.0 million. Investment securities decreased $11.2
million, or 6.0%, to $176.1 million at June 30, 2000 from $187.3 million at
December 31, 1999. This decrease was due to principal payments received on
securities which were used to fund loan growth and to pay down other borrowed
funds.
Cash and due from banks, interest-bearing deposits, and federal funds
sold are all liquid funds. The aggregate amount in these three categories
increased by $11.1 million or 52.7% to $32.2 million at June 30, 2000 from $21.1
million at December 31, 1999 due to additional funds generated from deposit
growth.
Total liabilities increased $25.9 million or 4.7%, to $577.2 million at
June 30, 2000 from $551.3 million at December 31, 1999, due primarily to deposit
growth partially offset by a $47.6 million reduction in other borrowed funds.
Deposits, the Company's primary source of funds, increased $73.0 million, or
23.9% to $378.8 million at June 30, 2000 from $305.8 million at December 31,
1999. The aggregate of transaction accounts, which include demand, money market
and savings accounts, increased $26.7 million to $130.6 million at June 30, 2000
15
<PAGE>
from $103.9 million at December 31, 1999. Certificates of deposit increased by
$46.3 million, or 22.9%, to $248.2 million at June 30, 2000 from $201.9 million
at December 31, 1999. The increase in all deposit products was a result of the
success of the Company's deposit generation strategies instituted in 2000. The
Company formed deposit teams and aggressively targeted customers in five
specific business categories. This will be an ongoing part of the Company's
long-term strategy going forward in order to reduce the reliance on borrowed
funds.
Other borrowed funds were $189.0 million at June 30, 2000 as compared
to $236.6 million at December 31, 1999. The decrease was primarily the result of
the Company's decision to put more emphasis on deposit gathering and less
reliance on other borrowed funds. Accordingly the Company paid down borrowings.
The Company's shareholders' equity as of June 30, 2000 and December 31,
1999 was $36.5 million and $35.0 million, respectively. Book value per share of
the Company's common stock increased from $5.68 as of December 31, 1999 to $5.92
as of June 30, 2000. This increase was mainly attributable to the earnings for
the year which was partially offset by the decline in market value of the
available for sale securities portfolio.
Three Months Ended June 30, 2000 Compared to June 30, 1999
Results of Operations:
Overview
The Company's net income increased $133,000 to $883,000 for the three
months ended June 30, 2000, from $750,000 for the three months ended June 30,
1999. This increase was a result of higher net interest income and other
non-interest income, partially offset by higher other operating costs. Diluted
earnings per share for the three months ended June 30, 2000 was $0.14 compared
to $0.12, for the three months ended June 30, 1999, due to the increase in net
income. This resulted in a return on average assets and average equity of 0.60%
and 8.23% respectively, compared to 0.56% and 7.82% respectively for the same
period in 1999. The improvement in both ratios was due primarily to increased
net income.
Analysis of Net Interest Income
Historically, the Company's earnings have depended heavily upon the
Banks' net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is affected by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
The Company's net interest income increased $378,000, or 10.1%, to $4.1
million for the three months ended June 30, 2000 from $3.7 million for the three
months ended June 30, 1999. As shown in the following Rate Volume table, the
increase in net interest income was due to the positive effect of volume changes
totaling $636,000 partially offset by the costs associated with higher interest
rates of $258,000. The positive impact from volume changes was attributable to a
significant increase in interest-earning assets, which increased $50.8 million
on average to $571.8 million during the quarter ended June 30, 2000, from $521.0
million for the quarter ended June 30, 1999. The negative impact from changes in
rates was attributable to higher costing deposits and borrowed funds due to the
rising-rate environment. Net interest margin (net interest income as a
percentage of average interest-earning assets) was 2.89% for the three months
ended June 30, 2000 versus 2.88% for the three months ended June 30, 1999. The
improvement in net interest margin was the result of the change in the mix of
interest-bearing liabilities to lower costing deposits from higher costing other
borrowed funds.
16
<PAGE>
The Company's total interest income increased $1.5 million, or 15.4%,
to $11.2 million for the three months ended June 30, 2000 from $9.8 million for
the three months ended June 30, 1999. Approximately $1.2 million of the increase
was related to a $50.8 million increase in average interest-earning assets while
the remaining $295,000 was the result of the 38 basis point increase in the
yield earned on interest-earning assets to 7.88%. Interest and fees on loans
increased $1.6 million, or 24.3%, to $8.1 million for the three months ended
June 30, 2000 from $6.5 million for the three months ended June 30, 1999.
Approximately $1.3 million of the increase was due to an $59.7 million increase
in average loans outstanding while the remaining $240,000 of the increase was
due to an increase in the average rate earned on these loans of 38 basis points
to 8.63%. Interest and dividend income on securities decreased $147,000, or
4.6%, to $3.1 million for the three months ended June 30, 2000 from $3.2 million
for the three months ended June 30, 1999. This decrease in investment income was
the result of a decrease in the average balance of securities owned of $12.6
million, to $190.6 million for the three months ended June 30, 2000 from $203.2
million for the three months ended June 30, 1999. This decline in securities is
due to a plan to improve the mix of assets by redeploying the cash resulting
from maturities into higher yielding loans.
Interest expense increased $1.1 million, or 18.7%, to $7.1 million for
the three months ended June 30, 2000 from $6.0 million for the three months
ended June 30, 1999. Interest-bearing liabilities averaged $511.7 million , an
increase of $45.6 million, or 9.8%, from $466.2 million for the three months
ended June 30, 1999. The growth in interest-bearing liabilities contributed
$567,000 to the growth in interest expense while the increase in rates paid on
interest-bearing liabilities contributed the remaining $553,000 to the increase.
