10-K405 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION ------------------------------------------------ Washington, D.C. 20549 FORM 10-K --------- (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 2000 ----------------- OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________________ to _____________________ Commission file number: 0-17007 REPUBLIC FIRST BANCORP, INC. ---------------------------- (Exact name of registrant as specified in charter) Pennsylvania 23-2486815 ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1608 Walnut Street, Suite 1000, Philadelphia, PA 19103 ------------------------------- ------------------------------------ (Address of principal (Zip Code) Executive offices) Issuer's telephone number, including area code: (215) 735-4422 Securities registered pursuant to Section 12(b) of the Act: None. Title of each class Name of each exchange on which registered Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K [ X ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average of the bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. $26,222,452 based on the average of the bid and asked prices on the National Association of Securities Dealers Automated Quotation System on February 28, 2001. APPLICABLE ONLY TO CORPORATE REGISTRANTS Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Common Stock $0.01 Par Value 6,358,126 ---------------------------- ---------------------------- Title of Class Number of Shares Outstanding as of February 28, 2001 Documents incorporated by reference: Part III incorporates certain information by reference from the Registrant's Proxy Statement for the 2000 Annual Meeting of Shareholders. REPUBLIC FIRST BANCORP | 1
REPUBLIC FIRST BANCORP, INC. Form 10-K INDEX PART I Page Item 1 Description of Business................................................................... 3 Item 2 Description of Properties................................................................. 6 Item 3 Legal Proceedings......................................................................... 7 Item 4 Submission of Matters to a Vote of Security Holders ...................................... 10 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ................... 11 Item 6 Selected Financial Data.................................................................. 12 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations..... 13 Item 8 Financial Statements and Supplementary Data............................................... 34 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 34 PART III Item 10 Directors and Executive Officers of the Registrant ....................................... 34 Item 11 Executive Compensation ................................................................... 34 Item 12 Security Ownership of Certain Beneficial Owners and Management ........................... 34 Item 13 Certain Relationships and Related Transactions ........................................... 34 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................... 35
2 | REPUBLIC FIRST BANCORP PART I Item 1: Description of Business Republic First Bancorp, Inc. Republic First Bancorp, Inc. (the "Company"), is a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiaries, First Republic Bank (the "Bank"), and Republic First Bank of Delaware (the "Delaware Bank"), (together the "Banks") offer a variety of banking services to individuals and businesses throughout the Greater Philadelphia, Delaware and South Jersey area through their offices and branches in Philadelphia and Montgomery Counties in Pennsylvania and in New Castle County, Delaware. As of December 31, 2000, the Company had total assets of approximately $655.6 million, total shareholders' equity of approximately $43.0 million, total deposits of approximately $425.6 million and net loans receivable outstanding of approximately $418.3 million. The majority of such loans were made for commercial purposes. The Company provides banking services through the Banks and does not presently engage in any activities other than these banking activities. The principal executive offices of the Company and the Bank are located at 1608 Walnut Street, Suite 1000, Philadelphia, PA 19103. Its telephone number is (215) 735-4422. The Company and the Banks have a total of 137 employees. First Republic Bank The Bank commenced operations on November 3, 1988 as First Executive Bank. Concurrent with the merger on June 7, 1996 between First Executive and Republic Bank, its name was changed to First Republic Bank. The Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania, is a member of the Federal Reserve System and its primary federal regulator is the Federal Reserve Board of Governors. The deposits held by the Bank are insured up to applicable limits by the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC"). It presently conducts its principal banking activities through its five Philadelphia offices and three suburban offices in Ardmore, East Norriton and Abington, all of which are located in Montgomery County, Pennsylvania. As of December 31, 2000, the Bank had total assets of approximately $627.2 million, total shareholders' equity of approximately $36.7 million, total deposits of approximately $404.6 million and net loans receivable of approximately $397.3 million. The majority of such loans were made for commercial purposes. The Bank offers many commercial and consumer banking services, with an emphasis on serving the needs of individuals, small and medium-sized businesses, executives, professionals and professional organizations in its service area. The Bank attempts to offer a high level of personalized service to both its commercial and consumer customers. The Bank offers both commercial and consumer deposit accounts, including checking accounts, interest-bearing "NOW" accounts, insured money market accounts, certificates of deposit, savings accounts, sweep accounts, lockbox services and individual retirement accounts. The Bank actively solicits non-interest and interest-bearing deposits from its borrowers. The Bank offers a broad range of loan and credit facilities to the businesses and residents of its service area, including secured and unsecured commercial loans including commercial real estate and construction loans, home improvement loans, bridge loans, mortgages, home equity lines of credit, overdraft lines of credit and loans for the purchase of marketable securities. Management manages the Banks' credit risk through loan application evaluation, approval and monitoring procedures. Since their inception, the Banks' have had a senior officer monitor compliance with the Banks' lending policies and procedures by the Banks loan officers. The Bank also maintains an investment securities portfolio. Investment securities are purchased by the Bank within standards of the Banks' Investment Policy, which is approved annually by the Banks' board of directors. The Investment Policy addresses such issues as permissible investment categories, credit quality of the investment, maturities and concentrations of investments. At December 31, 2000, and 1999, approximately 91% and 90%, respectively, of the aggregate dollar amount of the investment securities consisted of either U.S. Government debt securities or U.S. Government agency issued mortgage backed securities or collateralized mortgage obligations (CMOs). Credit risk associated with these U.S. Government debt securities and the U.S. Government Agency securities is minimal, with risk-based capital weighting factors of 0% and 20%, respectively. The CMOs are fixed and variable rate debt securities, with current weighted average lives of approximately ten years. REPUBLIC FIRST BANCORP | 3 The Banks' regulatory authorities require the Bank to maintain certain liquidity ratios such that the Bank maintains available funds, or can obtain available funds at reasonable rates, in order to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, the Bank has formed an Asset/Liability Committee, comprised of certain members of the Banks' board of directors and senior management, which determines such ratios. The purpose of the committee is, in part, to monitor the Banks' liquidity and adherence to the ratios in addition to managing interest rate risk to the Bank. The Asset/Liability Committee meets at least quarterly. The Banks' lending activities are focused on small and medium-sized businesses within the professional community. Loans for commercial purposes are the most significant category of the Banks' lending activities, representing approximately 81.6%, of total loans outstanding at December 31, 2000. While residential first mortgage loans made for non-commercial purposes comprised 17.7% of total loans outstanding at that date, the Banks are not currently expanding that portfolio. Instead, the Banks are focusing on expanding their commercial loan base. Repayment of these loans is, in part, dependent on general economic conditions affecting the community and the various businesses within the community. Although the majority of the Banks' loan portfolio is collateralized with real estate or other collateral, a portion of the commercial portfolio is unsecured, representing loans made to borrowers considered to be of sufficient strength to merit unsecured financing. The unsecured portion of the portfolio represents the greatest risk of loss to the Bank but is only 3% of the loan portfolio. Although management continues to follow strict underwriting policies, and monitors loans through the Banks' loan review officer, credit risk is still inherent in the portfolio. Management has further mitigated credit risk within the loan portfolio by focusing on the origination of collateralized loans, which represent a lower credit risk to the Bank. Republic First Bank of Delaware In the second quarter of 2001, Republic First Bank of Delaware will change its name to First Bank of Delaware. Republic First Bank of Delaware is a Delaware State chartered Bank, located at Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle, Delaware. The Delaware Bank opened for business on June 1, 1999. The Delaware Bank offers many of the same services and financial products as First Republic Bank, described above, and will serve to expand the Company's market penetration into Delaware. It presently conducts its principal banking activities through its two offices in Wilmington, Delaware. As of December 31, 2000, the Delaware Bank had total assets of approximately $28.4 million, total shareholders' equity of approximately $3.4 million, total deposits of approximately $24.5 million and net loans receivable of approximately $21.0 million. The majority of such loans were made for commercial purposes. Service Area/Market Overview The Banks' primary market service area consists of the Greater Philadelphia region, including Center City Philadelphia and the northern and western suburban communities located principally in Montgomery County. The Banks also serve the surrounding counties of Bucks, Chester and Delaware in Pennsylvania, southern New Jersey and northern Delaware. In 1998, the Bank entered into an alliance with MBM/ATM Group Ltd., to deploy offsite Automated Teller Machines (ATMs) to provide cash dispensers to service the greater Philadelphia region and parts of Southern New Jersey, Delaware and Maryland. The Company sold its rights to these machines and other assets to MBM/ATM Group, LTD, effective December 31, 2000. No gain or loss was recognized on the sale. The Company will provide cash to the MBM/ATM Group, Ltd. for these machines and will charge them a market interest rate. Competition There is substantial competition among financial institutions in the Banks' service area. The Banks compete with new and established local commercial banks, as well as numerous regionally-based and super-regional commercial banks. In addition to competing with new and established commercial banking institutions for both deposits and loan customers, the Banks compete directly with savings banks, savings and loan associations, finance companies, credit unions, factors, mortgage brokers, insurance companies, securities brokerage firms, mutual funds, money market funds, private lenders and other institutions for deposits, mortgages and consumer and commercial loans, as well as other services. Competition among financial institutions is based upon a number of factors, including, but not limited to, the quality of services rendered, interest rates offered on deposit accounts, interest rates charged on loans and other credit services, service charges, the convenience of banking facilities, locations and hours of operation and, in the case of loans to larger commercial borrowers, relative lending limits. It is the view of Management that a combination of many factors, including, but not limited to, the level of market interest rates, has increased competition for loans and deposits. 4 | REPUBLIC FIRST BANCORP Many of the banks with which the Banks compete have greater financial resources than the Bank and offer a wider range of deposit and lending instruments with a higher lending limit. The Banks' combined lending limits were $6.8 million at December 31, 2000. The Banks are subject to potential intensified competition from new branches of established banks in the area as well as new banks which could open in its market area. Several de novo banks with business strategies similar to those of the Banks have opened since the Banks' inception. There are banks and other financial institutions which serve surrounding areas and additional out-of-state financial institutions which currently, or in the future, may compete in the Banks' market. The Banks compete to attract deposits and loan applications both from customers of existing institutions and from customers new to the greater Philadelphia area. The Banks anticipate a continued increase in competition in its market area. Operating Strategy The Company's objective is for the Banks to become the primary alternative to the large banks that dominate the Greater Philadelphia market. The Company's management team has developed a business strategy consisting of the following key elements to achieve this objective: Providing Attentive and Personalized Service. The Company believes that a very attractive niche exists serving small-to medium-sized business customers not adequately served by the Banks' larger competitors. The Company believes this segment of the market responds very positively to the attentive and highly personalized service provided by the Banks. The Banks offer individuals and small to medium-sized businesses a wide array of banking products, informed and friendly service, extended operating hours, consistently applied credit policies, and local, timely decision making. The banking industry is experiencing a period of rapid consolidation and many local branches have been acquired by large out-of-market institutions. The ensuing changes in these banking institutions have resulted in a change in their product offerings and the degree of personal attention they provide to their customers. The Company is positioned to respond to these dynamics by offering a community banking alternative and tailoring its product offering to fill voids created as larger competitors increase the price of products and services or de-emphasize such products and services. Attracting and Retaining Highly Experienced Personnel. The Banks' executive officers and other personnel have substantial employment experience with larger banks in the region. When opening new branches, the Banks extensively screens and trains its employees to ensure the staff has the necessary ability and contacts in the community to foster rapid growth. The Company seeks to instill a sales and service oriented culture in its personnel in order to build customer relationships and maximize cross-selling opportunities. The Company offers meaningful sales-based incentives to its customer contact employees. Capitalizing on Market Dynamics. In the past three years, banks controlling nearly half of the deposits in the Banks' primary market areas have been acquired by large and super-regional bank holding companies. The ensuing cultural changes in these banking institutions have resulted in a change in their product offerings and the degree of personal attention they provide. The Company has sought to capitalize on these changes by offering a community banking alternative. As a result of continuing consolidations, the Company believes it has a continuing opportunity to increase its market share. Products and Services Traditional Banking Products and Services. The Banks offer a range of commercial and retail banking services to their customers, including commercial loans, commercial loans secured by real estate, construction loans, personal and business checking and savings accounts, certificates of deposit, residential mortgages and consumer loans. The Banks' commercial loan customers typically borrow between $250,000 and $1,000,000. The Banks attempt to offer a high level of personalized service to both its commercial and consumer customers. In addition, the Bank provides travelers' checks, money orders and other typical banking services. The Banks are members of the MAC(TM) and PLUS(TM) networks in order to provide customers with access to automated teller machines worldwide. The Banks currently have eight proprietary automated teller machines at its branch locations, and its customers have access to 135 offsite automated teller machines, throughout Pennsylvania, southern New Jersey, Maryland and Delaware through its affiliation with MBM/ATM Group Ltd. Tax Refund Products. The Company had a contractual relationship with Jackson Hewitt, Inc. ("Jackson Hewitt"), one of the Nation's largest tax preparation services, to provide tax refund products to consumer taxpayers for whom Jackson Hewitt prepares and electronically files federal income tax returns (the "Tax Refund Program"). The Tax Refund Program enabled the Bank to provide accelerated check refunds ("ACRs") and refund anticipation loans ("RALs") (collectively, "Tax Refund Products"). There are a limited number of banks that provide this service nationwide. The Bank generated significant revenue from the Tax Refund Program in 1999 and 1998. In April 1998 Jackson Hewitt had notified the Company that it would not renew the agreement beyond October 31, 1999. The Bank was paid its contractual obligation in 1999 and did not participate in the program beyond the 1999 tax preparation season. REPUBLIC FIRST BANCORP | 5 The Bank participated in the Tax Refund Program in 1999 and 1998. The Tax Refund Program generated $2.7 million and $2.4 million in net revenue during 1999 and 1998 respectively. In 1999 the Bank was paid $2.7 million under its contractual obligation with Jackson Hewitt. The Tax Refund Program earnings are realized primarily in the first quarter of the year. These pretax earnings constituted approximately 84% and 61% of the company first quarter 1999 and 1998 pretax earnings, respectively, and 39% and 42% of the Company's pretax earnings for the year ended December 31, 1999 and 1998, respectively. Revenue generated by the Tax Refund Program accounted for 6% of total revenues in the years ended December 31, 1999 and 1998. The Bank did not participate in the Tax Refund Program with Jackson Hewitt beyond the 1999 tax season. The Bank received a processing fee for each ACR and RAL it provided. When the Bank provided a RAL, it received an additional fee that is equal to 4% of the RAL. If the Internal Revenue Service (the "IRS") does not deposit the expected refund into the bank account established for its receipt because, among other reasons, the taxpayer owes back taxes, the amount due under a RAL will not be paid without instituting individual collection actions against the taxpayer. The risk of RAL default in excess of 4% is apportioned between the Bank and Jackson Hewitt on a 35%/65% basis, respectively. The default rate was 5.02% in 1998, and did not exceed 4% in 1997 or 1999. The Bank participates in cross-collection arrangements with other RAL lenders. Under these arrangements, the banks share information regarding the identity of, and amounts payable by, delinquent RAL borrowers. By sharing this information the banks are able to identify these individuals in later tax seasons should they obtain a RAL from a tax preparation company. RAL borrowers are advised in advance that should they become identified as owing any portion of a RAL from a prior tax season, any tax refunds attributable to such borrower will be offset first against the prior debt. Income recognized as a result of cross-collections during the first quarter of 2000 was $181,000. The company has re-entered the tax refund loan and refund line of Business with another partner in 2001. However, it is not yet possible to determine the impact on 2001 and future earnings, since the program differs in significant aspects from prior years. Branch Expansion Plans and Growth Strategy The company has no current plans to add branch locations in 2001, but may do so if opportunities arise. Management's goal when establishing a new branch is to achieve deposits of at least $35.0 million in three years or less. The Bank opened its first suburban office in Ardmore, Montgomery County in November 1995. This was followed by three additional suburban branches on City Line Avenue, East Norriton and Abington in March 1997, May 1997 and November 1997, respectively. As of December 31, 2000, these branches had $18.4 million, $25.8 million and $62.1 million in deposits, respectively. In 1998, the Bank opened an additional branch located at 1818 Market Street in the heart of the Philadelphia business district, which had $30.6 million in total deposits, at December 31, 2000. Item 2: Description of Properties The Company leases approximately 26,961 square feet on the second, tenth and eleventh floors of 1608 Walnut Street, Philadelphia, Pennsylvania, as its headquarter facilities. The space is occupied by both the Company and the Bank and is used as executive offices, Bank operations and commercial bank lending. Management believes that its present space is adequate but that future staffing needs may require the Bank to secure additional space. The current term of the lease on its headquarter facilities expires on July 31, 2007 with annual rent expense of $376,788 payable monthly. In addition to the base rent and building operation expenses, the Company is required to pay its proportional share of all real estate taxes, assessments, and sewer costs, water charges, excess levies, license and permit fees under its lease and to maintain insurance on the premises. The Bank leases approximately 1,829 square feet on the ground floor at 1601 Market Street in Center City, Philadelphia. This space contains a banking area and vault and represents the Banks main office. The initial ten year term of the lease expires March 2003 and contains a five year renewal option. The annual rent for such location is $83,448, payable in monthly installments. The Bank leases approximately 1,743 square feet of space on the ground floor at 1601 Walnut Street, Center City Philadelphia, PA. This space contains a banking area and vault. The initial ten-year term of the lease expires August 2006 and contains one renewal option of five years. The annual rent for such location is $42,600, payable in monthly installments. The Bank leases approximately 785 