The growth in interest-bearing liabilities was due to deposit growth which was
used to fund the growth in interest-earning assets and to repay certain other
borrowed funds. This deposit growth was a result of the Company's successful
implementation of deposit generating strategies. The average rate paid on
interest-bearing liabilities increased 42 basis points to 5.58% for the three
months ended June 30, 2000 from 5.16% for the three months ended June 30, 1999
due primarily to the increase in average rates paid on other borrowings and
certain deposit accounts in response to the rising-rate environment.
Interest expense on time deposits increased $901,000 or 33.6%. This
increase was primarily due to an increase in the average rate of interest paid
on time deposits of 17 basis points from 5.86% at June 30, 1999 to 6.03% at June
30, 2000, and an increase in average volume of certificates of deposit of $54.9
million, or 30.0%, to $238.1 million for the three months ended June 30, 2000
from $183.2 million for the three months ended June 30, 1999. The increase in
the interest rate is in response to the rising-rate environment.
Interest expense on FHLB advances and overnight federal funds purchased
was $2.8 million for the three months ended June 30, 2000 compared to $2.9
million for the three months ended June 30, 1999. This decrease was due to a
decrease in the average volume of other borrowed funds of $28.3 million to
$193.3 million for the three months ended June 30, 2000 from $221.6 million for
the three months ended June 30, 1999 as a result of successful deposit
generating strategies. The decline in volume more than offset the increase in
interest expense from the increase in the average rate paid of 62 basis points
from 5.16% at June 30, 1999 to 5.78% at June 30, 2000, due to the rising-rate
environment.
17
<PAGE>
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the period. Changes that are not due to volume or rate variances have been
allocated proportionally to both, based on their relative absolute values.
Rate/Volume Table
<TABLE>
<CAPTION>
Three months ended June 30,
2000 versus 1999
(dollars in thousands)
Due to change in:
Volume Rate Total
------------ ------------- ------------
Interest Income
Loans
<S> <C> <C> <C>
Commercial $ 1,288 $ 213 $ 1,501
Residential Mortgage 4 19 23
Consumer and other 55 8 63
---------------------------------------------------------------------------------------------------------------------
Total Loans 1,347 240 1,587
Securities (201) 54 (147)
Other interest-earning assets 57 1 58
---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,203 295 1,498
Interest Expense
Deposits
Interest-bearing Demand deposits (46) (59) (105)
Money market and savings (84) (99) (183)
Time deposits (824) (77) (901)
---------------------------------------------------------------------------------------------------------------------
Total deposit interest expense (954) (235) (1,189)
Other borrowed funds 387 (318) 69
---------------------------------------------------------------------------------------------------------------------
Total interest expense (567) (553) (1,120)
---------------------------------------------------------------------------------------------------------------------
Net interest income $ 636 $ (258) $ 378
---------------------------------------------------------------------------------------------------------------------
</TABLE>
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 and inherent risks within the Company's loan
portfolio. Management's periodic evaluation is based upon an examination of the
portfolio, past loss experience, current economic conditions, the results of the
most recent regulatory examinations and other relevant factors. The provision
for loan losses was $200,000 and $210,000 for the three months ended June 30,
2000 and 1999, respectively. The amounts recorded in the second quarters of 2000
and 1999 were the amounts management considered necessary to increase the
allowance for loan losses to an amount that reflects the known and inherent
losses in the portfolio. As of June 30, 2000 and 1999 the allowance for loan
losses to total loans, net of deferred loan fees was 0.93% and 0.89%,
respectively.
18
<PAGE>
Non-Interest Income
Total non-interest income increased $161,000 to $359,000 for the three
months ended June 30, 2000 from $198,000 for the three months ended June 30,
1999. This increase is due to increased service fees on deposit accounts as a
result of the large growth in deposits as well as pre-payment penalty and
forfeited commitment fees on loans.
Non-Interest Expenses
Total non-interest expenses increased $347,000 to $3.0 million for the
three months ended June 30, 2000. Salaries and benefits increased $385,000 or
30.8%, to $1.6 million for the three months ended June 30, 2000 from $1.3
million for the three months ended June 30, 1999. The increase was due primarily
to an increase in staff of First Republic Bank as a result of business
development efforts, the opening of the Delaware Bank for a full quarter and
normal merit increases.
Occupancy and equipment expenses increased $32,000, or 7.5%, to
$459,000 for the three months ended June 30, 2000 from $427,000 for the three
months ended June 30, 1999 due to increased rent and repairs and maintenance
expenses, and the opening of the Delaware branch during the second quarter of
1999.
Other non-interest expense decreased $70,000, to $873,000 for the three
months ended June 30, 2000 from $943,000 for the same period in 1999. This
decline was primarily due to lower legal loan workout expenses and lower general
corporate legal expenses.
Provision for Income Taxes
The provision for income taxes increased $69,000, or 18.9%, to $435,000
for the three months ended June 30, 2000 from $366,000 for the three months
ended June 30, 1999. This increase is mainly the result of the increase in
pre-tax income from 1999 to 2000. The effective tax rate for both years was
approximately 33.0%.