square feet in the lower level of Pepper Pavilion at Graduate Hospital, 19th and Lombard Streets, Philadelphia, Pennsylvania. The space contains a banking area, lobby, office and vault. The current lease had an initial five year term and one five year renewal option which expires June 2002. The annual rental at such location is $22,320, payable in monthly installments. The Bank leases approximately 798 square feet of space on the ground floor and 903 square feet on the 2nd floor at 233 East Lancaster Avenue, Ardmore, PA. The space contains a banking area and business development office. The initial ten-year term 6 | REPUBLIC FIRST BANCORP of the lease expires in August 2005, and contains one renewal option for five years. The annual rental at such location is $44,604, payable in monthly installments. The Bank leases an approximately 2,143 square foot building at 4190 City Line Avenue, Philadelphia, Pennsylvania. The space contains a retail banking facility. The initial ten year term of the lease expires January 2007 and contains a five year renewal option. The annual rent for such location is $65,904, payable in monthly installments. The Bank leases an approximately 4,500 square foot building at 75 East Germantown Avenue, East Norriton, Pennsylvania. The space contains a banking area and business development office. The initial ten year term contains two five year renewal options and the initial lease term expires December 2006. The annual rent for such location is $64,632, payable in monthly installments. The Bank purchased an approximately 2,800 square foot facility for its Abington, Montgomery County office at 1480 York Road, Abington, Pennsylvania. This space contains a banking area and additional space for a possible loan administration office. The Bank leases approximately 1,850 square feet on the ground floor at 1818 Market St. Philadelphia, Pennsylvania. The space contains a banking area and a vault. The initial ten year term of the lease expires in December 2008 and contains two five year renewal options. The annual rent for such location is $64,584, payable in monthly installments. The Delaware Bank has a land lease on approximately 2,000 sq. feet of ground at Concord Pike and Rocky Run Pkwy, Brandywine Hundred, Delaware for its branch operations and headquarters. The Delaware Bank opened for business on June 1, 1999. The initial ten year term of the lease expires June 2008 and contains two five year options to renew the lease. The annual rent for such location is $70,224, payable in monthly installments. The Delaware Bank leases approximately 2,220 sq. feet on the ground floor of a building at 824 Market Street, Wilmington, DE. The space contains a loan production office and a branch that opened in November of 2000. The initial five year term of the lease expires in October 2004. The annual rent for such location is $39,624, payable in monthly installments. Item 3: Legal Proceedings The Company and the Banks are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. First Republic Bank has been sued alleging a breach of a prior settlement agreement and subsequent infringement of the alleged trademark "First Republic," as well as unfair competition, dilution and unjust enrichment. While the Bank has answered the complaint denying the above, with counterclaims, the complaint seeks injunctive relief, a name change and monetary damages. It is not possible to determine the outcome of the suit at this time. Supervision and Regulation Various requirements and restrictions under the laws of the United States and the Commonwealth of Pennsylvania affect the Company and the Banks. General The Company is a bank holding company subject to supervision and regulation by the Federal Reserve Bank of Philadelphia ("FRB") under the Bank Holding Company Act of 1956, as amended. As a bank holding company, the Company's activities and those of the Banks are limited to the business of banking and activities closely related or incidental to banking, and the Company may not directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the FRB. The Banks are subject to supervision and examination by applicable federal and state banking agencies. The Banks are members of the Federal Reserve System and subject to the regulations of the FRB. First Republic Bank is also a Pennsylvania-chartered bank subject to supervision and regulation by the Pennsylvania Department of Banking. The Delaware Bank is a Delaware-chartered bank subject to the supervision and regulation of the Delaware Department of Banking. In addition, because the FDIC insures the deposits of the Banks, the Banks are subject to regulation by the FDIC. The Banks are also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, REPUBLIC FIRST BANCORP | 7 and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the FRB in attempting to control the money supply and credit availability in order to influence interest rates and the economy. Holding Company Structure The Banks are subject to restrictions under federal law which limit their ability to transfer funds to the Company, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by the Banks to the Company are generally limited in amount to 10% of the Banks' capital and surplus. Furthermore, such loans and extensions of credit are required to be secured in specific amounts, and all transactions are required to be on an arm's length basis. The Banks have never made any loan or extension of credit to the Company nor have they purchased any assets from the Company. Under FRB policy, the Company is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks, i.e., to downstream funds to the Banks. This support may be required at times when, absent such policy, the Company might not otherwise provide such support. Any capital loans by the Company to the Banks are subordinate in right of payment to deposits and to certain other indebtedness of the Banks. In the event of the Company's bankruptcy, any commitment by the Company to a federal bank regulatory agency to maintain the capital of the Banks will be assumed by the bankruptcy trustee and entitled to a priority of payment. Gramm-Leach-Bliley Act On November 12, 1999, the GLB Act was passed into law. The GLB Act does three fundamental things: (a) The GLB Act repeals the key provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks (securities firms). (b) The GLB Act amends the BHCA to permit qualifying bank holding companies to engage in any type of financial activities that are not permitted for banks themselves. (c) The GLB Act permits subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. The result is that banking companies will generally be able to offer a wider range of financial products and services and will be more readily able to combine with other types of financial companies, such as securities and insurance companies. The GLB Act creates a new kind of bank holding company called a "financial holding company" (an "FHC"). An FHC is authorized to engage in any activity that is "financial in nature or incidental to financial activities" and any activity that the Federal Reserve determines is "complementary to financial activities" and does not pose undue risks to the financial system. Among other things, "financial in nature" activities include securities underwriting and dealing, insurance underwriting and sales, and certain merchant banking activities. A bank holding company qualifies to become an FHC if each of its depository institution subsidiaries is "well capitalized," "well managed," and CRA-rated "satisfactory" or better. A qualifying bank holding company becomes an FHC by filing with the Federal Reserve an election to become an FHC. If an FHC at any time fails to remain "well capitalized" or "well managed," the consequences can be severe. Such an FHC must enter into a written agreement with the Federal Reserve to restore compliance. If compliance is not restored within 180 days, the Federal Reserve can require the FHC to cease all its newly authorized activities or even to divest itself of its depository institutions. On the other hand, a failure to maintain a CRA rating of "satisfactory" will not jeopardize any then existing newly authorized activities; rather, the FJC cannot engage in any additional newly authorized activities until a "satisfactory" CRA rating is restored. In addition to activities currently permitted by law and regulation for bank holding companies, an FHC may engage in virtually any other kind of financial activity. Under limited circumstances, an FHC may even be authorized to engage in certain non-financial activities. The most important newly authorized activities are as follows: (a) Securities underwriting and dealing; (b) Insurance underwriting and sales; (c) Merchant banking activities; (d) Activities determined by the Federal Reserve to be "financial in nature" and incidental activities; and (e) "Complimentary: financial activities, as determined by the Federal Reserve. 8 | REPUBLIC FIRST BANCORP Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those currently permitted by law and regulation. As of the date of this Report of Form 10-K, the Company has not elected to become a FHC. The GLB Act also authorizes national banks to create "financial subsidiaries." This is in addition to the present authority of national banks to create "operating subsidiaries: A "financial subsidiary" is a direct subsidiary of a national bank that satisfies the same conditions as an FHC, plus certain other conditions, and is approved in advance by the OCC. A "financial subsidiary" can engage in most, but not all, of the newly authorized activities. In addition, the GLB Act also provides significant new protections for the privacy of customer information. These provisions apply to any company "the business of which" is engaging in activities permitted for an FHC, even if it is not itself an FHC. Basically, the GLB Act subjects a financial institution to four new requirements regarding non-public information about a customer. The financial institution must (1) adopt and disclose a privacy policy; (2) give customers the right to "opt out" of disclosures to non-affiliated parties; (3) not disclose any account information to third party marketers; and (4) follow regulatory standards (to be adopted in the future) to protect the security and confidentiality of customer information. Although the long-range effects of the GLB Act cannot be predicted with reasonable certainty, most probably it will further narrow the differences and intensify competition between and among commercial banks, investment banks, insurance firms and other financial service companies. Regulatory Restrictions on Dividends Dividend payments by the Banks to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act, and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under the FRB's regulations, the Banks cannot pay dividends that exceed its net income from the current year and the preceding two years. Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, the Bank would be limited to $8.0 million of dividends plus an additional amount equal to the Banks' net profit for 2001, up to the date of any such dividend declaration. No dividend payments by the Banks or the Company are expected to be declared or paid in 2001. State and federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Adherence to such standards further limits the ability of the Banks to pay dividends to the Company. Dividend Policy The Company has not paid any cash dividends on its Common Stock. At the present time, the Company does not foresee paying cash dividends to shareholders and intends to retain all earnings to fund the growth of the Company and the Banks. FDIC Insurance Assessments The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule, the FDIC, on a semiannual basis, assigns each institution to one of three capital groups (well capitalized, adequately capitalized or under capitalized) and further assigns such institution to one of three subgroups within a capital group corresponding to the FDIC's judgment of the institution's strength based on supervisory evaluations, including examination reports, statistical analysis and other information relevant to gauging the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10.00% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.00% or greater and a Tier 1 leverage ratio of 5.00% or greater, are assigned to the well capitalized group. Capital Adequacy The FRB adopted risk-based capital guidelines for bank holding companies, such as the Company. The required minimum ratio of total capital to risk-weighted assets (including off-balance sheet activities, such as standby letters of credit) is 8.0%. At least half of the total capital is required to be Tier 1 capital, consisting principally of common shareholders' equity, non-cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill. The remainder, Tier 2 capital, may consist of a limited amount of subordinated debt and intermediate-term preferred stock, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. REPUBLIC FIRST BANCORP | 9 In addition to the risk-based capital guidelines, the FRB established minimum leverage ratio (Tier 1 capital to average total assets) guidelines for bank holding companies. These guidelines provide for a minimum leverage ratio of 3% for those bank holding companies that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other bank holding companies are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. The Company is in compliance with these guidelines. The FRB subjects the Bank to similar capital requirements. The risk-based capital standards are required to take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. As a denovo bank, the Delaware Bank is subject to certain capital requirements and guidelines imposed by the FRB and Delaware State Department of Banking. These guidelines provide for a minimum leveraged ratio of 9.00% and total shareholders' equity of at least $3.0 million during the period in which the Delaware Bank is considered a denovo bank. Management expects that the Delaware Bank will be considered a denovo bank through June 30, 2002. After that time period, the Delaware Bank would then be subject to the same risk-based capital and leveraged capital guidelines as the Company and the Bank. At December 31, 2000, the Delaware Bank had a Tier 1 leveraged ratio of 12.15% and shareholders equity of $3.4 million. Interstate Banking The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995 (the "Interstate Banking Law"), amended various federal banking laws to provide for nationwide interstate banking, interstate bank mergers and interstate branching. The interstate banking provisions allow for the acquisition by a bank holding company of a bank located in another state. Interstate bank mergers and branch purchase and assumption transactions were allowed effective September 1, 1998; however, states may "opt-out" of the merger and purchase and assumption provisions by enacting a law that specifically prohibits such interstate transactions. States could, in the alternative, enact legislation to allow interstate merger and purchase and assumption transactions prior to September 1, 1999. States could also enact legislation to allow for de novo interstate branching by out of state banks. In July 1997, Pennsylvania adopted "opt-in" legislation which allows such transactions. Profitability, Monetary Policy and Economic Conditions The Banks' profitability is principally dependent on interest rate differentials. In general, the difference between the interest paid by a bank on its deposits and other borrowings and the interest received by a bank on loans and securities held in its investment portfolio comprise the major portion of a Banks' earnings. Thus, the earnings and growth of the Banks will be subject to the influence of economic conditions, both domestic and foreign, on the levels of and changes in interest rates. In addition to being affected by general economic conditions, the earnings and growth of the Bank will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking, the FRB and the FDIC. An important function of the FRB is to regulate the supply of money and other credit conditions in order to manage interest rates. The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon the future business, earnings and growth of the Bank cannot be determined. See "Management's Discussion and Analysis of Financial Condition" and "Results of Operations". Item 4: Submission of Matters to a Vote of Security Holders Not applicable. 10 | REPUBLIC FIRST BANCORP PART II Item 5: Market Registrants for Common Equity and Related Stockholder Matters Market Information Shares of the Common Stock are traded in the over-the-counter market and are quoted on the Nasdaq/NMS under the symbol "FRBK." The Common Stock began trading on Nasdaq/NMS on December 4, 1997. Prior to that date, the Common Stock was quoted on the Nasdaq SmallCap Market. The table below presents the range of high and low trade prices reported for the Common Stock on Nasdaq/NMS or on the Nasdaq SmallCap Market, as the case may be, for the periods indicated. Market quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not necessarily reflect actual transactions. All price information in the following table has been adjusted retroactively to reflect the 10% stock dividend for distribution on March 18, 1999, as well as two six-for-five stock splits effected in the form of 20% stock dividends distributed on March 27, 1998 and April 15, 1997. As of December 31, 2000, there were approximately 255 holders of record of the Common Stock. On February 28, 2001, the closing price of a share of Common Stock on the Nasdaq/NMS was $5.13. Year Quarter High Low ---- ------- ---- --- 2000.................. 4th $4.31 $3.50 3rd 4.63 3.88 2nd 5.13 4.25 1st 6.63 4.75 1999.................. 4th 7.75 5.06 3rd 8.88 6.25 2nd 9.13 7.06 1st 11.94 8.19 1998.................. 4th 9.89 7.85 3rd 10.28 7.62 2nd 12.05 9.55 1st 12.12 9.56 Stock Repurchase Program Effective June 21, 1999, the Company's stock repurchase program, originally announced on August 24, 1998 and established for the period through and including June 30, 1999, was extended to December 31, 1999. The aggregate amount of stock to be repurchased did not exceed 4.9% of the Company's issued and outstanding stock, or approximately 297,000 shares. As of December 31, 1999, there were 54,916 shares repurchased pursuant to rule 10b-18 of the Securities and Exchange Commission. There were also an additional 279,088 shares purchased in block transaction purchases, that are not included as part of the stock repurchase program specified under rule 10b-18. The exercise of 158,832 options during 1999 was funded from such block transaction purchases. The stock repurchase program was not extended beyond December 31, 1999. Dividend Policy The Company has not paid any cash dividends on its Common Stock. At the present time, the Company does not foresee paying cash dividends to shareholders and intends to retain all earnings to fund the growth of the Company and the Banks. The Company paid a 10% Stock Dividend on March 18, 1999, as well as 20% stock dividends on March 27, 1998 and April 15, 1997. The payment of dividends in the future, if any, will depend upon earnings, capital levels, cash requirements, the financial condition of the Company and the Banks, applicable government regulations and policies and other factors deemed relevant by the Company's Board of Directors, including the amount of cash dividends payable to the Company by the Banks. The principal source of income and cash flow for the Company, including cash flow to pay cash dividends on the Common Stock, is dividends from the Banks. Various federal and state laws, regulations and policies limit the ability of the Banks to pay cash dividends to the Company. For certain limitations on the Banks' ability to pay cash dividends to the Company, see item 3 "Supervision and Regulation". REPUBLIC FIRST BANCORP | 11 Item 6: Selected Financial Data
As of or for the Years Ended December 31, ------------------------------------------------------------- (Dollars in thousands, except per share data) 2000 1999 1998 1997 1996 INCOME STATEMENT DATA: Total interest income...................................... $ 46,887 $ 39,448 $ 34,404 $ 23,533 $ 17,112 Total interest expense..................................... 29,792 24,512 20,845 12,912 9,715 ------- ------- ------- ------- ------- Net interest income........................................ 17,095 14,936 13,559 10,621 7,397 Provision for loan losses.................................. 666 880 370 320 155 Non-interest income........................................ 1,724 3,805 3,773 2,625 2,405 Non-interest expenses...................................... 13,132 10,956 11,302 7,792 5,581 Federal income taxes....................................... 1,657 2,271 1,862 1,583 1,353 ------- ------- ------- ------- ------- Net income................................................. $ 3,364 $ 4,634 $ 3,798 $ 3,551 $ 2,713 ======= ======= ======= ======= ======= PER SHARE DATA (1) Basic earnings per share................................... $0.54 $0.77 $0.63 $0.75 $0.74 Diluted earnings per share................................. 0.54 0.74 0.59 0.69 0.70 Book value per share....................................... 6.96 5.68 6.22 5.71 4.07 BALANCE SHEET DATA Total assets............................................... $655,637 $586,330 $516,361 $375,462 $273,795 Total loans, net (2)...................................... 418,313 359,606 306,768 209,999 170,002 Total securities........................................... 169,841 187,308 177,552 147,980 80,954 Total deposits............................................. 425,551 305,793 283,084 248,401 250,059 Total borrowings........................................... 176,442 236,640 188,009 85,912 -- Total shareholders' equity................................. 43,030 35,040 36,622 34,622 18,371 PERFORMANCE RATIOS Return on average assets................................... 0.55% 0.85% 0.81% 1.21% 1.22% Return on average shareholders' equity..................... 7.73 10.94 10.21 16.84 17.85 Net interest margin........................................ 2.91 2.85 3.09 3.76 3.37 Total other expenses as a percentage of average assets..... 2.16 2.02 2.42 2.65 2.51 ASSET QUALITY RATIOS Allowance for loan losses as a percentage of loans, net (2) 0.96% 0.88% 0.79% 0.96% 1.22% Allowance for loan losses as a % of non-performing loans... 118.96 151.97 213.27 106.01 109.02 Non-performing loans as a percentage of total loans, net (2) 0.81 0.58 0.36 0.90 1.12 Non-performing assets as a percentage of total assets...... 0.52 0.47 0.36 1.03 0.81 Net charge-offs (recoveries) as a percentage of average loans, net (2)................................... (0.05) 0.02 0.00 0.21 0.20 LIQUIDITY AND CAPITAL RATIOS Average equity to average assets........................... 6.12% 6.70% 7.97% 7.17% 6.84% Leverage ratio............................................. 6.91 7.23 7.50 10.53 6.65 Tier 1 capital to risk-weighted assets..................... 11.99 12.37 11.76 15.42 10.08 Total capital to risk-weighted assets...................... 13.08 13.33 12.54 16.33 11.25 ------------------ (1) Adjusted to reflect a 10% Stock Dividend paid on March 18, 1999 and two six-for-five stock splits effected in the form of 20% Stock Dividends, paid on March 27, 1998 and April 15, 1997. (2) Includes loans held for sale.
12 | REPUBLIC FIRST BANCORP Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of the significant changes in the Company's results of operations, financial condition and capital resources presented in the accompanying consolidated financial statements of Republic First Bancorp, Inc. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements. Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "may", "believes", "expect", "estimate", "project", "anticipate", "should", "intend", "probability", "risk", "target", "objective" and similar expressions or variations on such expressions. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; business conditions in the financial services industry; the regulatory environment, including evolving banking industry standards; rapidly changing technology and competition with community, regional and national financial institutions; new service and product offerings by competitors, 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 similar filings in 2001. Results of Operations for the years ended December 31, 2000 and 1999 Overview The Company's net income decreased $1.3 million, or 27.4%, to $3.4 million for the year ended December 31, 2000, from $4.6 million for the year ended December 31, 1999. The earnings decreased primarily as a result of the decrease in revenue from the Tax Refund Program of approximately $2.5 million. During the first quarter of 1999, the Company participated in the program and earned revenues of $2.7 million. During 2000, the Company did not participate in the Tax Refund program but earned $181,000 in revenue during the period representing recoveries of delinquent tax refund program loans from prior years. Diluted earnings per share for the year ended December 31, 2000 were $0.54 compared to $0.74, for the year ended December 31, 1999, due to lower net income during 2000 compared to 1999. This resulted in an average return on assets and average equity of 0.55% and 7.73%, respectively in 2000, compared to 0.85% and 10.94%, respectively, for the year ended 1999. Excluding non-recurring revenue from the Tax Refund Program, diluted earnings per share of $0.52 for calendar year 2000 grew 16% to $0.45 when compared to calendar year 1999. This increase was a result of increased interest income as a result of loan growth and an increase in service fees on loans and deposits. Analysis of Net Interest Income Historically, the Company's earnings have depended primarily upon the Banks' net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The following table provides an analysis of net interest income on an annualized basis, setting forth for the periods (i) average assets, liabilities, and shareholders' equity, (ii) interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities, (iii) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, and (iv) the Banks' net interest margin (net interest income as a percentage of average total interest-earning assets). All averages are computed based on daily balances. Non-accrual loans are included in average loans receivable. Yields are not presented on a tax equivalent basis. REPUBLIC FIRST BANCORP | 13
Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1) Balance Expense Rate (1) Balance Expense Rate (1) ------- ------- -------- ------- ------- -------- ------- ------- -------- For the Year For the Year For the Year Ended Ended Ended (Dollars in thousands) December 31, 2000 December 31, 1999 December 31, 1998 -------------------------------- ------------------------------ ------------------------------- Interest-earning assets: Federal funds sold......... $ 11,652 $ 754 6.47% $ 640 $ 33 5.16% $ 3,948 $ 216 5.47% Securities................. 186,804 12,121 6.49% 197,026 12,518 6.35% 185,976 12,348 6.64% Loans receivable (3)....... 389,156 34,012 8.74% 325,544 26,897 8.26% 248,479 21,840 8.79% ------- -------- -------- -------- -------- -------- Total interest-earning assets 587,612 46,887 7.98% 523,210 39,448 7.54% 438,403 34,404 7.85% Other assets............... 21,169 19,740 28,548 -------- -------- -------- Total assets.................. $608,781 $542,950 $466,951 ======== ======== ======== Interest-bearing liabilities: Demand - non-interest bearing $ 37,445 $-- N/A $ 30,507 $-- N/A $ 31,260 $-- N/A Demand - interest-bearing 24,437 586 2.40% 13,752 186 1.35% 13,727 343 2.50% Money market & savings... 63,226 2,823 4.46% 45,547 1,714 3.76% 41,157 1,173 2.85% Time deposits............ 241,738 14,985 6.20% 193,430 11,296 5.84% 191,829 11,687 6.09% ------- -------- -------- -------- -------- -------- Total deposits 366,846 18,394 5.01% 283,236 13,196 4.66% 277,973 13,203 4.75% ------- -------- -------- -------- -------- -------- Total interest-bearing deposits 329,401 18,394 5.58% 252,729 13,196 5.22% 246,713 13,203 5.35% ------- -------- -------- -------- -------- -------- Other borrowings............ 196,091 11,398 5.81% 214,975 11,316 5.26% 143,094 7,642 5.34% ------- -------- -------- -------- -------- -------- Total interest-bearing liabilities.............. 525,492 29,792 5.67% 467,704 24,512 5.24% 389,807 20,845 5.35% ------- -------- ---- -------- -------- ---- -------- -------- ---- Total deposits and other borrowings......... 562,937 29,792 5.29% 498,211 24,512 4.92% 421,067 20,845 4.95% ------- -------- ---- -------- -------- ---- -------- -------- ---- Non-interest-bearing liabilities.............. 8,591 8,380 8,666 Shareholders' equity........ 37,253 36,359 37,218 -------- -------- -------- Total liabilities and shareholders' equity .... $608,781 $542,950 $466,951 ======== ======== ======== Net interest income......... $ 17,095 $ 14,936 $ 13,559 ======== ======== ======== Net interest spread......... 2.69% 2.62% 2.90% ==== ==== ==== Net interest margin (2)..... 2.91% 2.85% 3.09% ==== ==== ==== (1) Yields on investments are calculated based on amortized cost. (2) Represents the difference between interest earned and interest paid, divided by average total interest earning assets. (3) Includes loans held for sale.
14 | REPUBLIC FIRST BANCORP Rate/Volume Analysis of Changes in Net Interest Income Net interest income may also be analyzed by segregating the volume and rate components of interest income and interest expense. The following table sets forth an analysis of volume and rate changes in net interest income for the periods indicated. For purposes of this table, changes in interest income and expense are allocated to volume and rate categories based upon the respective changes in average balances and average rates.
Year ended December 31, Year Ended December 31, 2000 vs. 1999 1999 vs. 1998 Change due to Change due to Average Average Increase Average Average Increase (Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease) Interest earned on: Federal funds sold.................... $ 710 $ 11 $ 721 $ (173) $ (10) $ (183) Securities............................ (659) 262 (397) 716 (546) 170 Loans ................................ 5,490 1,625 7,115 6,433 (1,376) 5,057 ------- ------ ------- ------- ------- ------- Total interest earning assets............ $ 5,541 $ 1,898 $ 7,439 $ 6,976 $(1,932) $ 5,044 ------- ------ ------- ------- ------- ------- Interest expense of Deposits Interest-bearing demand deposits...... $ (200) $ (200) $ (400) $ (1) $ 158 $ 157 Money market and savings.............. (749) (360) (1,109) (124) (417) (541) Time Deposits......................... (2,960) (729) (3,689) (97) 488 391 ------- ------ ------- ------- ------- ------- Total deposit interest expense........... (3,909) (1,289) (5,198) (222) 229 7 ------- ------ ------- ------- ------- ------- Other borrowed funds.................. 1,041 (1,123) (82) (3,785) 111 (3,674) ------- ------ ------- ------- ------- ------- Total interest expense................... (2,868) (2,412) (5,280) (4,007) 340 (3,667) ------- ------ ------- ------- ------- ------- Net interest income................... $ 2,673 $ (514) $ 2,159 $ 2,969 $(1,592) $ 1,377 ======= ====== ======= ======= ======= =======
Net Interest Income The Company's net interest margin increased 6 basis points to 2.91% for the year ended December 31, 2000, from 2.85% for the year ended December 31, 1999. The improvement in net interest margin reflected an increase in the average yield on interest-earning assets of 44 basis points to 7.98% for the year ended December 31, 2000, from 7.54% for the year ended December 31, 1999. The average rate on interest-bearing liabilities increased 43 basis points from 5.24% from the year ended December 31, 1999 to 5.67% for the year ended December 31, 2000. While the 44 basis point increase in the yield on interest earning assets in 2000 compared to 1999, approximated the 43 basis point increase in the rate on interest bearing liabilities, the increase in the net interest margin of 6 basis points reflected an increase in the proportion of non-interest bearing demand in 2000 as compared to 1999. Non interest bearing demand grew 22.7% in 2000 as compared to the prior year. The Company's net interest income increased $2.2 million, or 14.5%, to $17.1 million for the year ended December 31, 2000, from $14.9 million for the year ended December 31, 1999. As shown in the Rate Volume table above, the increase in net interest income was due to the positive effect of volume changes of approximately $2.7 million, partially offset by the effect of higher interest rates which totaled $514,000. The positive impact of volume changes was attributable to a significant increase in average interest earning assets which increased $64.4 million, or 12.3%, to $587.6 million for the year ended December 31, 2000, from $523.2 million for the year ended December 31, 1999. The Company's total interest income increased $7.4 million, or 18.9%, to $46.9 million for the year ended December 31, 2000, from $39.4 million for the year ended December 31, 1999. Approximately $5.5 million of the increase was the result of a $64.4 million increase in average volume of interest-earning assets while the remaining $1.9 million of the increase was related to the 44 basis point increase in the yield earned on interest-earning assets to 7.98%. Interest and fees on loans increased $7.1million, or 26.5%, to $34.0 million for the year ended December 31, 2000, from $26.9 million for the year ended December 31, 1999. Approximately $5.5 million of the increase in loans was due to a $63.6 million, or 19.5% increase in average loans outstanding to $389.2 million at December 31, 2000, from $325.5 million at December 31, 1999. The remaining $1.6 million of the increase in interest income on loans was due to an increase in the average rate earned on these loans of 48 basis points to 8.74%. The growth was primarily realized in the commercial loan area. The Company changed it's focus to emphasize commercial banking and accordingly offered several new commercial loan products that drove growth in that area including commercial construction lending, residential construction lending and commercial and industrial lending. The full-year effect of the Delaware Bank also contributed to the loan growth. Interest and dividend income on securities decreased $397,000 to $12.1 million for the year REPUBLIC FIRST BANCORP | 15 ended December 31, 2000, from $12.5 million for the year ended December 31, 1999. This decline was due principally to the $10.2 million decrease in average securities outstanding to $186.8 million at December 31, 2000. This volume decrease more than offset the revenue effect of an increase in rate earned on these securities of 14 basis points. The Company's total interest expense increased $5.3 million, or 21.5%, to $29.8 million for the year ended December 31, 2000, from $24.5 million for the year ended December 31, 1999. Interest-bearing liabilities averaged $525.5 million for the year ended December 31, 2000, an increase of $57.8 million, or 12.4%, from $467.7 million for the year ended December 31, 1999. The growth in interest-bearing liabilities contributed $2.9 million to the increase in interest expense while the increase in rates paid on interest-bearing liabilities contributed the remaining $2.4 million of the increase. The increase in volume reflects the impact of deposit-generating strategies which allowed the Banks' to fund loan growth with deposits and also reduce the reliance on other borrowed funds. The average rate paid on interest-bearing liabilities increased 43 basis points to 5.67% for the year ended December 31, 2000, from 5.24% for the year ended December 30, 1999, due to the increase in average rates paid on most deposit products and other borrowed funds in response to the higher interest rate environment. Interest expense on time deposits increased $3.7 million or 32.7% to $15.0 million at December 31, 2000, from $11.3 million at December 31, 1999. This increase was primarily due to an increase in the average volume of certificates of deposit of $48.3 million, or 25.0%, to $241.7 million for the year ended December 31, 2000, from $193.4 million for the year ended December 31, 1999. The increase in volume was due in part to the Company's strategy of increasing deposits to reduce the reliance on borrowed funds. The average rate of interest paid on time deposits increased to 6.20% at December 31, 2000, versus 5.84% at December 31, 1999, primarily due to the higher interest rate environment during the year 2000, compared to 1999. Interest expense on FHLB advances and overnight federal funds purchased (other borrowings) was $11.4 million for the year ended December 31, 2000, compared to $11.3 million for the year ended December 31, 1999. This increase reflected an increase in the average rate of interest paid on other borrowed funds of 55 basis points from 5.26% at December 31, 1999 to 5.81% at December 31, 2000, due to the rising-rate environment during the latter part of 1999 and all of 2000. However, most of the increase in expense resulting from higher rates was offset by a decrease in balances. The average volume of other borrowed funds decreased by $18.9 million to $196.1 million for the year ended December 31, 2000, from $215.0 million for the year ended December 31, 1999. This was a result of the Banks deposit generation strategies, which have reduced the reliance on other borrowed funds. Provision for Loan Losses The provision for loan losses is charged to operations to bring the total allowance for loan loss to a level considered appropriate by management. The level of the allowance for loan losses is determined by management based upon its evaluations of the known as well as inherent risks within the Banks' loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, the results of the most recent regulatory examination, current economic conditions and trends that may affect the borrower's ability to pay. The provision for loan losses decreased $214,000 to $666,000 for the year ended December 31, 2000, from $880,000 for the year ended December 31, 1999 due primarily to a large recovery during the year of $250,000. Non-performing assets were 0.52% of total assets or $3.4 million at December 31, 2000, compared to 0.47% of total assets or $2.8 million at December 31, 1999. Loans past due 30 to 89 days were 0.45% of total loans or $1.9 million at December 31, 2000, compared to 0.98% of total loans or $3.6 million at December 31, 1999. Non-Interest Income Total non-interest income decreased $2.1 million, or 54.7%, to $1.7 million for the year ended December 31, 2000, from $3.8 million for the year ended December 31, 1999. This decrease 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 as well as fees earned on participated loans. These items increased $451,000 to $1.4 million at December 31, 2000, from $1.0 million for the year ended December 31, 1999. The increase in service fees on deposits is primarily the result of increased business development in transaction based accounts. Non-Interest Expenses Total non-interest expenses increased $2.2 million to $13.1 million for the year ended December 31, 2000, from $10.9 million at December 31, 1999. Salaries and benefits increased $1.3 million or 23.9%, to $6.9 million for the year ended 16 | REPUBLIC FIRST BANCORP December 31, 2000 from $5.5 million for the year ended December 31, 1999. The increase was due primarily to an increase in staff associated with business development efforts and expansion of the commercial loan department. In addition, the full year effect of the Delaware Bank, higher health insurance costs and normal merit increases contributed to the rise in salary and benefits from year to year. Occupancy and equipment expenses increased $256,000, or 14.9%, to $2.0 million for the year ended December 31, 2000, from $1.7 million for the year ended December 31, 1999. This increase was principally the result of increased rent and repairs and maintenance expense. In addition, depreciation expense increased due to costs associated with the Company's implementation of an internal e-mail system, the launching of the Company's website, www. frbkonline.com and other technological projects. Other non-interest expenses increased $690,000 to $4.3 million for the year ended December 31, 2000, from $3.6 million for the same period in 1999. This increase was attributable to increases in advertising, business development expense, professional fees, as well as the overall growth of the Company. Advertising expense increased approximately $400,000 as the Company embarked on an advertising and branding campaign during the latter half of 2000. The purpose of the campaign was to target customers displaced by continuing bank mergers. The increase in professional fees reflects increased legal fees on a variety of matters. Provision for Income Taxes The provision for income taxes decreased $645,000, or 28.0%, to $1.7 million for the year ended December 31, 2000, from $2.3 million for the year ended December 31, 1999. This decrease is mainly the result of the decrease in pre-tax income from 1999 to 2000. The Company also recorded for 1999, $31,000 of tax benefit of the effect of a change in accounting principle upon the adoption of SOP 98-5 on January 1, 1999. The effective tax rate was 33.0% for 2000 and 32.9% for 1999. Results of Operations for the Years ended December 31, 1999 and 1998 The Company's net interest margin decreased 24 basis points to 2.85% for the year ended December 31, 1999, from 3.09% for the year ended December 31, 1998. This