19
<PAGE>
Six Months Ended June 30, 2000 Compared to June 30, 1999
Results of Operations:
Overview
The Company's net income decreased $1.0 million to $1.9 million for the
six months ended June 30, 2000, from $2.9 million for the six months ended June
30, 1999. This decrease is a result of the decrease in revenue from the Tax
Refund Program of approximately $1.7 million, or $0.27 per diluted share after
tax. During the first quarter of 1999 the Company participated in the program
and earned revenues of $2.7 million. In the year 2000 the Company did not
participate in the Tax Refund program and earned $181,000 in revenue during the
year representing recoveries of delinquent Tax Refund program loans from prior
years. Diluted earnings per share for the six months ended June 30, 2000, was
$0.30 compared to $0.46, for the six months ended June 30, 1999, due to the
decrease in net income. This resulted in a return on average assets and average
equity of 0.65% and 8.89% respectively, compared to 1.10% and 15.42%
respectively for the same period in 1999. The decline in these ratios is
generally due to lower net income. Excluding non-recurring revenue net of tax
from the Tax Refund Program, diluted earnings per share for the first six months
of 2000 of $0.28 grew 65% when compared to $0.17 for the first six months of
1999.
Analysis of Net Interest Income
Historically, the Company's earnings have depended heavily upon the
Banks' net interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is affected by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
The Company's net interest income increased $928,000, or 12.9%, to $8.1
million for the six months ended June 30, 2000 from $7.2 million for the six
months ended June 30, 1999. As shown in the Rate Volume table below, the
increase in net interest income was due to the positive effect of volume changes
of approximately $1.2 million partially offset by the effect of higher interest
rates which totaled $236,000. The positive impact of volume changes was
attributable to a significant increase in average interest earning assets which
increased $57.6 million to $563.7 million for the six months ended June 30,
2000, from $506.1 million for the six months ended June 30, 1999. Net interest
margin (net interest income as a percentage of average interest-earning assets)
was 2.89% for the six months ended June 30, 2000 versus 2.84% for the six months
ended June 30, 1999. The improvement in net interest margin was the result of a
shift in the mix of interest-bearing liabilities from other borrowed funds to
lower costing deposits as well as growth in interest-earning assets.
The Company's total interest income increased $3.1 million, or 16.3%,
to $22.0 million for the six months ended June 30, 2000 from $18.9 million for
the six months ended June 30, 1999. Approximately $2.6 million of the increase
was the result of a $57.6 million increase in average volume of interest-earning
assets while the remaining $518,000 of the increase was related to the 31 basis
point increase in the yield earned on interest-earning assets to 7.81%. Interest
and fees on loans increased $2.8 million, or 22.0%, to $15.6 million for the six
months ended June 30, 2000 from $12.8 million for the six months ended June 30,
1999. Approximately $2.5 million of the increase in loans was due primarily to a
$54.6 million increase in average loans outstanding while the remaining $344,000
of the increase was due to an increase in the average rate earned on these loans
of 28 basis points to 8.51%. The growth was primarily realized in the Commercial
loan area. The full-year effect of the Delaware bank also contributed to the
loan growth. Interest and dividend income on securities increased $199,000, or
3.3%, to $6.3 million for the six months ended June 30, 2000 from
20
<PAGE>
$6.1 million for the six months ended June 30, 1999. Approximately $173,000 of
this increase in investment income was the result of an increase in yield on the
securities portfolio of 18 basis points to 6.49% while $26,000 of the increase
was due to an increase in the average balance of securities owned of $833,000,
to $193.2 million for the six months ended June 30, 2000 from $192.4 million for
the six months ended June 30, 1999.
The Company's total interest expense increased $2.1 million, or 18.4%,
to $13.8 million for the six months ended June 30, 2000 from $11.7 million for
the six months ended June 30, 1999. Interest-bearing liabilities averaged $507.5
million, an increase of $55.1 million, or 12.2%, from $452.5 million for the six
months ended June 30, 1999. The growth in interest-bearing liabilities
contributed $1.4 million to the growth in interest expense while the increase in
rates paid on interest-bearing liabilities contributed the remaining $754,000 of
the increase. The increase in volume is the result of very successful deposit
generating strategies which allowed the bank to fund growth with deposits and
reduce the reliance on borrowed funds. The average rate paid on interest-bearing
liabilities increased 26 basis points to 5.46% for the six months ended June 30,
2000 from 5.20% for the six months ended June 30, 1999 due primarily to the
increase in average rates paid on other borrowings and certain deposit accounts
in response to generally higher interest rates.
Interest expense on time deposits increased $1.0 million or 18.2%. This
increase was primarily due to an increase in the average volume of certificates
of deposit of $31.6 million, or 16.9%, to $219.2 million for the six months
ended June 30, 2000 from $187.5 million for the six months ended June 30, 1999.
The average rate of interest paid on time deposits increased slightly to 5.93%
at June 30, 2000 versus 5.90% at June 30, 1999.
Interest expense on FHLB advances and overnight federal funds purchased
was $6.0 million for the six months ended June 30, 2000 compared to $5.3 million
for the six months ended June 30, 1999. This increase was principally due to an
increase in the average rate of interest paid on other borrowed funds which
increased 51 basis points from 5.16% at June 30, 1999 to 5.67% at June 30, 2000,
due to the rising-rate environment. In addition, the average volume of other
borrowed funds increased by $6.2 million to $212.3 million for the six months
ended June 30, 2000 from $206.2 million for the six months ended June 30, 1999.
21
<PAGE>
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the six month period ending June 30, 2000 versus the comparable period for 1999.
Changes that are not due to volume or rate variances have been allocated
proportionally to both, based on their relative absolute values.