decease was primarily due to a decrease in the yield on interest-earning assets. The average yield on interest-earning assets decreased 31 basis points to 7.54% for the year ended December 31, 1999 from 7.85% for the year ended December 31, 1998. The average rate on interest-bearing liabilities decreased 11 basis points from 5.35% from the year ended December 31, 1998, to 5.24% for the year ended December 31, 1999. The Company's net interest income increased $1.4 million, or 10.2%, to $14.9 million for the year ended December 31, 1999, from $13.6 million for the year ended December 31, 1998. The increase in net interest income was primarily due to an increase in average interest-earning assets as a result of increased business development. The Company's total interest income increased $5.0 million, or 14.7%, to $39.4 million for the year ended December 31, 1999, from $34.4 million for the year ended December 31, 1998. Interest and fees on loans increased $5.1 million, or 23.2%, to $26.9 million for the year ended December 31, 1999, from $21.8 million for the year ended December 31, 1998, largely as a result of an increase in average loan balances of $77.1 million, or 31.0%, to $325.5 million for the year ended December 31, 1999, from $248.5 million for the year ended December 31, 1998. The yield on the loan portfolio decreased 53 basis points to 8.26% for the year ended December 31, 1999, from 8.79% for the year ended December 31, 1998. This decrease was due primarily to the Banks residential mortgage portfolios increasing approximately $40.0 million on average during 1999. These loans generally have a lower yield than the existing loan portfolio, therefore, incremental growth in the residential mortgage portfolio has had a negative impact on the yield on total loans. Interest and dividend income on securities increased $170,000, or 1.4%, to $12.5 million for the year ended December 31, 1999. This increase in investment income was the result of a combination of an increase in the average balance of securities owned of $11.1 million, or 5.9%, to $197.0 million for the year ended December 31, 1999, from $186.0 million for the year ended December 31, 1998, partially offset by a decrease in yield on securities of 29 basis points to 6.35% for the year ended December 31, 1999, from 6.64% for the year ended December 31, 1998. This was due in part to the sale of certain higher yielding investment securities during the third and fourth quarters of 1998, as well as accelerated prepayments on higher yielding mortgage backed securities in early 1999, as a result of the decline in mortgage interest rates. The sale of these investment securities will have a negative impact on future security investment yields, if the securities sold are not replaced with equal or higher yielding securities. The Company's total interest expense increased $3.7 million, or 17.6%, to $24.5 million for the year ended December 31, 1999, from $20.8 million the year ended December 31, 1998. This increase was due to an increase in the volume of average interest-bearing liabilities of $77.9 million, or 20.0% to $467.7 million for year ended December 31, 1999, from $389.8 million for the year ended December 31, 1998. The average rate paid on interest-bearing liabilities decreased 11 basis points to 5.24% for the year ended December 31, 1999, from 5.35% for the year ended December 31, 1998. The average rate paid on deposits and other borrowings decreased slightly from 4.95% for the year ended December 31, 1998, to 4.92% for the year ended REPUBLIC FIRST BANCORP | 17 December 31, 1999, as other borrowed funds, which have a higher cost than the Banks' deposit base, became a greater percentage of interest bearing liabilities. Interest expense on time deposits decreased $391,000, or 3.3%, to $11.3 million for the year ended December 31, 1999, from $11.7 million for the year ended December 31, 1998. This decrease was mainly due to a decrease in the average rates paid on certificates of deposit from 6.09% for the year ended December 31, 1998 to 5.85% for the year ended December 31, 1999. Interest expense on other borrowings, which include federal funds purchased and FHLB advances increased $3.7 million to $11.3 million for the year ended December 31, 1999, from $7.6 million for the year ended December 31, 1998. In 1999, average earning assets increased by $84.8 million of which $71.9 million was funded by other borrowings. Provision for Loan Losses The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered appropriate by management. The level of the allowance for loan losses is determined by management based upon its evaluation of the known as well as inherent risks within the Banks' loan portfolio. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, the results of the most recent regulatory examination, current economic conditions and trends that may affect the borrower's ability to pay. The provision for loan losses increased $510,000 to $880,000 for the year ended December 31, 1999, from $370,000 for the year ended December 31, 1998, in part due to an increase in total loans outstanding of $53.7 million as of December 31, 1999 compared to the prior year amount. Non-performing assets were 0.47% of total assets or $2,754,000 at December 31, 1999, compared to 0.36% of total assets or $1,841,000 at December 31, 1998. Loans past due 30 to 89 days were 0.98% of total loans or $3,572,000 at December 31, 1999, compared to 0.59% of total loans or $1,832,00 at December 31, 1998. Non-Interest Income Total other income increased $660,000, or 21.0%, to $3.8 million for the year ended December 31, 1999, from $3.1 million for the year ended December 31, 1998. The increase was due primarily to a $330,000 increase in Tax Refund Program income associated with an increase in Tax Refund Product sales in the 1999 tax return season compared to the 1998 tax return season and an increase in service fees and other income of $518,000 from $572,000 for the year ended December 31, 1998, to $1.1 million for the year ended December 31, 1999, as a result of higher service charges on deposit accounts and prepayment penalty fees on loans. These increases in 1999 over 1998 amounts are partially offset by gains the Company realized on the sale of investment securities of $188,000 for the year ended December 31, 1998. Non-Interest Expenses Total other expenses decreased $440,000, or 3.9%, to $10.9 million for the year ended December 31, 1999, from $11.3 million for the year ended December 31, 1998. Non interest expenses were higher in 1998 than 1999 due primarily to the loss the Company recorded on its mortgage banking affiliate of $1.6 million. This loss was primarily due to the devaluation of the affiliate mortgage banking company's mortgage servicing portfolio as a result of significant prepayment of the underlying loans. There was no such loss during 1999. Offsetting this reduction in expense, during 1999 the Company recorded $233,000 in legal expenses as settlement of a legal matter and wrote down its only OREO property by $75,000. Salaries and benefits increased $564,000 or 11.3%, to $5.5 million for the year ended December 31, 1999, from $5.0 million for the year ended December 31, 1998. The increase was due primarily to an increase in staff associated with business development efforts. Occupancy and equipment expenses increased a combined $219,000, or 14.6%, to $1.7 million for the year ended December 31, 1999, from $1.5 million for the year ended December 31, 1998. Other operating expenses encompass all expenses not otherwise categorized, and include items such as data processing costs, advertising costs, printing and supplies, insurance and other miscellaneous expenses. The increases in other operating expenses of $331,000 (after adjusting for the items mentioned above) was due to overall growth of the Company. Provision for Income Taxes The provision for income taxes increased $647,000, or 39.1%, to $2.3 million for the year ended December 31, 1999, from $1.7 million for the year ended December 31, 1998. This increase is mainly the result of the increase in pre-tax income from 1998 to 1999. The Company also recorded for 1999 and 1998, $31,000 of tax benefit and $207,000 of tax expense in connection with the cumulative effect of a change in accounting principle upon the adoption of SOP 98-5 on January 1, 1999 and SFAS No. 133, respectively. 18 | REPUBLIC FIRST BANCORP Financial Condition December 31, 2000 Compared to December 31, 1999 Total assets increased $69.3 million, or 11.8%, to $655.6 million at December 31, 2000, from $586.3 million at December 31, 1999. The increase in assets was the result of higher levels of loans and federal funds sold, which were funded by net increases in both transaction accounts and time deposits. Loans: The loan portfolio, which represents the Company's largest asset classification is its most significant source of interest income. The Company's lending strategy is to focus on small and medium-sized businesses and professionals that seek highly personalized banking services. Total loans increased $59.6 million, or 16.4% to $422.4 million at December 31, 2000, versus $362.8 million at December 31, 1999. The loan portfolio consists of commercial and industrial ("C&I") loans, residential and commercial construction loans, real estate loans, residential mortgages, home equity loans and lines of credit. During the year 2000, the Company began to offer two new products, commercial construction loans as well as residential construction loans. Commercial construction loans are loans to builders for commercial properties as well as loans for housing developments. These loans generally have a loan to value no greater than 80% and are generally secured by the property and in some cases the guarantee of the owner. Residential construction loans are loans to individuals to build new homes. Upon the completion of these properties, these loans are repaid by the borrower when they obtain a first mortgage from another institution. These new business lines along with increased C&I lending and the full year effect of the Delaware Bank were the most significant contributors to loan growth. These loans often range from $250,000 to $1.0 million but may be as high as the Banks legal lending limit which was $6.8 million at December 31, 2000. Securities: Securities available-for-sale are investments, which may be sold in response to changing market and interest rate conditions as well as other business purposes. The Company's available-for-sale securities consist of U.S. Government debt securities or U.S. Government agency issued mortgage-backed securities or collateralized mortgage obligations. Collateralized mortage obligations consist of securities issued by the Federal Home Loan Mortgage Corporation ("FHLMC"). Available-for-sale securities totaled $152.1 million, a decrease of $17.2 million or 10.1%, from year-end 1999. This decline was a result of management's decision to purchase minimal amounts of securities in 2000. Instead, cash from maturing securities was used to pay down borrowed funds and to fund loan growth. These maturities were partially offset by a $7.0 million improvement in the market value of available-for-sale securities. At December 31, 2000, the portfolio had net unrealized losses of $3.1 million, compared to unrealized losses of $10.1 million at the end of the prior year. Securities held-to-maturity are investments for which there is positive intent and ability to hold to maturity. These investments are carried at amortized cost. The held-to maturity portfolio consists primarily of Federal Home Loan Bank ("FHLB") securities. In addition, the Bank holds treasury securities, other debt securities and CMO securities. At December 31, 2000, securities held to maturity totaled $17.7 million, a decrease of $316,000 from $18.0 million at year end 1999. The market value of the held-to-maturity portfolio was $17.8 million at December 31, 2000, versus $18.0 million at December 31, 1999. Cash and due from Banks: 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 $29.5 million, to $50.7 million at December 31, 2000 from $21.1 million at December 31, 1999. The increase resulted as excess funds generated from deposit growth and maturities of securities were reinvested as federal funds as management sought to improve the Banks' on-balance-sheet liquidity. Other Assets: Bank premises and equipment, net of accumulated depreciation, increased $140,000 to $5.2 million at December 31, 2000 from $5.0 million at December 31, 1999. The increase was mainly attributable to the purchase of new equipment related to hosting the Bank's website and other technological upgrades. REPUBLIC FIRST BANCORP | 19 Deposits: Deposits, which include non-interest-bearing demand deposits, interest-bearing time and savings deposits, are the Banks' major source of funding. Deposits are generally solicited from the Company's market area through the offering of a variety of products to attract and retain customers, with a primary focus of building and expanding multiple product relationships. Total deposits increased by $119.8 million, or 39.2% to $425.6 million at December 31, 2000, from $305.8 million at December 31, 1999. Transaction accounts, which include demand non-interest bearing, demand interest bearing (NOW), money market and savings accounts increased by $46.7 million, or 44.9% to $150.6 million at December 31, 2000, versus $103.9 million at the prior year-end. Time deposits increased $73.1 million, or 36.2% to $275.0 million at December 31, 2000 versus $201.9 million at prior year end. These increases reflected the Banks deposit generating strategies instituted in 2000. The Banks formed deposit teams and targeted customers in selected business categories. Reaching deposit goals will be an ongoing part of the Company's long-term strategy in order to continue to reduce the reliance on other borrowed funds. Other Borrowed Funds: Other borrowed funds are comprised of overnight federal funds purchased and FHLB borrowings. These borrowings are used primarily to fund asset growth not supported by deposit generation. During 2000, other borrowed funds declined by $60.2 million to $176.4 million at December 31, 2000, from $236.6 million at December 31, 1999. This decline resulted from paydowns of advances with funds generated from deposit gathering and maturing securities being used to pay down these borrowed funds. Shareholders' Equity: Total shareholders' equity increased $8.0 million, or 22.8% to $43.0 million at December 31, 2000, versus $35.0 million at December 31, 1999. This increase was the result of the improvement in the unrealized loss on available for sale securities, net of tax, of $4.6 million and 2000 net income of $3.4 million. 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. 20 | REPUBLIC FIRST BANCORP The Company attempts to manage its assets and liabilities in a manner that optimizes net interest income under a broad range of interest rate environments. Adjustments to the mix of assets and liabilities may be made in an effort to manage net interest income. The following tables present a summary of the Company's interest rate sensitivity GAP at December 31, 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, without regard to interest rate fluctuations. Additionally certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of mortgage-backed securities.
Interest Sensitive Gap At December 31, 2000 (Dollars in thousands) More Financial 0-90 91-180 181-365 1-2 2-3 3-4 4-5 than 5 Statement Fair Days Days Days Years Years Years Years Years Total Value Interest Sensitive Assets: Securities and interest bearing balances due from banks............ $ 51,715 $ 6,139 $ 12,012 $21,295 $22,225 $17,288 $ 13,991 $ 54,843 $199,508 $199,551 Average interest rate. 6.76% 6.47% 6.46% 6.45% 6.45% 6.43% 6.44% 6.45% Loans receivable ........ 157,683 17,296 29,119 48,463 44,130 43,795 31,376 46,451 418,313 427,767 Average interest rate. 9.87% 8.33% 8.22% 8.22% 8.23% 8.09% 8.41% 7.14% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total ................ 209,398 23,435 41,131 69,758 66,355 61,083 45,367 101,294 617,821 627,318 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Cumulative Totals........ $209,398 $232,833 $273,964 $343,722 $410,077 $471,160 $516,527 $617,821 ======== ======== ======== ======== ======== ======== ======== ======== Interest Sensitive Liabilities: Demand Interest Bearing.. $15,584 $ 272 $ 544 $1,087 $1,087 $1,087 $10,123 $ -- $29,784 $29,784 Average interest rate. 2.51% 1.15% 1.15% 1.15% 1.15% 1.15% 1.15% -- Savings Accounts......... 2,672 47 93 186 186 186 1,736 -- 5,106 5,106 Average interest rate. 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% -- Money Market Accounts.... 37,360 652 1,303 2,607 2,607 2,607 24,267 -- 71,403 71,403 Average interest rate. 4.81% 5.81% 5.81% 5.81% 5.81% 5.81% 5.81% -- Time Deposits............ 57,331 41,712 99,863 60,033 6,274 997 8,755 11 274,976 277,245 Average interest rate. 5.88% 6.32% 6.46% 6.79% 6.30% 6.25% 6.73% 5.07% FHLB Borrowings.......... 28,942 5,000 -- 17,500 -- 100,000(1) 25,000(1) -- 176,442 179,090 Average interest rate. 6.05% 5.86% -- 5.58% -- 6.06% 6.71% -- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Total ................ 141,889 47,683 101,803 81,413 10,154 104,877 69,881 11 557,711 562,628 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Cumulative Totals........ $141,889 $189,572 $291,375 $372,788 $382,942 $487,819 $557,700 $557,711 ======== ======== ======== ======== ======== ======== ======== ======== Interest Rate Sensitivity GAP....... $67,509 $(24,248) $(60,672) $(11,655) $56,201 $(43,794) $(24,515) $101,283 Cumulative GAP........... $67,509 $43,261 $(17,411) $(29,066) $27,135 $(16,659) $(41,173) $60,110 Interest Sensitive Assets/ Interest Sensitive Liabilities........... 147.58% 49.15% 40.40% 85.68% 653.49% 58.24% 64.92% --% Cumulative GAP/ Total Earning Assets.. 11% 7% -3% -5% 4% -3% -7% 10% Total Earning Assets.. $617,821 ======== Off balance sheet items notional value: Commitments to extend credit....... $ 641 $64,106 ----- ------- Average interest rate. 9.50% 9.50% _________________ (1) The Federal Home Loan Bank has the option of calling these advances prior to scheduled maturity where they appear in the table, whereupon they would be replaced by advances at then current market rates.