Rate/Volume Table
<TABLE>
<CAPTION>
Six months ended June 30,
2000 versus 1999
(dollars in thousands)
Due to change in:
Volume Rate Total
------------- ------------ ------------
Interest Income
Loans
<S> <C> <C> <C>
Commercial $ 2,303 $ 251 $ 2,554
Residential Mortgage 56 83 139
Consumer and other 110 10 120
------------------------------------------------------------------------------------------------------------------
Total Loans 2,469 344 2,813
Securities 26 173 199
Other interest-earning assets 64 1 65
------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 2,559 518 3,077
Interest Expense
Deposits
Interest-Bearing Demand deposits (65) (21) (86)
Money market and savings (195) (146) (341)
Time deposits (965) (34) (999)
------------------------------------------------------------------------------------------------------------------
Total deposit interest expense (1,225) (201) (1,426)
Other borrowed funds (170) (553) (723)
------------------------------------------------------------------------------------------------------------------
Total interest expense (1,395) (754) (2,149)
------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,164 $ (236) $ 928
------------------------------------------------------------------------------------------------------------------
</TABLE>
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 and inherent risks within the Company's loan
portfolio. Management's periodic evaluation is based upon an examination of the
portfolio, past loss experience, current economic conditions, the results of the
most recent regulatory examinations and other relevant factors. The provision
for loan losses was $400,000 and $460,000 for the six months ended June 30, 2000
and 1999, respectively. The amounts recorded in 2000 and 1999 were the amounts
management considered necessary to increase the allowance for loan losses to an
amount that reflects the known and inherent losses in the portfolio. As of June
30, 2000 and 1999 the allowance for loan losses to total loans, net of deferred
loan fees was 0.93% and 0.89%, respectively.
22
<PAGE>
Non-Interest Income
Total non-interest income decreased $2.2 million to $874,000 for the
six months ended June 30, 2000 from $3.1 million for the six months ended June
30, 1999. This was mainly attributable to a $2.5 million decrease in revenues
related to the Tax Refund Program. This decrease results from the termination of
the Bank's participation in the Tax Refund Program after the 1999 tax
preparation season. Partially offsetting the tax refund amounts was an increase
in non-interest income from service fees on deposit accounts and pre-payment
penalty and forfeited commitment fees on loans which increased $307,000 from
$328,000 for the six months ended June 30, 1999. The increase in service fees on
deposits is the result of increased business development in transaction based
accounts.
Non-Interest Expenses
Total non-interest expenses increased 318,000 to $5.8 million for the
six months ended June 30, 2000 from $5.5 million at June 30, 1999. Salaries and
benefits increased $497,000 or 18.5%, to $3.2 million for the six months ended
June 30, 2000 from $2.7 million for the six months ended June 30, 1999. The
increase was due primarily to an increase in staff associated with business
development efforts, the full year effect of the Delaware branch opening and
normal merit increases.
Occupancy and equipment expenses increased $73,000, or 8.6%, to
$918,000 for the six months ended June 30, 2000 from $845,000 for the six months
ended June 30, 1999. This was principally the result of increased rent and
repairs and maintenance expense, and the opening of the Delaware branch during
the second quarter of 1999.
Other non-interest expense decreased $252,000 to $1.7 million for the
six months ended June 30, 2000 from $1.9 million for the same period in 1999.
This was mainly due to the accrual of a legal settlement for $233,000 during the
first quarter of 1999. The Company also recorded a write-down of its only
property held in other real estate owned, of $75,000, during the first quarter
of 1999. The absence of these expenses in 2000 were partially offset by the
growth of the Company and business development activities.
Provision for Income Taxes
The provision for income taxes decreased $507,000, or 35.3%, to
$929,000 for the six months ended June 30, 2000 from $1.4 million for the six
months ended June 30, 1999. This decrease is mainly the result of the decrease
in pre-tax income from 1999 to 2000. For the year ended June 30, 1999, the
Company recorded an income tax benefit of $31,000 in connection with the
cumulative effect of a change in accounting principle, upon the adoption of SOP
98-5. The effective tax rate for both years was approximately 33.0%.
23
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
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.
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. Management uses gap analysis and simulation models to attempt to
monitor effects of its interest sensitive assets and liabilities. Adjustments to
the mix of assets and liabilities are made periodically in an effort to provide
dependable and steady growth in net interest income regardless of the behavior
of interest rates.
The following tables present a summary of the Company's interest rate
sensitivity GAP at June 30, 2000. 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
24
<PAGE>
prepayment assumptions were made with regard to investment securities based upon
the expected prepayment of the underlying collateral of the mortgage backed
securities.
<TABLE>
<CAPTION>
Republic First Bancorp
Interest Sensitive Gap
(dollars in thousands) as of June 30, 2000
-------------------------------------------------------------------------------------------------------
More
than Financial
0-90 91-180 181-365 1-2 2-3 3-4 4-5 5 Statement
Days Days Days Years Years Years Years Years Total Fair Value
-------------------------------------------------------------------------------------------------------
Interest Sensitive Assets:
==========================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities and interest
bearing balances due
from banks $35,377 $6,868 $10,732 $17,440 $19,301 $17,619 $14,625 $64,314 $186,276 $186,254
Average interest rate 6.77% 6.45% 6.52% 6.48% 6.45% 6.44% 6.45% 6.44%
Loans receivable 128,008 12,722 16,172 35,964 34,135 38,869 53,511 67,172 386,553 386,160
Average interest rate 9.95% 8.20% 8.06% 8.14% 8.26% 8.13% 8.37% 7.35%
Total 163,385 19,590 26,904 53,404 53,436 56,488 68,136 131,486 572,829 572,414
-------------------------------------------------------------------------------------------------------
Cumulative Totals $163,385 $182,975 $209,879 $263,283 $316,719 $373,207 $441,343 $572,829
Interest Sensitive Liabilities:
Demand Interest Bearing $11,350 $ 267 $ 533 $ 1,066 $ 1,066 $ 1,066 $ 9,414 $ - $24,763 $24,763
Average interest rate 3.06% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 0.00%
Savings Accounts 2,946 69 138 277 277 277 2,444 $ - 6,428 6,428
Average interest rate 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 0.00%
Money Market Accounts 25,543 600 1,201 2,400 2,400 2,400 21,184 $ - 55,727 55,727
Average interest rate 4.78% 4.78% 4.78% 4.78% 4.78% 4.78% 4.78% 4.78%
Time Deposits 33,774 56,444 60,963 85,603 2,056 3,310 6,069 2 248,222 246,665
Average interest rate 5.41% 5.59% 5.69% 6.14% 5.68% 5.86% 6.46% 5.83%
FHLB Borrowings 29,000 - 42,500 117,500 - - - - 189,000 187,539
Average interest rate 4.98% 0.00% 5.97% 6.07% 0.00% 0.00% 0.00% 0.00%
Total 102,613 57,380 105,335 206,846 5,799 7,053 39,111 2 524,140 521,122
-------------------------------------------------------------------------------------------------------
Cumulative Totals $102,613 $159,993 $265,328 $472,174 $477,973 $485,026 $524,138 $524,140
Interest Rate
sensitivity GAP $60,772 $(37,790) $(78,431) $(153,442) $47,637 $ 49,435 $29,025 $131,485
Cumulative GAP $60,772 $22,982 $(55,449) $(208,891) $(161,254) $(111,819) $(82,794) $ 48,689
Interest Sensitive Assets/
Interest Sensitive
Liabilities 159% 34% 26% 26% 921% 801% 174% 65,743%
Cumulative GAP/
Total Earning Assets 11% 4% -10% -36% -28% -20% -14% 9%
Total Earning Assets $572,829
==========
Off balance sheet
items notional
value:
Commitments to
extend credit $4,716 $35,000 $39,716 $397
-------------------- --------------------
Average interest
rate 9.50% 9.75%
</TABLE>
25
<PAGE>
In addition to the GAP analysis, the Company utilized 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 as 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 June 30, 2001,
based upon the assets, liabilities and off-balance sheet financial instruments
in existence at June 30, 2000. 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 table reflects the estimated
percentage change in estimated net interest income for the years ending June 30,
2001 and December 31, 2000.
Percentage Change
Rate shocks to interest rates 6/30/01 12/31/00
----------------------------- ------- --------
+2% (.03)% (1.9%)
+1% (0.3) (1.2)
-1% (1.5) 0.1
-2% (4.9) 1.0
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 a
change 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.
26
<PAGE>
Regulatory Matters
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 ("FDIA"). Under the Banking Code, no
dividends may be paid except from the "accumulated net earnings" (generally,
undivided profits). Under the FRB's regulations, the Banks cannot pay dividends
that exceed its net income from the current and preceding two years. Under the
FDIA, an insured bank may pay no dividends if the bank is in arrears in the
payment of insurance due to the FDIC.
Federal banking agencies impose three minimum capital requirements on
the Company's risk-based capital ratios based on total capital, "Tier 1 capital,
and a leverage capital ratio. The risk-based capital ratios measure the adequacy
of a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level of
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks. The Banks and the Company are
subject to periodic examinations by regulatory agencies.
Under FRB and FDIC regulations, a bank is deemed to be "well
capitalized" when it has a "leverage ratio" ("Tier l capital to total assets")
of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%,
and a total capital to weighted-risk assets ratio of at least 10%. At June 30,
2000 and December 31, 1999, First Republic Bank, Republic First Bank of DE and
Republic First Bancorp, Inc. exceeded all requirements to be considered well
capitalized.
The following table presents the Company's capital regulatory ratios at
June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ----------- ----------- ----------- -----------
Dollars in thousands
At June 30, 2000
Total risk based capital
<S> <C> <C> <C> <C> <C> <C>
First Republic Bank 40,266 11.75% 27,426 8.00% 34,282 10.00%
Republic First Bank of DE 3,661 27.95% 1,048 8.00% 1,310 10.00%
Republic First Bancorp, Inc. 46,968 13.19% 28,491 8.00% 35,613 10.00%
Tier one risk based capital
First Republic Bank 36,768 10.73% 13,713 4.00% 20,569 6.00%
Republic First Bank of DE 3,515 26.83% 524 4.00% 786 6.00%
Republic First Bancorp, Inc. 43,324 12.17% 14,245 4.00% 21,368 6.00%
Tier one leveraged capital
First Republic Bank 36,768 6.30% 29,183 5.00% 29,183 5.00%
Republic First Bank of DE 3,515 23.07% 762 5.00% 762 5.00%
Republic First Bancorp, Inc. 43,324 7.24% 29,932 5.00% 29,932 5.00%
27
<PAGE>
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ----------- ----------- ----------- -----------
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%
Dividend Policy
</TABLE>
The Company has not paid any cash dividends on its Common Stock. At the present
time, the Company does not intend to pay cash dividends to shareholders and
intends to retain all earnings to fund the growth of the Company and the Bank.
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 $32.2 million at June 30, 2000
compared to $21.1 million at December 31, 1999. Maturing and repaying loans are
another source of asset liquidity. At June 30, 2000, the Company estimated that
an additional $156.9 million of loans will mature or repay in the next one year
period ending June 30, 2001.