REPUBLIC FIRST BANCORP | 21 In addition to the GAP analysis, the Company utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. Income simulation considers not only the impact of changing market interest rates on forecasted net interest income, but also other factors such 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 December 31, 2001, based upon the assets, liabilities and off-balance sheet financial instruments and interest rates in existence at December 31, 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") at that date. Rate shocks assume that all of the interest rate increases or decreases occur on the first day of the year shown 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 December 31: Percent change -------------- Rate shocks to interest rates 2001 2000 ----------------------------- ---- ---- +2% (0.3%) (1.9%) +1% 0.4 (1.2) -1% (2.9) 0.1 -2% (9.8) 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 changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. Capital Resources The Company is required to comply with certain "risk-based" capital adequacy guidelines issued by the FRB, the FDIC and the Pennsylvania Department of Banking. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the "credit-equivalent" amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts. Under these guidelines, banks are expected to meet a minimum target ratio for "qualifying total capital" to weighted risk assets of 8%, at least one-half of which is to be in the form of "Tier 1 capital". Qualifying total capital is divided into two separate categories or "tiers". "Tier 1 capital" includes common stockholders' equity, certain qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited in the aggregate to one-half of total qualifying capital) includes allowances for credit losses (within limits), certain excess levels of perpetual preferred stock and certain types of "hybrid" capital instruments, subordinated debt and other preferred stock. Applying the federal guidelines, the ratio of qualifying total capital to weighted-risk assets, was 13.08% and 13.33% at December 31, 2000, and 1999, respectively, and as required by the guidelines, at least one-half of the qualifying total capital consisted of Tier l capital elements. Tier l risk-based capital ratios on December 31, 2000 and 1999 were 11.99% and 12.37%, respectively. At December 31, 2000, and 1999, the Company and the Banks exceeded the requirements for risk-based capital adequacy under both federal and Pennsylvania and Delaware guidelines. (See Item 3: Capital Adequacy.) Under FRB and FDIC regulations, a bank is deemed to be "well capitalized" when it has a "leverage ratio" ("Tier l capital to total assets") of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%, and a total capital to weighted-risk assets ratio of at least 10%. At December 31, 2000 and 1999, the Company's leverage ratio was 6.91% and 7.23%, respectively. Accordingly, at December 31, 2000 and 1999, the Company and the Banks were considered "well capitalized" under FRB and FDIC regulations. The shareholders' equity of the Company as of December 31, 2000 totaled approximately $43.0 million compared to approximately $35.0 million as of December 31, 1999. This increase of $8.0 million was mainly attributable to an improvement in the change in the unrealized loss on securities, net of tax, of $4.6 million and net income for the year of approximately $3.4 million. Book value per share of the Company's common stock increased from $5.68 as of December 31, 1999, to $6.96 as of December 31, 2000, based upon 6,168,729 and 6,182,954 shares, respectively, outstanding. The increase was primarily attributable to the improvement in market value of available for sale securities as well as net income for the year. 22 | REPUBLIC FIRST BANCORP Regulatory Capital Requirements Federal banking agencies impose three minimum capital requirements on the Company's risk-based capital ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks. The following table presents the Company's regulatory capital ratios at December 31, 2000, and 1999:
To be well For Capital capitalized under Actual Adequacy Purposes FRB capital guidelines ------------------------------------------------------------------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------------- At December 31, 2000 Total risk based capital First Republic Bank.............. $ 42,281 11.92% $ 28,369 8.00% $ 35,461 10.00% Republic First Bank of DE........ 3,648 19.34% 1,509 8.00% 1,886 10.00% Republic First Bancorp, Inc...... 48,907 13.08% 29,917 8.00% 37,396 10.00% Tier one risk based capital First Republic Bank.............. 38,471 10.85% 14,184 4.00% 21,277 6.00% Republic First Bank of DE........ 3,387 17.96% 754 4.00% 1,132 6.00% Republic First Bancorp, Inc...... 44,835 11.99% 14,958 4.00% 22,438 6.00% Tier one leveraged capital First Republic Bank.............. 38,471 6.19% 31,060 5.00% 31,060 5.00% Republic First Bank of DE........ 3,387 12.15% 1,394 5.00% 1,394 5.00% Republic First Bancorp, Inc...... 44,835 6.91% 32,446 5.00% 32,446 5.00% At December 31, 1999 Total risk based capital First Republic Bank.............. $37,591 11.37% $26,446 8.00% $33,058 10.00% Republic First Bank of DE........ 3,086 33.49% 737 8.00% 922 10.00% Republic First Bancorp, Inc...... 44,646 13.33% 26.803 8.00% 33,504 10.00% Tier one risk based capital First Republic Bank.............. 34,469 10.43% 13,223 4.00% 19,835 6.00% Republic First Bank of DE........ 3,000 32.55% 369 4.00% 553 6.00% Republic First Bancorp, Inc...... 41,438 12.37% 13,402 4.00% 20,103 6.00% Tier one leveraged capital First Republic Bank.............. 34,469 6.08% 28,333 5.00% 28,333 5.00% Republic First Bank of DE........ 3,000 40.70% 369 5.00% 369 5.00% Republic First Bancorp, Inc...... 41,438 7.23% 28,638 5.00% 28,638 5.00%
Management believes that the Company and Banks meet as of December 31, 2000, and 1999, all capital adequacy requirements to which they are subject. As of December 31, 2000, and 1999, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action provisions of Section 38 of the Federal Deposit Insurance Act. The Company and the Banks' ability to maintain the required levels of capital is substantially dependent upon earnings, especially its margins and the impact of future economic events on the Banks' loan customers as well as the Banks' ability to manage its interest rate risk and control its operating expenses. In addition to the above minimum capital requirements, the Federal Reserve Bank approved a rule that became effective on December 19, 1992, implementing a statutory requirement that federal banking regulators take specified "prompt corrective action" when an insured institution's capital level falls below certain levels. The rule defines five capital categories based on several of the REPUBLIC FIRST BANCORP | 23 above capital ratios. The Banks currently exceed the levels required for a bank to be classified as "well capitalized". However, the Federal Reserve Bank may consider other criteria when determining such classifications, which consideration could result in a downgrading in such classifications. The Company's equity-to-assets ratio increased from 5.98% as of December 31, 1999, to 6.56% as of December 31, 2000. The Company's daily average equity-to-assets ratio for calendar year 2000 was 6.12% compared to 6.70% for the same period in 1999. The increase at year-end 2000 was a result of the improvement in the market value of available-for sale securities towards the latter part of 2000 as well as the net income for the year. The Company's average return on equity for 2000, 1999 and 1998 was 7.7%, 10.9% and 10.2%, respectively; and its average return on assets for 2000, 1999 and 1998 was 0.55%, 0.85% and 0.81%, respectively. The decline in both ratios reflected the loss of the Tax Refund Program revenue in the year 2000. 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 $50.7 million at December 31, 2000, compared to $21.1 million at December 31, 1999 due to an increase in federal funds sold. Maturing and repaying loans are another source of asset liquidity. At December 31, 2000, the Bank estimated that an additional $47.8 million of loans will mature or repay in the next six-month period ended June 30, 2001. Liquidity can be met by attracting deposits with competitive rates, buying federal funds or utilizing the facilities of the Federal Home Loan Bank System. At December 31, 2000, the Bank had $149.6 million in unused lines of credit available to it under arrangements with correspondent banks compared to $27.4 million at December 31, 1999. This increase in borrowing capacity is due to the FHLB's inclusion of certain collateral permitted to be pledged against the line of credit as a result of federal legislation. These lines of credit enable the Bank to purchase funds for short or long-term needs at current capital market rates. At December 31, 2000, the Company had outstanding commitments (including unused lines of credit and letters of credit) of $64.1 million. Certificates of deposit which are scheduled to mature within one year totaled $198.9 million at December 31, 2000, and borrowings that are scheduled to mature within the same period amounted to $33.9 million. The Company anticipates that it will have sufficient funds available to meet its current commitments. The Banks' target and actual liquidity levels are determined and managed based on Management's comparison of the maturities and marketability of the Banks' interest-earning assets with its projected future maturities of deposits and other liabilities. Management currently believes that floating rate commercial loans, short-term market instruments, such as 2-year United States Treasury Notes, adjustable rate mortgage-backed securities issued by government agencies, and federal funds, are the most appropriate approach to satisfy the Banks' liquidity needs. The Bank has established a line of credit from its correspondent to assist in managing the Banks' liquidity position. Such line of credit totaled $10.0 million at December 31, 2000. Additionally, the Bank has established a line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $316.0 million. As of December 31, 2000, and 1999, the Company had borrowed $176.4 million and $236.6 million, respectively, under its lines of credit. The Company's Board of Directors has appointed an Asset/Liability Committee to assist Management in establishing parameters for investments. Cash flows from operations have provided a source of liquidity to the Company for the last three years. Operating cash flows are primarily derived from cash provided from net income during the year. Cash used in investment activities for the years ended December 31, 2000, was mainly used to fund loan growth. This was partially offset by the maturities of available-for-sale securities. Cash used in investment activities for the years ended December 31, 1999, and 1998 were primarily used for both the investing of excess and borrowed funds into investment securities and funding loan growth. Cash was provided by financing activities in 2000, as the Bank grew its deposit base in order to fund loan growth and pay down borrowed funds. Cash was provided by financing activities during 1999 and 1998, as the Bank grew its deposit base and increased its borrowings to fund anticipated loan growth. The Banks' Asset/Liability Committee is responsible for managing the liquidity position, the net interest margin and interest rate risk of the Banks. Such committee's primary objective is to maximize net interest margin in an ever changing rate environment, while managing the ratio of the Banks interest-sensitive assets and liabilities and providing adequate liquidity for projected needs. 24 | REPUBLIC FIRST BANCORP Management presently believes that the effect on the Bank of any future fall in interest rates, reflected in lower yielding assets would be detrimental since the Bank does not have the ability to quickly decrease costs on its interest bearing liabilities, primarily time deposits, other borrowed funds and certain transaction accounts. 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 optimize 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 The Company's securities portfolio is intended to provide liquidity and contribute to earnings while reducing the Company's exposure to credit risk. The decline in securities in 2000 is a result of the Company's strategy to redeploy securities balances into higher-yielding commercial loans or to pay down other borrowed funds. A summary of securities available for sale and securities held to maturity at December 31, 2000, 1999, and 1998 follows.
Securities Available for Sale at December 31, --------------------------------------------- (Dollars in thousands) 2000 1999 1998 ---- ---- ---- U.S. Government Agencies........................... $ 2,246 $ 2,662 $ 3,000 CMOs/Mortgage Backed Securities (1)................ 153,002 176,694 157,579 -------- -------- -------- Total amortized cost of securities................. $155,248 $179,356 $160,579 -------- -------- -------- Total fair value of securities..................... $152,134 $169,285 $160,554 -------- -------- -------- Securities Held to Maturity at December 31, --------------------------------------------- (Dollars in thousands) 2000 1999 1998 ---- ---- ---- U.S. Government Agencies........................... $ 1,650 $ 1,621 $ 1,300 CMOs/Mortgage Backed Securities (1)................ 1,732 1,747 5,601 Other securities (2)............................... 14,325 14,655 10,097 -------- -------- -------- Total amortized cost of securities................. $ 17,707 $ 18,023 $ 16,998 -------- -------- -------- Total fair value of securities..................... $ 17,750 $ 18,038 $ 16,982 -------- -------- -------- ----------- (1) All of these obligations consist of U.S. Government Agency issued securities. (2) Comprised mostly of FHLB stock and Federal Reserve Bank stock.
REPUBLIC FIRST BANCORP | 25 The following table presents the contractual maturity distribution and weighted average yield of the securities portfolio of the Company at December 31, 2000. Mortgage backed securities are presented without consideration of amortization or prepayments.
Securities Available for Sale at December 31, 2000 ---------------------------------------------------------------------------------------------------- Within One Year One to Five Years Five to Ten Years Past 10 Years Total ---------------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ---------------------------------------------------------------------------------------------------- (Dollars in thousands) U.S. Government Agencies...... $-- --% $ 621 6.91% $1,624 6.91% $ -- --% $ 2,245 6.91% CMOs / Mortgage-backed securities................. 184 7.00% 1,008 6.65% -- --% 148,697 6.46% 149,889 6.46% Other securities.............. -- --% -- --% -- --% -- --% -- --% ----- ---- ------ ---- ------ ---- -------- ---- -------- ---- Total AFS securities.......... $ 184 7.00% $1,629 6.75% $1,624 6.91% $148,697 6.46% $152,134 6.47% ===== ==== ====== ==== ====== ==== ======== ==== ======== ==== Securities Held to Maturity at December 31, 2000 ---------------------------------------------------------------------------------------------------- Within One Year One to Five Years Five to Ten Years Past 10 Years Total ---------------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ---------------------------------------------------------------------------------------------------- (Dollars in thousands) U.S. Government Agencies...... $1,392 5.83% $ 243 7.19% $-- --% $ 15 7.82% $ 1,650 6.05% CMOs / Mortgage-backed securities................. -- -- -- -- -- -- 1,732 7.71% 1,732 7.71% Other securities.............. 50 7.50% 475 6.49% 105 6.61% 13,695 7.23% 14,325 7.20% ----- ---- ------ ---- ------ ---- -------- ---- -------- ---- Total HTM securities.......... $1,442 5.89% $ 718 6.73% $105 6.61% $15,442 7.28% $17,707 7.14% ===== ==== ====== ==== ====== ==== ======== ==== ======== ====
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, commercial construction loans, residential construction loans 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 and other purposes. The majority of these commercial loans are collateralized by real estate and may be secured by other collateral and personal guarantees. The Banks commercial loans often range from $250,000 to $1,000,000 in amount up to the Banks combined legal lending limit of $6.8 million at December 31, 2000. The Company's net loans increased $58.7 million, or 16.3%, to $418.3 million at December 31, 2000, from $359.6 million at December 31, 1999, which were primary funded by an increase in deposits. The following table sets forth the Company's gross loans by major categories for the periods indicated:
At December 31, ------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Commercial: Real estate secured (1)....................... $181,607 $183,783 $132,185 $ 87,701 $ 62,016 Non real-estate secured....................... 39,016 36,600 35,294 36,400 37,783 Non-real estate unsecured..................... 10,543 4,467 6,686 6,119 7,224 -------- -------- -------- -------- -------- Total commercial........................... 231,166 224,850 174,165 130,220 107,023 Residential real estate secured*................. 188,432 136,129 133,158 78,366 61,240 Consumer and other............................... 2,787 1,834 1,840 3,441 3,831 -------- -------- -------- -------- -------- Total loans, net of unearned income........ $422,385 $362,813 $309,163 $212,027 $172,094 ======== ======== ======== ======== ======== --------------- (1) Includes loans held for sale for all periods presented. * Residential real estate secured includes $113.6 million of residential real estate secured loans made for commercial purposes and $74.8 million of jumbo residential first mortgage loans.
26 | REPUBLIC FIRST BANCORP Loan Maturity and Interest Rate Sensitivity The amount of loans outstanding by category as of the dates indicated, which are due in (i) one year or less, (ii) more than one year through five years and (iii) over five years, is shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates:
At December 31, 2000 ----------------------------------------------------------------- (Dollars in thousands) One Year More Than One Year Over Total or Less Through Five Years Five Years Loans ----------------------------------------------------------------- Total Commercial and Commercial Real Estate...... $57,812 $110,799 $ 62,555 $231,166 Total Residential Real Estate.................... 33,460 66,029 88,943 188,432 Total Other...................................... 1,597 870 320 2,787 ------- -------- -------- -------- Total (1).............................. $92,869 $177,698 $151,818 $422,385 ======= ======== ======== ======== Loans with Fixed Rate............................ $21,543 $134,256 $119,496 $275,295 Loans with Floating Rate......................... 71,326 43,442 32,322 147,090 ------- -------- -------- -------- Total loans, net of unearned income (1) $92,869 $177,698 $151,818 $422,385 ======= ======== ======== ======== Percent Composition by Maturity.................. 21.99% 42.07% 35.94% 100.00% Fixed Rate Loans as Percent of Total............. 23.20 75.55 78.71 65.18 Floating Rate Loans as Percent of Total.......... 76.80 24.45 21.29 34.82 -------- (1) Includes loans held for sale
At December 31, 2000, 65.2% of total loans were fixed rate compared to 70.2% at December 31, 1999. Credit Quality The Banks' written lending policies require underwriting, loan documentation and credit analysis standards to be met prior to funding. In addition, a senior loan officer reviews all loan applications. The Board of Directors reviews the status of loans bi-monthly to monitor that proper standards are maintained. Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms. While a loan is classified as non-accrual or as an impaired loan and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. REPUBLIC FIRST BANCORP | 27 The following summary shows information concerning loan delinquency and other non-performing assets at the dates indicated.
At December 31, ----------------------------------------------------------- 2000 1999 1998 1997 1996 ----------------------------------------------------------- (Dollars in thousands) Loans accruing, but past due 90 days or more........... $ 91 $ 333 $ 121 $ 113 $ 27 Restructured loans..................................... 1,982 -- -- -- -- Non-accrual loans...................................... 1,350 1,778 1,002 1,800 1,892 ------ ------ ------ ------ ------ Total non-performing loans............................. 3,423 2,111 1,123 1,913 1,919 Foreclosed real estate................................. -- 643 718 1,944 295 ------ ------ ------ ------ ------ Total non-performing assets (1)........................ $3,423 $2,754 $1,841 $3,857 $2,214 ====== ====== ====== ====== ====== Non-performing loans as a percentage of total loans, net of unearned income (1)(2)................ 0.81% 0.58% 0.36% 0.90% 1.12% Non-performing assets as a percentage of total assets.. 0.52% 0.47% 0.36% 1.03% 0.81% (1) Non-performing loans are comprised of (i) loans that are on a non-accrual basis, (ii) accruing loans that are 90 days or more past due and (iii) restructured loans. Non-performing assets are composed of non-performing loans and foreclosed real estate (assets acquired in foreclosure). (2) Includes loans held for sale.
Potential problem loans consist of loans that are included in performing loans, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At December 31, 2000, all identified potential problem loans are included in the preceding table. The restructured loan represents loans to a single borrower which were restructured in the second quarter of 2000. Management believes that the collateral pledged against both the non-accrual and restructured loans is adequate to protect the Bank from potential losses associated with those credits. The foreclosed real estate property was sold in the third quarter of 2000. The following summary shows the impact on interest income of non-performing loans for the periods indicated:
For the Year Ended December 31, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------- Interest income that would have been recorded had the loans been in accordance with their original terms .................................. $125,000 $189,000 $79,000 $279,000 $135,000 Interest income included in net income ........... $171,000 $-- $55,000 $-- $ 60,000
At December 31, 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 $76.6 million, which represented 18.1% of gross loans receivable. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. Foreclosed real estate is initially recorded at the lower of cost or fair value, net of estimated selling costs at the date of foreclosure, thereby establishing a new carrying basis. After foreclosure, valuations are periodically performed by management and, if necessary, the carrying value of assets is further adjusted based on the lower of cost or fair value, less estimated costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other expenses. The Banks had no credit exposure to "highly leveraged transactions" at December 31, 2000, as defined by the FRB. 28 | REPUBLIC FIRST BANCORP Allowance for Loan Losses A detailed analysis of the Company's allowance for loan losses for the years ended December 31, 2000, 1999, 1998, 1997, and 1996 is as follows:
For the Year Ended December 31, ------------------------------------------------------------------ (Dollars in thousands) 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Balance at beginning of period $ 3,208 $ 2,395 $ 2,028 $ 2,092 $ 680 Charge-offs: Commercial 66 91 76 383 293 Real estate -- -- -- 67 -- Consumer 90 117 34 31 98 -------- -------- -------- -------- -------- Total charge-offs 156 208 110 481 391 -------- -------- -------- -------- -------- Recoveries: Commercial 340 124 13 18 101 Real estate -- -- -- 67 -- Consumer 14 17 94 12 19 -------- -------- -------- -------- -------- Total recoveries 354 141 107 97 120 -------- -------- -------- -------- -------- Net charge-offs (recoveries) (198) 67 3 384 271 -------- -------- -------- -------- -------- Acquisition of ExecuFirst -- -- -- -- 1,528 Provision for loan losses 666 880 370 320 155 -------- -------- -------- -------- -------- Balance at end of period $ 4,072 $ 3,208 $ 2,395 $ 2,028 $ 2,092 ======== ======== ======== ======== ======== Average loans outstanding (1) $389,156 $325,544 $248,479 $183,246 $132,294 As a percent of average loans (1): Net charge-offs (recoveries) (0.05)% 0.02% 0.00% 0.21% 0.20% Provision for loan losses 0.17 0.27 0.15 0.17 0.12 Allowance for loan losses 1.05 0.99 0.96 1.11 1.58 Allowance for loan losses to: Total loans, net of unearned income 0.96% 0.88% 0.79% 0.96% 1.22% Total non-performing loans 118.96% 151.97% 213.27% 106.01% 109.02% (1) Includes non-accruing loans.
Management makes a monthly determination as to an appropriate provision from earnings necessary to maintain an allowance for loan losses that is adequate for known and inherent losses. The Company's Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans criticized by the Banks' regulators or internal loan review officer, who reviews both the loan portfolio and the overall adequacy of the allowance for loan losses. During the review of the allowance for loan losses, the Board of Directors considers specific loans, pools of similar loans, historical charge-off activity, and a reserve allocation to provide for imperfections in the methodology used by management in determining the loan loss reserve requirements. The sum of these components is compared to the loan loss reserve balance. Any additions deemed necessary to the loan loss reserve balance are charged to operating expenses. The Company has an existing loan review program, which monitors the loan portfolio on an ongoing basis. Loan review is conducted by a loan review officer and the findings are reported quarterly to the Board of Directors. The Board of Directors reviews the adequacy of the reserve for loan losses on a monthly basis. Based on the recommendations of this program, past performance of the Banks' loan portfolio and general economic conditions, Management believes that the reserve for loan losses is reasonable and should be adequate to absorb known and inherent losses. REPUBLIC FIRST BANCORP | 29 Determining the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In Management's opinion, the allowance for loan losses was adequate at December 31, 2000. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required. The Banks' management is unable to determine in what loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The allocation is consistent with their methodology for establishing the allowance for loan losses. The entire allowance for loan losses is available to absorb loan losses in any loan category:
At December 31, ---------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 1997 1996 ---------------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent Of Loans Of Loans Of Loans Of Loans Of Loans In Each In Each In Each In Each In Each Category to Category to Category to Category to Category to Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) Amount Loans(1) ---------------------------------------------------------------------------------------------------- Allocation of allowance for loan losses: Commercial (2) ............ $3,055 54.70% $2,119 61.98% $1,638 56.33% $1,595 61.42% $1,573 62.19% Residential real estate ... 224 44.60 423 37.51 391 43.07 41 36.96 21 35.59 Consumer and other ........ 246 0.70 84 0.51 71 0.60 58 1.62 90 2.22 Unallocated ............... 547 582 295 334 408 ------ ------ ------ ------ ------ Total .................. $4,072 $3,208 $2,395 $2,028 $2,092 ====== ====== ====== ====== ====== (1) Gross loans net of unearned income. (2) Includes loans held for sale.