Liquidity can be met by attracting deposits with competitive rates,
buying federal funds or utilizing the facilities of the Federal Reserve System
or the Federal Home Loan Bank System. At June 30, 2000, the Banks had $76.0
million in unused lines of credit available to it under informal arrangements
with correspondent banks compared to $27.4 million at December 31, 1999. These
lines of credit enable the Banks to purchase funds for short-term needs at
current market rates.
At June 30, 2000, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $39.7 million. Certificates of
deposit which are scheduled to mature within one year totaled $151.2 million at
June 30, 2000, and borrowings that are scheduled to mature within the same
period amounted to $71.5 million. The Company anticipates that it will have
sufficient funds available to meet its current commitments.
28
<PAGE>
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 lines of credit from its
correspondent, in the amount of $10.0 million, to assist in managing the Bank's
liquidity position. Additionally, the Bank has established a line of credit with
the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of
approximately $255.0 million. As of June 30, 2000 and December 31, 1999, the
Company had borrowed $189.0 and $236.6 million, respectively, under its lines of
credit.
The Company's Board of Directors has appointed an Asset/Liability
Committee (ALCO) to assist Management in establishing parameters for
investments. The Asset/Liability Committee is responsible for managing the
liquidity position and interest sensitivity of the Banks. Such committee's
primary objective is to maximize net interest margin in an ever changing rate
environment, while balancing the Banks' interest-sensitive assets and
liabilities and providing adequate liquidity for projected needs.
Management presently believes that the effect on the Banks of any
sustained future rise in interest rates, reflected in higher cost of funds,
would be detrimental since the amount of the Banks' interest bearing liabilities
which would reprice, are greater than the Banks' interest earning assets which
would reprice, over the next twelve months. However, a decrease in interest
rates generally could have a positive effect on the Banks, due again to the
timing difference between repricing the Banks' liabilities, primarily
certificates of deposit and other borrowed funds, and the largely automatic
repricing of its existing interest-earning assets. As of June 30, 2000, 19.6% of
the Banks' interest-bearing deposits and other borrowings were to mature, and be
repriceable, within three months, and an additional 10.9% 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.
Securities Portfolio
At June 30, 2000, the Company had identified certain investment
securities that are being held for indefinite periods of time, including
securities that will be used as part of the Company's asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments and similar factors. These securities are classified as
available-for-sale and are intended to increase the flexibility of the Company's
asset/liability management. Available-for-sale securities consist of US
Government Agency securities and other investments. The book and market values
of securities available-for-sale were $169.0 million and $158.3 million as of
June 30, 2000. The net unrealized loss on securities available-for-sale, as of
this date, was $10.7 million.
29
<PAGE>
The following table represents the carrying and estimated fair values
of Investment Securities at June 30, 2000.
<TABLE>
<CAPTION>
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized
Available-for-Sale Cost Gain Loss Fair Value
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed $ 166,518 $ - $ (10,696) $ 155,822
U.S. Government Agencies 2,483 14 (43) 2,454
------------------------------------------------------------------------------
Total Available-for-Sale $ 169,001 $ 14 $ (10,739) $ 158,276
------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Held-to-Maturity Cost Gain Loss Fair Value
-----------------------------------------------------------------------------
Mortgage-backed $ 1,738 $ 14 $ (21) $ 1,731
US Government Agencies 1,303 2 - 1,305
Other 14,820 2 (19) 14,803
-----------------------------------------------------------------------------
Total Held-to-Maturity $ 17,861 $ 18 $ (40) $ 17,839
-----------------------------------------------------------------------------
</TABLE>
Loan Portfolio
The Company's loan portfolio consists of commercial loans, commercial
real estate loans, commercial loans secured by one-to-four family residential
property, as well as residential, home equity loans and consumer loans.
Commercial loans are primarily term loans made to small-to-medium-sized
businesses and professionals for working capital purposes. The majority of these
commercial loans are collateralized by real estate and further secured by other
collateral and personal guarantees. The Company's commercial loans generally
range from $250,000 to $1,000,000 in amount.
The Company's net loans increased $26.9 million, or 7.5%, to $386.6
million at June 30, 2000 from $359.6 million at December 31, 1999 (including
loans held for sale), which were generally funded by increased deposits.
30
<PAGE>
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
<TABLE>
<CAPTION>
(dollars in thousands) As of June 30, 2000 As of December 31, 1999
------------------------------------------------------------------------------
Balance % of Total Balance % of Total
------------------------------------------------------------------------------
Commercial:
<S> <C> <C> <C> <C>
Real Estate Secured (1) $ 176,073 45.1 $ 183,783 50.7
Non Real Estate Secured 48,364 12.4 41,067 11.3
------------------------------------------------------------------------------
224,437 57.5 224,850 62.0
Residential Real Estate 163,190 41.8 136,129 37.5
Consumer & Other 2,570 0.7 1,834 0.5
------------------------------------------------------------------------------
Total Loans (1) 390,197 100.0% 362,813 100.0%
Less allowance for loan losses (3,644) (3,208)
--------------- ----------------
Net loans $ 386,553 $ 359,605
=============== ================
</TABLE>
(1) Includes loans held for sale at December 31, 1999.
Credit Quality
The Company's written lending policies require underwriting, loan
documentation, and credit analysis standards to be met prior to funding. In
addition, a senior loan officer reviews all loan applications. The Board of
Directors reviews the status of loans monthly to ensure that proper standards
are maintained.
Loans, including impaired loans, are generally classified as nonaccrual
if they are past due as to maturity or payment of principal and/or interest for
a period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as nonaccrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in accordance
with the contractual terms of the loan.