The unallocated allowance decreased $35,000 to $547,000 at December 31, 2000, from $582,000 at December 31, 1999, primarily as a result of result of an increase in non-performing loans, partially offset by recoveries during the year. The recorded investment in loans for which impairment has been recognized totaled $3.3 million, $1.8 million and $1.0 million at December 31, 2000, and 1999 and 1998 respectively, of which $3.1 million, $1.4 million and $576,000, respectively, related to loans with no valuation allowance because the loans have been partially written down through charge-offs. The increase in 2000 was primarily related to the addition of a restructured loan of $2.0 million during the second quarter of 2000. Loans with valuation allowances at December 31, 2000, 1999 and 1998 were $175,000, $353,000, $426,000 respectively, and the amount of such valuation allowances were $139,000, $104,000 and $143,000, respectively. For the years ended December 31, 2000, 1999 and 1998, the average recorded investment in impaired loans was approximately $3.6 million, $1.4 million, and $1.4 million, respectively. The increase is the result of the $2.0 million restructured loan. During 2000 and 1998, the Bank recognized interest income of $171,000 and $55,000, respectively on impaired loans. The Bank did not recognize any interest income on impaired loans during 1999. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein. The Banks had delinquent loans as follows: (i) 30 to 59 days past due, at December 31, 2000, and 1999, in the aggregate principal amounts of $1.5 million and $3.4 million, respectively; and (ii) 60 to 89 days past due, at December 31, 2000, and 1999 in the aggregate principal amounts of $435,000 and $169,000, respectively. In addition, the Banks have classified certain loans as substandard and doubtful, in accordance with definitions used by banking regulatory agencies. At December 31, 2000, and 1999, substandard loans totaled approximately $4.0 million and $2.2 million, respectively; and doubtful loans totaled approximately $113,000 and $274,000, respectively. The increase in substandard loans is again due to the addition of the $2.0 million restructured loan. 30 | REPUBLIC FIRST BANCORP The following table is an analysis of the change in Other Real Estate Owned for the years ended December 31, 2000 and 1999. 2000 1999 --------- --------- Balance at January 1, ........... $ 643,000 $ 718,000 Additions, net .................. -- -- Sales ........................... (597,000) -- Write downs/loss on sale ........ (46,000) (75,000) --------- --------- Balance at December 31, ......... $ -- $ 643,000 ========= ========= Deposit Structure Of the total daily average deposits of approximately $366.8 million held by the Banks during the year ended December 31, 2000, approximately $37.4 million, or 10.2%, represented non-interest bearing deposits, compared to approximately $30.5 million, or 10.7%, of approximately $283.2 million total daily average deposits during 1999. Total deposits at December 31, 2000, consisted of approximately $44.3 million in non-interest-bearing demand deposits, approximately $29.8 million in interest-bearing demand deposits, approximately $76.5 million in savings deposits and money market accounts, approximately $175.8 million in time deposits under $100,000, and approximately $99.1 million in time deposits greater than $100,000. In general, the Banks pay higher interest rates on time deposits over $100,000 in principal amount. Due to the nature of time deposits and changes in the interest rate market generally, it should be expected that the Banks' deposit liabilities may fluctuate from period-to-period. The following table is a distribution of the average balances of the Banks' deposits and the average rates paid thereon, for the twelve month periods ended December 31, 2000, 1999 and 1998.
For the Years Ended December 31, ------------------------------------------------------------------------------ (Dollars in thousands) 2000 1999 1998 ------------------ ------------------- -------------------- Average Average Average Balance Rate Balance Rate Balance Rate -------- ---- -------- ---- -------- ---- Money market & savings deposits .......... $ 63,226 4.46% $ 45,547 3.76% $ 41,157 2.85% Time deposits ............................ 241,738 6.20% 193,430 5.84% 191,829 6.09% Demand deposits, interest-bearing ........ 24,437 2.40% 13,752 1.35% 13,727 2.50% -------- ---- -------- ---- -------- ---- Total interest-bearing deposits .......... $329,401 5.58% $252,729 5.22% $246,713 5.35% ======== ==== ======== ==== ======== ====
The following is a breakdown, by contractual maturities, of the Company's time certificates of deposit issued in denominations of $100,000 or more as of December 31, 2000, 1999, and 1998.
Certificates of Deposit ------------------------------------------ (Dollars in thousands) 2000 1999 1998 ------- ------- ------- Maturing in: Three months or less ....................... $30,614 $11,575 $14,229 Over three months through six months ....... 15,440 10,695 7,756 Over six months through twelve months ...... 28,218 24,135 3,365 Over twelve months ......................... 24,870 14,049 -- ------- ------- ------- TOTAL ................................... $99,142 $60,454 $25,350 ======= ======= =======
REPUBLIC FIRST BANCORP | 31 The following is a breakdown, by contractual maturities of the Company's time certificate of deposits for the years 2001 through 2005 and beyond.
2005 and 2001 2002 2003 2004 Beyond Totals -------- ------- ------ ---- ------ -------- (Dollars in thousands) Time certificates of deposit......... $198,906 $60,033 $6,274 $997 $8,766 $274,976 ======== ======= ====== ==== ====== ========
Commitments In the normal course of their business, the Banks make commitments to extend credit and issue standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The type and amount of collateral obtained, if deemed necessary upon extension of credit, are based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued to assure the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers and is based on management's evaluation of the creditworthiness of the borrower and the quality of the collateral. At December 31, 2000, and 1999, firm loan commitments approximated $60.3 million and $17.5 million respectively and commitments of standby letters of credit approximated $3.8 million and $2.4 million, respectively. The increase reflects an increase in commercial construction and residential construction commitments outstanding. The Company entered these two business lines in the year 2000. 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 optimize its position between rate sensitive assets and liabilities over a one year time horizon in order to optimize net interest income. The following tables are summary unaudited income statement information for each of the quarters ended during 2000 and 1999. 32 | REPUBLIC FIRST BANCORP Summary Selected Consolidated Financial Data
For the Quarter Ended, 2000 -------------------------------------------------- Dollars in thousands, except per share data Fourth Third Second First ------ ----- ------ ----- Income Statement Data: Total interest income ........................................... $12,625 $12,300 $11,249 $10,713 Total interest expense .......................................... 8,204 7,762 7,122 6,704 ----- ----- ----- ------- Net interest income ............................................. 4,421 4,538 4,127 4,009 Provision for loan losses ....................................... 66 200 200 200 Net non-interest (expense) ...................................... (3,265) (3,223) (2,609) (2,311) Federal income tax expense ...................................... 360 368 435 494 ----- ----- ----- ------- Net income ...................................................... $ 730 $ 747 $ 883 $ 1,004 ===== ===== ===== ======= Per Share Data: Basic: Net income ...................................................... $0.12 $0.12 $0.14 $0.16 ===== ===== ===== ===== Diluted: Net income ...................................................... $0.12 $0.12 $0.14 $0.16 ===== ===== ===== ===== For the Quarter Ended, 1999 -------------------------------------------------- Fourth Third Second First ------ ----- ------ ----- Income Statement Data: Total interest income .............................................. $10,449 $10,114 $ 9,751 $ 9,134 Total interest expense ............................................. 6,583 6,252 6,002 5,675 ------- ------- ------- ------- Net interest income ................................................ 3,866 3,862 3,749 3,459 Provision for loan losses .......................................... 210 210 210 250 Net non-interest income/(expense) .................................. (2,242) (2,434) (2,423) 42 Federal income tax expense ......................................... 462 403 366 1,071 ------- ------- ------- ------- Net income before a cumulative change in accounting principle ...... 952 815 750 2,180 Cumulative effect of a change in accounting principle (net of tax) . -- -- -- (63) ------- ------- ------- ------- Net income ......................................................... $ 952 $ 815 $ 750 $2,117 ======= ======= ======= ======= Per Share Data: Basic: Income before cumulative change in accounting principle .......... $0.15 $0.13 $0.13 $0.37 Cumulative effect of change in accounting principle .............. -- -- -- (0.01) ------- ------- ------- ------- Net income ......................................................... $0.15 $ 0.13 $0.13 $0.36 ======= ======= ======= ======= Diluted: Income before cumulative change in accounting principle .......... $0.15 $0.13 $0.12 $0.35 Cumulative effect of change in accounting principle .............. -- -- -- (0.01) ------- ------- ------- ------- Net income ......................................................... $0.15 $ 0.13 $0.12 $0.34 ======= ======= ======= =======
REPUBLIC FIRST BANCORP | 33 Item 8: Financial Statements and Supplementary Data The consolidated financial statements of the Company begin on Page 37. Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. PART III Item 10: Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Commission in connection with the Company's 2000 annual meeting of shareholders scheduled for April 24, 2001. Item 11: Executive Compensation The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Commission in connection with the Company's 2000 annual meeting of shareholders scheduled for April 24, 2001. Item 12: Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Commission in connection with the Company's 2000 annual meeting of shareholders scheduled for April 24, 2001. Item 13: Certain Relationships and Related Transactions Certain of the directors of the Company and/or their affiliates have loans outstanding from the Bank. All such loans were made in the ordinary course of the Banks' business; were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons; and, in the opinion of management, do not involve more than the normal risk of collectibility or present other unfavorable features. 34 | REPUBLIC FIRST BANCORP Item 14: Exhibits and Reports on Form 8-K A. Financial Statements Page 37 (1) Report of Independent Accountants. (2) Consolidated Balance Sheets as of December 31, 2000 and 1999. (3) Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998. (4) Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. (5) Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income/(Loss) for the years ended December 31, 2000, 1999 and 1998. (6) Notes to Consolidated Financial Statements. B. Exhibits The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an annual report on Form 10-K) Exhibit No. 11 Computation of Per Share Earnings See footnote No. 2 to Notes to Consolidated Financial Statements under Earnings per Share. 21 Subsidiaries of the Company. First Republic Bank (the "Bank"), a wholly-owned subsidiary, commenced operations on November 3, 1988. The Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania. Republic First Bank of Delaware (the "Delaware Bank") is also a wholly-owned subsidiary of the Company, and commenced operations June 1, 1999. The Delaware Bank is a commercial bank chartered pursuant to the laws of the State of Delaware. The Bank and the Delaware Bank are both members of the Federal Reserve System and their primary federal regulators are the Federal Reserve Board of Governors. 23.1 Consent of Independent Certified Public Accountants. (a) Consent of KPMG LLP All other schedules and exhibits are omitted because they are not applicable or because the required information is set out in the financial statements or the notes thereto. Reports on Form 8-K None. REPUBLIC FIRST BANCORP | 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania. REPUBLIC FIRST BANCORP, INC. [registrant] Date: March 23, 2001 By: /s/ Jere A. Young ----------------------- Jere A. Young President and Chief Executive Officer Date: March 23, 2001 By: /s/ Paul A. Frenkiel ----------------------- Paul A. Frenkiel, Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Date: March 23, 2001 /s/ Harris Wildstein, Esq. ------------------------------------- Harris Wildstein, Esq., Director /s/ Neal I. Rodin ------------------------------------- Neal I. Rodin, Director /s/ James E. Schleif ------------------------------------- James E. Schleif, Director /s/ Steven J. Shotz ------------------------------------- Steven J. Shotz, Director /s/ Sheldon E. Goldberg ------------------------------------- Sheldon E. Goldberg, Director /s/ Harry D. Madonna ------------------------------------- Harry D. Madonna, Director and Chairman of the Board /s/ Kenneth Adelberg ------------------------------------- Kenneth Adelberg, Director /s/ William Batoff ------------------------------------- William Batoff, Director /s/ Daniel S. Berman ------------------------------------- Daniel S. Berman, Director /s/ Michael Bradley ------------------------------------- Michael Bradley, Director 36 | REPUBLIC FIRST BANCORP INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF REPUBLIC FIRST BANCORP, INC. Page Report of Independent Accountants ......................................... 38 Consolidated Balance Sheets as of December 31, 2000 and 1999 .............. 39 Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 ................. 40 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 ................. 41 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income/(Loss) for the years ended December 31, 2000, 1999 and 1998 ............................... 43 Notes to Consolidated Financial Statements ................................ 44 REPUBLIC FIRST BANCORP | 37 KPMG 1600 Market Street Philadelphia, PA 19103-7212 Independent Auditors' Report The Board of Directors Republic First Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Republic First Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in shareholders' equity and comprehensive income/(loss), and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic First Bancorp, Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. As more fully described in Note 3 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities on July 1, 1998. /s/ KPMG LLP Philadelphia, Pennsylvania January 16, 2001 38 | REPUBLIC FIRST BANCORP REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2000 and 1999 (dollars in thousands, except share data)
2000 1999 --------- --------- ASSETS: Cash and due from banks ................................................ $ 20,990 $ 20,789 Federal funds sold ..................................................... 29,207 -- Interest-- bearing deposits with banks ................................. 460 321 --------- --------- Total cash and cash equivalents .................................. 50,657 21,110 Securities available for sale, at fair value ........................... 152,134 169,285 Securities held to maturity, at amortized cost (fair value of $17,750 and $18,038, respectively) ................... 17,707 18,023 Loans held for sale .................................................... -- 4,857 Loans receivable, (net of allowance for loan losses of $4,072 and $3,208, respectively) .................................... 418,313 354,748 Premises and equipment, net ............................................ 5,153 5,013 Real estate owned, net ................................................. -- 643 Accrued income and other assets ........................................ 11,673 12,651 --------- --------- Total Assets ..................................................... $ 655,637 $ 586,330 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Deposits: Demand-- non-interest-bearing .......................................... $ 44,281 $ 35,053 Demand-- interest-bearing .............................................. 29,784 19,174 Money market and savings ............................................... 76,510 49,667 Time less than $100,000 ............................................... 175,834 141,445 Time over $100,000 ..................................................... 99,142 60,454 --------- --------- Total Deposits ................................................... 425,551 305,793 Other borrowings ....................................................... 176,442 236,640 Accrued expenses and other liabilities ................................. 10,614 8,857 --------- --------- Total Liabilities ................................................ 612,607 551,290 ========= ========= Commitments and contingencies (See Note 11) Shareholders' Equity: Common stock, par value $0.01 per share; 20,000,000 shares authorized; shares issued 6,358,126 and 6,343,901 as of December 31, 2000 and 1999, respectively ............................ 63 63 Additional paid in capital ............................................. 32,117 32,083 Retained earnings ...................................................... 14,446 11,082 Treasury stock at cost (175,172 shares) ................................ (1,541) (1,541) Accumulated other comprehensive (loss) ................................. (2,055) (6,647) --------- --------- Total Shareholders' Equity ....................................... 43,030 35,040 --------- --------- Total Liabilities and Shareholders' Equity ....................... $ 655,637 $ 586,330 ========= =========
(See notes to consolidated financial statements) REPUBLIC FIRST BANCORP | 39