While a loan is classified as nonaccrual or as an impaired loan and the
future collectability of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectability of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case where a
nonaccrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the remaining
recorded loan balance at the contractual interest rate. Cash interest receipts
in excess of that amount are recorded as recoveries to the allowance for loan
losses until prior charge-offs have been fully recovered.
31
<PAGE>
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
---------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Loans accruing, but past due 90 days or more $153 $333
Non-accrual loans 3,102 1,778
Restructured loans 1,982 -
---------------------------------------------
Total non-performing loans (1) 5,237 2,111
Foreclosed real estate 643 643
---------------------------------------------
Total non-performing assets (2) $5,880 $2,754
=============================================
Non-performing loans as a percentage of total
loans net of unearned
Income (3) 1.34% 0.58%
Non-performing assets as a percentage of total
assets 0.96% 0.47%
</TABLE>
(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual
basis; (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans.
(2) Non-performing assets are composed of non-performing loans and foreclosed
real estate (assets acquired in foreclosure).
(3) Includes loans held for sale at December 31, 1999.
Total non-performing loans increased by $3.1 million to $5.2 million at
June 30, 2000 from $2.1 million at December 31, 1999. Total non-performing
assets increased by $3.1 million at June 30, 2000 to $5.9 million from $2.8
million at December 31, 1999. The increase in non-performing loans and
non-performing assets are primarily due to loans to one borrower totaling $1.4
million that were placed on non-accrual status during the first quarter of 2000
and the addition of one restructured loan totaling $2.0 million. Restructured
loans represent loans to one borrower totaling $2.0 million that were
restructured in the second quarter of 2000. Management believes that collateral
pledged against both the non-accrual and restructured loans is adequate to
protect the Bank from potential losses associated with these credits.
32
<PAGE>
The Company had delinquent loans as of June 30, 2000 and December 31,
1999 as follows; (i) 30 to 59 days past due, consisted of commercial, and
consumer and home equity loans in the aggregate principal amount of $90,000 and
$3,403,000 respectively; and (ii) 60 to 89 days past due, consisted of
commercial and consumer loan in the aggregate principal amount of $222,000 and
$169,000 respectively. In addition, the Company has classified certain loans as
substandard and doubtful (as those terms are defined in applicable Bank
regulations). At June 30, 2000 and December 31, 1999, substandard loans totaled
approximately $5.7 million and $2.2 million respectively; and doubtful loans
totaled $237,000 and $274,000, respectively at the end of both periods. This
increase in substandard loans was primarily the result of classifying loans made
to two different borrowers for $2.0 million and $1.4 million as substandard.
Both of these credits are included in the non-performing loan and asset totals
above. Management believes that there is sufficient collateral securing both of
these credits to protect the Bank from potential losses associated with these
credits.
The recorded investment in loans for which impairment has been
recognized in accordance with SFAS 114 totaled $5.1 million and $1.8 million at
June 30, 2000 and December 31, 1999 respectively, of which $4.8 million and $1.4
million respectively, related to loans with no valuation allowance because the
loans have been partially written down through charge-offs. Loans with valuation
allowances at June 30, 2000, and December 31, 1999 were $312,000 and $353,000,
respectively. The increase in impaired loans is due primarily to the
classification of loans to two borrowers totaling $2.0 million and $1.4 million
as impaired loans. The $2.0 million loan is included in restructured and
substandard loans while the $1.4 million loan is included in both the
non-accrual and substandard loan totals. There were no commitments to extend
credit to any borrowers with impaired loans as of the end of the periods
presented herein.
At June 30, 2000, 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 $82.6 million, which
represented 21.2% of gross loans receivable. Loan concentrations are considered
to exist when there are amounts loaned to a multiple number of borrowers engaged
in similar activities that would cause them to be similarly impacted by economic
or other conditions.
Real estate owned is initially recorded at the lower or cost or fair
value, net of estimated selling costs at the date of foreclosure. After
foreclosure, management periodically performs valuations and any subsequent
deteriations in fair value, and all other revenue and expenses are charged
against operating expenses in the period in which they occur.
Potential problem loans consist of loans that are included in
performing loans, but for which potential credit problems of the borrowers have
caused management to have serious doubts as to the ability of such borrowers to
continue to comply with present repayment terms. At June 30, 2000, all
identified potential problem loans are included in the preceding table with the
exception of loans classified as substandard but still accruing which totaled
$842,000 as of June 30, 2000.
The Company had no credit exposure to "highly leveraged transactions"
at June 30, 2000, as defined by the Federal Reserve Bank.
33
<PAGE>
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the six
months ended June 30, 2000, and 1999 and the twelve months ended December 31,
1999 is as follows:
<TABLE>
<CAPTION>
For the six months For the twelve months For the six months
ended ended ended
(Amounts in thousands) June 30, 2000 December 31, 1999 June 30, 1999
---------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Balance at beginning of period .......... $ 3,208 $ 2,395 2,395
Charge-offs:
Commercial ........................... 34 91 27
Real estate .......................... -- -- --
Consumer ............................. 2 117 8
--------- --------- ---------
Total charge-offs ................. 36 208 35
--------- --------- ---------
Recoveries:
Commercial ........................... 72 124 51
Real estate .......................... -- -- --
Consumer ............................. -- 17 7
--------- --------- ---------
Total recoveries .................. 72 141 58
--------- --------- ---------
Net charge-offs/(recoveries) ............ (36) 67 (23)
--------- --------- ---------
Provision for loan losses ............... 400 880 460
--------- --------- ---------
Balance at end of period ............. 3,644 $ 3,208 $ 2,878
========= ========= =========
Average loans outstanding (1)(2) ..... $ 368,204 $ 322,363 313,627
========= ========= =========
As a percent of average loans (1)(2):
Net charge-offs/Recoveries ........... (0.01)% 0.02% (0.01%)
Provision for loan losses ............ 0.11% 0.27% 0.15%
Allowance for loan losses ............ 0.99% 1.00% 0.92%
Allowance for loan losses to:
Total loans, net of unearned income at
period end ........................ 0.93% 0.88% 0.89%
Total non-performing loans at period
end ............................... 69.58% 151.97% 128.83%
</TABLE>
(1) Includes nonaccruing loans.