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 2000, 1999 and 1998 (dollars in thousands, except per share data) 2000 1999 1998 -------- -------- -------- Interest income: Interest and fees on loans .......................................... $ 34,012 $ 26,897 $ 21,840 Interest on federal funds sold ...................................... 754 33 216 Interest on deposits in banks ....................................... 47 4 3 Interest and dividends on investments ............................... 12,074 12,514 12,345 -------- -------- -------- 46,887 39,448 34,404 -------- -------- -------- Interest expense: Demand - interest bearing ........................................... 586 186 343 Money market and savings ............................................ 2,823 1,714 1,173 Time ................................................................ 10,086 9,177 10,165 Time over $100,000 .................................................. 4,899 2,119 1,522 Other borrowings .................................................... 11,398 11,316 7,642 -------- -------- -------- 29,792 24,512 20,845 -------- -------- -------- Net interest income ...................................................... 17,095 14,936 13,559 Provision for loan losses ................................................ 666 880 370 -------- -------- -------- Net interest income after provision for loan losses ...................... 16,429 14,056 13,189 -------- -------- -------- Non-interest income: Service fees ........................................................ 1,435 984 238 Gain on securities sold ............................................. -- -- 188 Tax Refund Program revenue .......................................... 181 2,715 2,385 Other income ........................................................ 108 106 334 -------- -------- -------- 1,724 3,805 3,145 -------- -------- -------- Non-interest expenses: Salaries and employee benefits ...................................... 6,867 5,543 4,979 Occupancy expenses .................................................. 1,267 1,085 1,024 Equipment ........................................................... 712 638 480 Professional fees ................................................... 1,000 531 776 Advertising expenses ................................................ 701 309 291 Loss on Mortgage banking affiliate .................................. -- -- 1,617 Other operating expenses ............................................ 2,585 2,756 2,135 -------- -------- -------- 13,132 10,862 11,302 -------- -------- -------- Income before income taxes ............................................... 5,021 6,999 5,032 Provision for income taxes ............................................... 1,657 2,302 1,655 -------- -------- -------- Income before cumulative effect of a change in accounting principle ...... 3,364 4,697 3,377 Cumulative effect of a change in accounting principle (Notes 2 and 3) .... -- (63) 421 -------- -------- -------- Net Income ............................................................... $ 3,364 $ 4,634 $ 3,798 ======== ======== ======== Net income per share: Basic: Income before cumulative effect of a change in accounting principle . $ 0.54 $ 0.78 $ 0.56 Cumulative effect of a change in accounting principle (Notes 2 and 3) -- (0.01) 0.07 -------- -------- -------- Net Income ............................................................... $ 0.54 $ 0.77 $ 0.63 ======== ======== ======== Diluted: Income before cumulative effect of a change in accounting principle . $ 0.54 $ 0.75 $ 0.52 Cumulative effect of a change in accounting principle (Notes 2 and 3) -- (0.01) 0.07 -------- -------- -------- Net income ............................................................... $ 0.54 $ 0.74 $ 0.59 ======== ======== ======== (See notes to consolidated financial statements)
40 | REPUBLIC FIRST BANCORP
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 2000, 1999 and 1998 (dollars in thousands) 2000 1999 1998 --------- --------- --------- Cash flows from operating activities: Net income ......................................................... $ 3,364 $ 4,634 $ 3,798 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Provision for loan losses ....................................... 666 880 370 Write down of other real estate owned ........................... -- 75 -- Loss on sale of other real estate owned ......................... 46 -- -- Depreciation .................................................... 712 584 432 Proceeds from sale of trading securities ........................ -- -- 46,108 Gain on sale of securities sold ................................. -- -- (816) Amortization of securities ...................................... 87 206 192 Increase in loans held for sale ....................................... -- (4,857) (7,204) Sales of loans held for sale .................................... 4,857 7,204 6,690 Loss on mortgage affiliate ...................................... -- -- 1,617 Increase in accrued income and other assets ..................... (1,387) (197) (2,359) Increase in accrued expenses and other liabilities .............. 1,757 492 2,601 --------- --------- --------- Net cash provided by operating activities ....................... 10,102 9,021 51,429 --------- --------- --------- Cash flows from investing activities: Purchase of securities: Available for sale .............................................. -- (44,978) (112,097) Held to maturity ................................................ (2,495) (7,476) (74,386) Proceeds from maturities and calls of securities: Available for sale .............................................. 380 2,000 -- Held to maturity ................................................ 2,796 2,500 56,192 Proceeds from sale of securities: Available for sale .............................................. -- -- 25,402 Principal collected on MBS's and CMO's: Available for sale .............................................. 23,641 23,995 19,732 Held to maturity ................................................ 15 3,951 10,083 Net increase in loans .............................................. (63,980) (56,069) (97,737) Net increase (decrease) in deferred fees ........................... (251) 4 333 Net proceeds from sale of real estate owned ........................ 597 -- 1,585 Investment in mortgage affiliate ................................... -- -- (1,617) Premises and equipment expenditures ................................ (852) (1,607) (1,888) --------- --------- --------- Net cash used in investing activities .............................. (40,149) (77,680) (174,398) --------- --------- --------- Cash flows from financing activities: Net proceeds from exercise of stock options ........................ 34 1,162 87 Purchases of treasury stock ........................................... -- (1,028) (1,929) Net increase in demand, money market and savings ................... 46,681 15,952 20,129 Net increase in time deposits ...................................... 73,077 6,757 14,554 Net increase (decrease) in borrowed funds less than 90 days ........ (10,198) (13,969) 297 Increase in borrowed funds greater than 90 days .................... -- 62,600 103,125 Repayment of borrowed funds greater than 90 days ................... (50,000) -- (1,325) --------- --------- --------- Net cash provided by financing activities .......................... 59,594 71,474 134,938 --------- --------- --------- REPUBLIC FIRST BANCORP | 41 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS (Continued) For the years ended December 31, 2000, 1999 and 1998 (dollars in thousands) 2000 1999 1998 --------- --------- --------- Increase in cash and cash equivalents ..................................... $ 29,547 $ 2,815 $ 11,969 --------- --------- --------- Cash and cash equivalents, beginning of year .............................. 21,110 18,295 6,326 Cash and cash equivalents, end of year .................................... 50,657 21,110 18,295 --------- --------- --------- Supplemental disclosures: Interest paid .......................................................... 29,456 23,417 19,515 Income taxes paid ...................................................... 495 2,475 1,500 Change in income tax payable due to exercise of stock options .......... (6) (281) (107) Change in unrealized gain/(loss) on securities available for sale ...... 6,957 (10,046) (25) Change in deferred taxes due to change in unrealized gain/(loss) on securities available for sale .................................... (2,365) 3,415 10 Transfer of securities from held to maturity to available for sale and trading ...................................... -- -- 136,143 Non-monetary transfers from loans to real estate owned ................. $ -- $ -- $ 718 (See notes to consolidated financial statements)
42 | REPUBLIC FIRST BANCORP
REPUBLIC FIRST BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME/(LOSS) For the years ended December 31, 2000, 1999 and 1998 (dollars in thousands) Accumulated Additional Other Total Comprehensive Common Paid in Retained Treasury Comprehensive Shareholders' Income Stock Capital Earnings Stock Income (Loss) Equity Balance, December 31, 1997............... $ 61 $26,358 $ 8,198 $-- $ 5 $34,622 ---- ------- ------- ------- ------- ------- Comprehensive income: Other comprehensive income, net of tax: Unrealized losses on securities....... $ (32) Less: Reclassification adjustment for losses included in net income.... 11 Total other comprehensive income......... (21) -- -- -- -- (21) (21) Net income for the year.................. 3,798 -- -- 3,798 -- -- 3,798 ------ ---- ------- ------- ------- ------- ------- Total comprehensive income............... 3,777 ====== Treasury stock purchases................. -- -- -- (1,929) -- (1,929) Options exercised........................ -- 152 -- -- -- 152 ---- ------- ------- ------- ------- ------- Balance December 31, 1998................ 61 26,510 11,996 (1,929) (16) 36,622 ----------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Other comprehensive income, net of tax: Unrealized losses on securities.... (6,631) Less: Reclassification adjustment for losses included in net income....... -- Total other comprehensive loss........... (6,631) -- -- -- -- (6,631) (6,631) Net income for the year.................. 4,634 -- -- 4,634 -- -- 4,634 ------ Total comprehensive (loss)............... (1,997) ====== Stock Dividend........................... -- 5,548 (5,548) -- -- -- Treasury stock purchases................. -- -- -- (1,028) -- (1,028) Options exercised........................ 2 25 -- 1,416 -- 1,443 ---- ------- ------- ------- ------- ------- Balance December 31, 1999................ 63 32,083 11,082 (1,541) (6,647) 35,040 ----------------------------------------------------------------------------------------------------------------------------- Comprehensive income: Other comprehensive income, net of tax: Unrealized gains on securities..... 4,592 Less: Reclassification adjustment for losses included in net income....... -- Total other comprehensive income......... 4,592 -- -- -- -- 4,592 4,592 Net income for the year.................. 3,364 -- -- 3,364 -- 3,364 ------ Total comprehensive income............... $ 7,956 ====== Options exercised........................ -- 34 -- -- -- 34 ---- ------- ------- ------- ------- ------- Balance December 31, 2000................ $ 63 $32,117 $14,446 $(1,541) $(2,055) $43,030 ==== ======= ======= ======= ======= ======= (See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 43 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization: Republic First Bancorp, Inc. (formerly known as "Republic Bancorporation") is a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiary, First Republic Bank (the "Bank"), offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and branches in Philadelphia and Montgomery Counties. During 1999, the Company opened a second wholly-owned banking subsidiary in the State of Delaware. The newly formed Bank, Republic First Bank of Delaware (the "Delaware Bank") is a Delaware State chartered Bank, located at Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County Delaware. The Delaware Bank opened for business on June 1, 1999 and offers many of the same services and financial products as First Republic Bank. 2. Summary of Significant Accounting Policies: Principles of Consolidation: The consolidated financial statements of the Company include the accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, First Republic Bank and Republic First Bank of Delaware, (the "Banks"). Such statements have been presented in accordance with generally accepted accounting principles 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 dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of the Banks are subject to risks and uncertainties surrounding their exposure to change in the interest rate environment. Additionally, through 1999 the Company derived fee income from the Banks' participation in a program (the "Tax Refund Program") which indirectly funded consumer loans collateralized by federal income tax refunds, and provided accelerated check refunds. Approximately $2.7 million in gross revenues were recognized from the Tax Refund Program in 1999. As a result of its contract termination with Jackson Hewitt Tax Services Inc., the Company did not participate in this program with Jackson-Hewitt beyond 1999. During 2000, the Company earned revenue of $181,000 from the program representing recoveries of delinquent tax refund loans from prior years. In 2001, however, the Company has decided to re-enter this line of business. However, it is not yet possible to determine the impact on 2001 earnings, since the program differs in significant aspects from prior years. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made by management in determining the allowance for loan losses, carrying values of real estate owned and deferred tax assets. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for loan losses and carrying value of real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Banks' control, it is at least reasonably possible that the estimates of the allowance for loan losses and the carrying values of the real estate owned could differ materially in the near term. Cash and Cash Equivalents: For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold to be cash and cash equivalents. The Banks are required to maintain certain average reserve balances as established by the Federal Reserve Board. The amounts of those balances for the 44 | REPUBLIC FIRST BANCORP reserve computation periods which include December 31, 2000 and 1999 were $3.1 million and $867,000, respectively. These requirements were satisfied through the utilization of vault cash and a balance at the Federal Reserve Bank of Philadelphia. Investment Securities: Debt and equity securities are classified in one of three categories, as applicable, and accounted for as follows: debt securities which the Company has the positive intent and ability to hold to maturity are classified as "securities held to maturity" and are reported at amortized cost; debt and equity securities that are bought and sold in the near term are classified as "trading" and are reported at fair market value with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held to maturity and/or trading securities are classified as "securities available for sale" and are reported at fair market value with net unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Securities available for sale include those management intends to use as part of its asset-liability matching strategy or that may be sold in response to changes in interest rates or other factors. Securities are adjusted for amortization of premiums and accretion of discounts over the life of the related security on a level yield method. Realized gains and losses on the sale of investment securities are recognized using the specific identification method. As described in Note 3, the Company transferred $106.4 million of securities from held to maturity to available for sale and $32.5 million of securities from held to maturity to the trading category during the third quarter of 1998. The Company sold the securities transferred to the trading category during the third quarter and realized a gain on the sale of these securities of $421,000, net of income taxes, as a cumulative effect of a change in accounting. The Company did not realize any gains on trading securities prior to or after the third quarter of 1998. Additionally, the Bank had no securities classified as trading securities, as of the end of any period reported herein. Loans: Loans are stated at the principal amount outstanding, net of deferred loan fees and costs. The amortization of deferred loan fees and costs are accounted for by a method which approximates level yield. Any unamortized fees or costs associated with loans which pay down in full are immediately recognized in the Company's operations. Income is accrued on the principal amount outstanding. Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) of interest and principal by the borrower, in accordance with the contractual terms. While a loan is classified as non-accrual or as an impaired loan and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. Loans Held for Sale: Loans held for sale are carried at the lower of aggregate cost or market value. The Company currently services all loans classified as held for sale and servicing is released when such loans are sold. Market values were estimated using the present value of the estimated cash flows, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Gains and losses on loans held for sale are included in non-interest income. The Company did not realize any gains or losses during any period reported herein. At December 31, 2000, the Company had no loans held for sale. Allowance for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. REPUBLIC FIRST BANCORP | 45 The allowance is an amount that management believes will be adequate to absorb loan losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, the results of the most recent regulatory examination, current economic conditions and trends that may affect the borrower's ability to pay. The Company considers residential mortgage loans with balances less than $250,000 and consumer loans, including home equity lines of credit, to be small balance homogeneous loans. These loan categories are collectively evaluated for impairment. Jumbo mortgage loans, those with balances greater than $250,000, commercial business loans and commercial real estate loans are individually measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral dependent loans are measured for impairment based on the fair market value of the collateral. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, using the straight-line method. Repairs and maintenance are charged to current operations as incurred, and renewals and betterments are capitalized. Real Estate Owned: Real estate owned consists of foreclosed assets and is stated at the lower of cost or estimated fair market value less estimated costs to sell the property. Costs to maintain other real estate owned, or deterioration in value of the properties are recognized as period expenses. There is no valuation allowance associated with the Company's other real estate portfolio for the periods presented. At December 31, 2000, the Company did not have any properties classified as other real estate owned. Income Taxes: Deferred income taxes are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at the tax rates expected to be in effect when the temporary differences are realized or settled. In addition, a deferred tax asset is recorded to reflect the future benefit of net operating loss carryforwards. The deferred tax assets may be reduced by a valuation allowance if it is more than likely than not that some portion or all of the deferred tax assets will not be realized. Earnings Per Share: Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSE"). Common stock equivalents consist of dilutive stock options granted through the Company's stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. Common stock equivalents which are antidilutive are not included for purposes of this calculation. For the first, second, third, and fourth quarters of 2000, there were 179,930, 298,970, 275,310, and 419,981 CSEs which were antidilutive, respectively. For the first, second, third, and fourth quarters of 1999, there were 41,250, 104,610, 138,610, and 243,964 CSEs which were antidilutive, respectively. For the third and fourth quarters of 1998, there were 54,301, and 59,730 CSEs which were antidilutive, respectively. At December 31, 2000, 1999 and 1998, there were 419,981, 243,964 and 59,730 CSEs which were antidilutive, respectively. These shares may be dilutive in the future. 46 | REPUBLIC FIRST BANCORP The Company paid a 10% Stock Dividend on March 18, 1999 as well as a six-for-five stock split effected in the form of a 20% stock dividend on March 27, 1998. All relevant financial data contained herein has been restated as if the dividend and splits had occurred at the beginning of each period presented.