(2) Includes loans held for sale.
Management makes a monthly determination as to an appropriate provision
from earnings necessary to maintain an allowance for loan losses that is
adequate based upon the loan portfolio composition, classified problem loans,
and general economic conditions. The Company's Board of Directors periodically
reviews the status of all nonaccrual and impaired loans and loans criticized by
the Company's regulators and internal loan review officer. The internal loan
review officer reviews both the loan portfolio and the overall adequacy of the
loan loss reserve. During the review of the loan loss reserve, the Board of
Directors considers specific loans, pools of similar loans, and historical
charge-off activity. The sum of these components is compared to the loan loss
reserve balance. Any additions deemed necessary to the loan loss reserve balance
are charged to operations.
34
<PAGE>
The Company has an existing loan review program, which monitors the
loan portfolio on an ongoing basis. Loan review is conducted by a loan review
officer and is reported quarterly to the Board of Directors. The Board of
Directors reviews the finding of the loan review program on a bi-monthly basis.
Determining the appropriate level of the allowance for loan losses at
any given date is difficult, particularly in a continually changing economy.
However, there can be no assurance that, if asset quality deteriorates in future
periods, additions to the allowance for loan losses will not be required.
The Company's management considers the entire allowance for loan losses
to be adequate, however, to comply with regulatory reporting requirements,
management has allocated the allowance for loan losses as shown in the table
below into components by loan type at each period end. Through such allocations,
management does not intend to imply that actual future charge-offs will
necessarily follow the same pattern or that any portion of the allowance is
restricted.
<TABLE>
<CAPTION>
At June 30, 2000 At December 31, 1999
Percent of Loans Percent of Loans
Amount In Each Category Amount (in In Each Category
(in 000's) To Loans 000's) to Loans (1)
---------- --------- ------ ------------
Allocation of allowance for loan losses:
<S> <C> <C> <C> <C>
Commercial .......................... $2,919 57.5% $2,119 61.98%
Residential real estate ............. 228 41.8% 423 37.54%
Consumer and other .................. 90 0.7% 84 0.51%
Unallocated ......................... 407 --% 582 --%
--- --- --- ---
Total ............................ $3,644 100.00% $3,208 100.00%
====== ======
</TABLE>
The unallocated allowance decreased $175,000 to $407,000 at June 30,
2000 from $582,000 at December 31, 1999. The Company's internal loan guidelines
require all classified credits to have a specific reserve allocated to the
credit, even though management believes the loan to be adequately
collateralized. The Company allocated a portion of the amount previously
unallocated to a specific loan that was downgraded during the first quarter of
2000, which caused the unallocated portion of the allowance for loan losses to
decrease. Management believes the collateral pledged against this loan is
adequate to protect the Bank from potential losses associated with this credit.
(1) Includes loans held for sale
35
<PAGE>
Commitments
In the normal course of its business, the Company makes commitments to
extend credit and issues standby letters of credit. Generally, such commitments
are provided as a service to its customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirement. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The type and amount of collateral obtained, if deemed
necessary upon extension of credit, are based on Management's credit evaluation
of the borrower. Standby letters of credit are conditional commitments issued to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing standby letters of credit is essentially the same as that
involved in extending loan facilities to customers and is based on Management's
evaluation of the creditworthiness of the borrower and the quality of the
collateral. At June 30, 2000 and December 31, 1999, firm loan commitments
approximated $35.0 million and $17.5 million respectively, and commitments of
standby letters of credit approximated $4.7 million and $2.4 million,
respectively.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's need and ability to react to
changes in interest rates. As discussed previously, management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest income
from being affected by wide interest rate fluctuations.
36
<PAGE>
Part II Other Information
Item 1: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
Item 2: Changes in Securities and use of proceeds
None
Item 3: Defaults upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-K for an
annual report on Form 10-K)
37
<PAGE>
Exhibit No.
10 Amended and Restated Material Contracts.- None
11 Computation of Per Share Earnings See footnote No. 2 to
Notes to Consolidated Financial Statements under Earnings
per Share.
21 Subsidiaries of the Company. First Republic Bank (the
"Bank"), a wholly-owned subsidiary, commenced operations on
November 3, 1988. The Bank is a commercial bank chartered
pursuant to the laws of the Commonwealth of Pennsylvania.
Republic First Bank of Delaware (the "Delaware Bank") is
also a wholly-owned subsidiary of the Company, commenced
operations on June 1, 1999. The Delaware Bank is a
commercial bank chartered pursuant to the laws of the State
of Delaware. The Bank and the Delaware Bank are both members
of the Federal Reserve System and their primary federal
regulators are the Federal Reserve Board of Governors.
27 Financial Data Schedule.
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
**Incorporated by reference in the Company's Form 10-K, filed March 23,
2000.
Reports on Form 8-K
None
38
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic First Bancorp, Inc.
/s/ Jere A. Young
-------------------------------------
Jere A. Young
President and Chief Executive Officer
/s/ George S. Rapp
-------------------------------------
George S. Rapp
Executive Vice President and Chief Financial Officer
Dated: August 11, 2000
39