(In thousands, except share data) 2000 1999 1998 ------ ------ ------ Income before cumulative effect of a change in accounting principle (numerator for basic and diluted earnings per share) $3,364 $4,697 $3,377 ====== ====== ======
Per Per Per Shares Share Shares Share Shares Share Weighted average shares outstanding for the period (denominator for basic earnings per share) 6,175,873 6,017,053 6,059,572 Earnings per share-- basic $0.54 $0.78 $0.56 Add common stock equivalents (CSE) representing dilutive stock options 97,424 243,964 402,192 ------ ------- ------- Effect on basic earnings per share of CSE (0.00) (0.03) (0.04) ----- ----- ----- Equals total weighted average shares and CSE (denominator for diluted earnings per share) 6,273,297 6,261,017 6,461,764 ========= ========= ========= Earnings per share-- diluted $0.54 $0.75 $0.52 ===== ===== =====
Reclassifications: Certain items in the 1999 and 1998 financial statements and accompanying notes have been reclassified to conform to the 2000 presentation format. There was no effect on net income for the periods presented herein as a result of reclassifications. Accounting for Assets with Premiums and Discounts: The Company accounts for amortization of premiums and accretion of discounts related to loans purchased and investment securities based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premium, discount or fees are recognized immediately as interest income. Investments in Affiliate Investment in affiliates not controlled, are recorded at cost, adjusted for the Company's share in the earnings or losses of the affiliate, net of any distributions received. At December 31, 1998, the Company had a 47% equity investment in Fidelity Bond and Mortgage Company. The investment had an original cost basis of $1.6 million. During 1998, the Company wrote the investment down to $0, as the value of the mortgage affiliate's servicing rights was reduced due to the accelerated prepayments of the underlying loans. Reporting on the Costs of Start-Up Activities In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). This statement requires costs of start-up activities, including organization costs, to be expensed as incurred. SOP 98-5 is effective for the Company's financial statements for fiscal years beginning after December 15, 1998. As of December 31, 1998 the Company had deferred costs relating to start-up activities of $94,000, remaining in the balance of other assets in the Consolidated Balance Sheets. The Company adopted SOP 98-5 effective January 1, 1999, and accordingly, expensed $63,000, net of tax, of costs of start-up activities in the first quarter of 1999 as a cumulative effect of a change in accounting principle. REPUBLIC FIRST BANCORP | 47 3. Investment Securities: Investment securities available for sale as of December 31, 2000 are as follows:
Gross Gross Estimated Unrealized Unrealized Fair Dollars in thousands Amortized Cost Gains Losses Value U.S. Government Agencies $ 2,246 $ 6 $ (7) $ 2,245 CMOs and Mortgage Backed Securities 153,002 44 (3,157) 149,889 -------- ---- ------- -------- Total $155,248 $ 50 $(3,164) $152,134 ======== ==== ======= ========
Investment securities held to maturity as of December 31, 2000 are as follows:
Gross Gross Estimated Unrealized Unrealized Fair Dollars in thousands Amortized Cost Gains Losses Value U.S. Government Agencies $ 1,650 $ 3 $-- $ 1,653 CMOs and Mortgage Backed Securities 1,732 19 -- 1,751 Other Investment Securities 14,325 21 -- 14,346 -------- ---- ------- -------- Total $ 17,707 $ 43 $-- $ 17,750 ======== ==== ======= ========
Investment securities available for sale as of December 31, 1999 are as follows:
Gross Gross Estimated Unrealized Unrealized Fair Dollars in thousands Amortized Cost Gains Losses Value U.S. Government Agencies $ 2,662 $ 2 $ (62) $ 2,602 CMO's and Mortgage Backed securities 176,694 26 (10,037) 166,683 -------- ---- ------- -------- Total $179,356 $ 28 $(10,099) $169,285 ======== ==== ======= ========
Investment securities held to maturity as of December 31, 1999 are as follows:
Gross Gross Estimated Unrealized Unrealized Fair Dollars in thousands Amortized Cost Gains Losses Value U.S. Government Agencies $ 1,621 $ 1 $ (1) $ 1,621 CMOs and Mortgage Backed Securities 1,747 22 -- 1,769 Other Investment Securities 14,655 -- (7) 14,648 -------- ---- ------- -------- Total $ 18,023 $ 23 $ (8) $ 18,038 ======== ==== ======= ========
In accordance with regulatory requirements, the Company held an investment in stock of the Federal Reserve Bank with a carrying value of $292,000 and $643,000 as of December 31, 2000 and 1999, respectively, which is included in other investment securities. Also included in other investment securities are investments in the stock of the Federal Home Loan Bank of Pittsburgh of $13.0 million at December 31, 2000 and 1999. Both the Federal Reserve Bank stock and the Federal Home Loan Bank Stock are recorded at cost, which approximates liquidation value. 48 | REPUBLIC FIRST BANCORP The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at December 31, 2000 are as follows:
Available for Sale Held to Maturity -------------------------------------------------------------- Amortized Estimated Amortized Estimated Dollars in thousands Cost Fair Value Cost Fair Value -------- -------- ------- ------- Due in 1 year or less $ 185 $ 184 $ 1,442 $ 1,442 After 1 year to 5 years 1,630 1,629 718 735 After 5 years to 10 years 1,628 1,624 105 109 After 10 years or no maturity 151,805 148,697 15,442 15,464 -------- -------- ------- ------- Total $155,248 $152,134 $17,707 $17,750 ======== ======== ======= =======
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties. The Company adopted SFAS Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" on July 1, 1998. As permitted by SFAS Statement No. 133, the Company transferred $90.6 million of securities from held to maturity to available for sale and $45.5 million of securities from held to maturity to the trading category. The amortized cost of securities transferred from held to maturity to available for sale and trading was $136.1 million, which had gross unrealized gains of $115,000 and $533,000, respectively on the date transferred. The Company sold the securities transferred to the trading category during the third quarter of 1998 and realized a gain on the sale of these securities of $421,000, net of income taxes of $207,000, as a cumulative effect of a change in accounting principle. There were no gains recognized in 1999 or 2000. Additionally, no securities were sold at a loss for any of the periods presented herein. The Company sold the securities during 1998 as part of a portfolio-restructuring program, which reduced the Company's risk of prepayment on its mortgage-backed securities portfolio due to the sharp decline in interest rates during the third quarter. Realized gains and losses on the sale of investment securities are recognized using the specific identification method. The Company realized gains on the sale of securities of approximately of $816,000 in 1998, $628,000 of which was accounted for as a cumulative effect of a change in accounting principle. The Company did not realize any gains or losses on the sale of securities during 1999 or 2000. At December 31, 2000, investment securities in the amount of approximately $4.8 million were pledged as collateral for public deposits and certain other deposits as required by law. Additionally, $157.8 million of investment securities were pledged as collateral for advances with the Federal Home Loan Bank of Pittsburgh. 4. Loans Receivable: Loans receivable at December 31, consist of the following: (Dollars in thousands) 2000 1999 Commercial and industrial $ 49,559 $ 41,067 Real estate - commercial 181,607 178,926 Real estate - residential (3) 188,432 136,129 Consumer and other 2,787 1,834 -------- -------- Loans receivable 422,385 357,956 Less allowance for loan losses (4,072) (3,208) -------- -------- 418,313 354,748 Loans held for sale -- 4,857 -------- -------- Total loans receivable, net (1)(2) $418,313 $359,605 ======== ======== (1) Includes loans held for sale. (2) Net of deferred loan fees of $886,000 and $635,000 at December 31, 2000 and 1999, respectively. (3) Residential real estate secured includes $113.6 million of residential real estate secured loans made for commercial purposes and $74.8 million of jumbo residential first mortgage loans. REPUBLIC FIRST BANCORP | 49 The recorded investment in loans for which impairment has been recognized totaled $3.3 million, $1.8 million and $1.0 million at December 31, 2000, 1999 and 1998, respectively, of which $3.1 million, $1.4 million, and $576,000, respectively, related to loans with no valuation allowance because the loans have been partially written down through charge-offs. This increase was primarily related to the addition of a restructured loan of $2.0 million during the second quarter of 2000. Loans with valuation allowances at December 31, 2000, 1999 and 1998 were $175,000, $353,000, and $426,000, respectively, and the amount of such valuation allowance was $139,000, $104,000, and $143,000, respectively. For the years ended December 31, 2000, 1999 and 1998, the average recorded investment in impaired loans was approximately $3.6 million, $1.4 million, and $1.4 million, respectively. The increase is the result of a $2.0 million restructured loan. During 2000 and 1998, the Bank recognized $171,000 and $55,000, of interest income respectively, on impaired loans. The Bank did not recognize any interest income on impaired loans during 1999. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein. As of December 31, 2000, 1999 and 1998, there were loans of approximately $1.4 million, $1.8 million, and $1.0 million, respectively, which were classified as non-accrual. If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $125,000, $189,000, and $79,000 for 2000, 1999 and 1998, respectively. The majority of loans are with borrowers in the Company's marketplace, Philadelphia and surrounding suburbs, including southern New Jersey. In addition the Company has loans to customers whose assets and businesses are concentrated in real estate. Repayment of the Company's loans is in part dependent upon general economic conditions affecting the Company's market place and specific industries. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral varies but primarily includes residential and income-producing properties. The Company had 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 $76.6 million, which represented 18.1% of gross loans receivable. Included in loans are loans due from directors and other related parties of $4.5 million and $5.1 million at December 31, 2000, and 1999, respectively. All loans made to directors have substantially the same terms and interest rates as other Bank borrowers. The following presents the activity in amounts due from directors and other related parties for the year ended December 31, 2000. (Dollars in thousands) 2000 ------ Balance at beginning of year............................ $5,057 Additions............................................... 507 Repayments/Removals..................................... (1,024) ------ Balance at end of year.................................. $4,540 ====== 5. Allowance for Loan Losses: Changes in the allowance for loan losses for the years ended December 31, are as follows:
(Dollars in thousands) 2000 1999 1998 ------ ------ ------ Balance at beginning of year............................ $3,208 $2,395 $2,028 Charge-offs............................................. (156) (208) (110) Recoveries.............................................. 354 141 107 Provision for loan losses............................... 666 880 370 ------ ------ ------ Balance at end of year.................................. $4,072 $3,208 $2,395 ====== ====== ======
50 | REPUBLIC FIRST BANCORP 6. Premises and Equipment: A summary of premises and equipment is as follows: (Dollars in thousands) 2000 1999 ------ ------ Furniture and equipment.................. $4,489 $3,692 Bank building............................ 1,891 1,864 Leasehold improvements................... 1,601 1,573 ------ ------ 7,981 7,129 Less accumulated depreciation............ (2,828) (2,116) ------ ------ Net premises and equipment............... $5,153 $5,013 ====== ====== Depreciation expense on premises, equipment and leasehold improvements amounted to $712,000, $584,000 and $432,000 in 2000, 1999 and 1998, respectively. The range of depreciable lives for leasehold improvements is five to ten years. The depreciable lives of the Banks' building and furniture/equipment is twenty years and, three to seven years, respectively. As of December 31, 2000, the Company had entered into non-cancelable lease agreements for its operations center, seven First Republic Bank branch facilities and two Republic First Bank of Delaware branches, expiring through August 31, 2008. The leases are accounted for as operating leases. The minimum annual rental payments required under these leases are as follows: (Dollars in thousands) Year Ended Amount ---------- ------ 2001.................................. $ 875 2002.................................. 863 2003.................................. 790 2004.................................. 762 2005 and beyond....................... 1,845 ------ Total................................. $5,135 ====== The Company incurred rent expense of $853,000, $764,000, and $747,000 in 2000, 1999 and 1998, respectively. The Company and MBM/ATM Group Ltd. had entered into non-cancelable lease agreements for its offsite automated teller cash dispenser machines, expiring through January 2005, whereas the Company was responsible for 50% of the lease expenses as a guarantor and MBM/ATM Group Ltd. (an unrelated third party), was responsible for the remaining 50% of the lease payments. However, the Company sold its rights and other assets to MBM/ATM Group, LTD, effective December 31, 2000. No gain or loss was recognized on the sale, but the MBM/ATM Group agreed to assume the Company's obligations under these leases. The Company remains contingently liable for 50% of the annual lease payments should the MBM/ATM Group fail to make these payments. The total minimum annual rental payments required under these leases for both the Company on a contingent basis and MBM/ATM Group Ltd. are as follows: (Dollars in thousands) Year Ended Amount ---------- ------ 2001...................................... $ 556 2002...................................... 556 2003...................................... 421 2004...................................... 130 2005...................................... 20 ------ Total..................................... $1,683 ====== The Company incurred rent expense on these leases of $269,000 and $210,000 during 2000 and 1999, respectively. REPUBLIC FIRST BANCORP | 51 7. Other Borrowings: The Company has lines of credit totaling $10.0 million available for the purchase of federal funds from its corresponding bank relationships. In addition, the Company has a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of $316.0 million as of December 31, 2000. This maximum borrowing capacity is subject to change on a monthly basis. As of December 31, 2000, and 1999, there were $176.4 million and $236.6 million, respectively outstanding on these lines of credit. The contractual maturity of the borrowings through the Federal Home Loan Bank range from overnight to five years. With the vast majority of these borrowings, the Federal Home Loan Bank has the option to convert the borrowings from a fixed rate to a variable rate. The following table represents the contractual maturity of the Company's borrowings at December 31, 2000. Weighted (In thousands) Amount Average Rate -------- ------------ Maturing in: Three months or less.................... $ 28,942 5.89% Over three months to one year........... 5,000 5.86% 1 - 2 years............................. 17,500 5.58% 2 - 3 years............................. -- -- 3 - 4 years............................. 100,000 6.06% 4 years and beyond...................... 25,000 6.71% -------- ---- Totals..................................... $176,442 6.08% ======== ==== 8. Deposits: The following is a breakdown, by contractual maturities of the Company's time certificate of deposits for the years 2001 through 2005 and beyond, which include brokered certificates of deposit of approximately $29.8 million with original terms ranging from thirty days to nine months.
2005 and (Dollars in thousands) 2001 2002 2003 2004 beyond Totals -------- ------- ------ ---- ------ -------- Time Certificates of Deposit..... $198,906 $60,033 $6,274 $997 $8,766 $274,976 ======== ======= ====== ==== ====== ========
9. Income Taxes: The following table accounts for the difference between the actual tax provision and the amount obtained by applying the statutory federal income tax rate of 34.0% to income before income taxes for the years ended December 31, 2000, 1999 and 1998.
(Dollars in thousands) 2000 1999 1998 ------ ------ ------ Tax provision computed at statutory rate................... $1,707 $2,380 $1,711 Amortization of negative goodwill.......................... (103) (103) (103) Other...................................................... 53 25 47 ------ ------ ------ Total provision for income taxes............... $1,657 $2,302 $1,655 ====== ====== ======
52 | REPUBLIC FIRST BANCORP The approximate tax effect of each type of temporary difference and carryforward that gives rise to net deferred tax assets included in the accrued income and other assets in the accompanying consolidated balance sheets at December 31, 2000 and 1999 are as follows:
(Dollars in thousands) 2000 1999 Allowance for loan losses............................... $1,154 $ 794 Deferred compensation................................... 480 444 Depreciation............................................ (50) 50 Real estate owned....................................... -- 26 Other................................................... -- 10 Unrealized loss on securities available for sale........ 1,059 3,423 ------- ------ Deferred tax asset...................................... 2,643 4,747 ------- ------ Negative goodwill allocated to deferred tax asset, net of amortization................................. (103) (206) ------- ------ Adjusted deferred tax assets............................ $2,540 $4,541 ------- ------ Deferred tax liabilities: Deferred loan costs.................................. (350) (277) Prepaid expenses..................................... (30) (61) ------- ------ Deferred tax liabilities................................ (380) (338) ------- ------ Net deferred tax asset.................................. ($2,160) $4,203 ======= ======
During 1999 and 1998, the Company recorded $31,000 of tax benefit and $207,000 of tax expense, respectively, in connection with the cumulative effect of a change in accounting principle upon the adoption of SOP 98-5 and SFAS No. 133, respectively. The realizability of the deferred tax asset is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes that it is more likely than not that the Company will realize the benefits of these deferred tax assets. The reverse acquisition of ExecuFirst by Republic on June 7, 1996 generated negative goodwill of $1.0 million, of which $685,000 was applied against the deferred tax assets. During 2000, 1999, and 1998, the negative goodwill allocated to the deferred tax assets was amortized by an amount of $103,000 for all three years, thereby resulting in a corresponding reduction to the provision for income taxes. The amortization of negative goodwill is being recorded based upon the estimated reversal period of the underlying components of the deferred tax assets. The following represents the components of income tax expense (benefit) for the years ended December 31, 2000, 1999 and 1998, respectively. (Dollars in thousands) 2000 1999 1998 ------ ------ ------ Current provision Federal............................... $1,978 $2,167 $2,004 Deferred provision - Federal............. (321) 135 (349) ------ ------ ------ Total provision for income taxes......... $1,657 $2,302 $1,655 ====== ====== ====== REPUBLIC FIRST BANCORP | 53 10. Directors and Officers Annuity Plan: The Bank has an agreement with an insurance company to provide for an annuity payment upon the retirement or death of certain of the Banks' Directors and officers, ranging from $15,000 to $25,000 per year for ten years. After five years of service, certain Directors or officers shall be 50% vested in their accrued benefit. For each additional year of service over five years, the Director or officer will be vested an additional 10% per year until he is 100% vested. The accrued benefits under the plan at December 31, 2000, 1999, and 1998 totaled $515,000, $431,000, and $355,000, respectively. The expense for the years ended December 31, 2000, 1999, and 1998 was $84,000, $69,000, and $68,000, respectively. The Bank has elected to fund the plan through the purchase of certain life insurance contracts. The cash surrender value of these contracts (owned by the Bank) aggregated $1.6 million, $1.4 million, and $1.4 million at December 31, 2000, 1999 and 1998, respectively, which is included in other assets. 11. Commitments and Contingencies: The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Credit risk is defined as the possibility of sustaining a loss due to the failure of the other parties to a financial instrument to perform in accordance with the terms of the contract. The maximum exposure to credit loss under commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same underwriting standards and policies in making credit commitments as it does for on-balance-sheet instruments. Financial instruments whose contract amounts represent potential credit risk are commitments to extend credit of approximately $60.3 and $17.5 million and standby letters of credit of approximately $3.8 million and $2.4 million at December 31, 2000 and 1999, respectively. Of the $60.3 million commitments to extend credit at December 31, 2000, $60.3 million were variable rate commitments. The increase in commitments is primarily a result of the entering of two new business lines, commercial real estate construction and residential real estate construction that are funded with lines of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Standby letters of credit are conditional commitments issued that assure the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. The Company has entered into employment agreements with the President of the Company, the President of the Bank and the Chief Lending Officer of the Bank, which provide for the payment of base salary and certain benefits through the year 2002. The aggregate commitment for future salaries and benefits under these employment agreements at December 31, 2000 is approximately $525,000. The Bank participates in a partially self-insured health plan (the "Plan"), for which employees of the Bank receive medical, dental, vision and pharmaceutical insurance coverage and reimbursements. During 2000, 1999 and 1998, the Bank paid claims under the plan of $438,000, $426,000, and $464,000, respectively. 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. First Republic Bank has been sued alleging a breach of a prior settlement and subsequent infringement of the alleged trademark "First Republic" as well as unfair competition, dilution and unjust enrichment. While the Bank has answered the 54 | REPUBLIC FIRST BANCORP complaint denying above with counterclaims, the complaint seeks injunctive relief, a name change and monetary damages. It is not yet possible to determine the outcome of the suit at this time. 12. Shareholders' Equity/Regulatory Capital: Effective June 21, 1999, the Company's stock repurchase program, originally announced on August 24, 1998 and established for the period through and including June 30, 1999 was extended to December 31, 1999. The aggregate amount of stock repurchased was determined by market conditions, but did not exceed 4.9% of the Company's outstanding stock, or approximately 297,000 shares as of June 30, 1999. As of December 31, 2000, there was 54,916 shares repurchased pursuant to rule 10b-18 of the Securities and Exchange Commission. There was also an additional 279,088 shares purchased in block transaction purchases, that are not included as part of the stock repurchase program specified under rule 10b-18. No stock repurchases were made during 2000. Dividend payments by the Bank to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act, and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking code, no cash dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under FRB's regulations, the Bank cannot pay dividends that exceed its net income from the current year and the preceding two years. Under the FDIA, an insured Bank may pay no dividends if the Bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking law, the Bank would be limited to $8.0 million of dividends plus an additional amount equal to the Banks' net profit for 2001, up to the date of any such dividend declaration. At December 31, 2000, there were no cash dividends declared or paid. At the present time, the Company does not foresee paying cash dividends to shareholders and intends to retain all earnings to fund the growth of the Company and the Banks. State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Federal banking agencies impose three minimum capital requirements on the Company's risk-based capital ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level 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. Management believes that the Banks meet, as of December 31, 2000, and 1999, all capital adequacy requirements to which it is subject. As of December 31, 2000, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action provisions of Section 3b of the Federal Deposit Insurance Act. There are no calculations or events since that notification that management believes have changed the Banks' category. The Federal Reserve Board's risk-based capital leverage ratio guidelines require all state-chartered member banks to maintain total capital equal to at least 8% of risk-weighted total assets, Tier 1 capital (adjusted for certain excludable regulatory items) equal to 4% of risk-weighted total assets, and a Tier 1 leverage ratio of 4%. At December 31, 2000, the aforementioned ratios are as follows: REPUBLIC FIRST BANCORP | 55 The following table presents the Company's capital regulatory ratios at December 31, 2000, and 1999:
To be well For Capital capitalized under Actual Adequacy Purposes FRB capital guidelines (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio At December 31, 2000 Total risk based capital First Republic Bank.............. $42,281 11.92% $28,369 8.00% $35,461 10.00% Republic First Bank of DE........ 3,648 19.34% 1,509 8.00% 1,886 10.00% Republic First Bancorp, Inc...... 48,907 13.08% 29,917 8.00% 37,396 10.00% Tier one risk based capital First Republic Bank.............. 38,471 10.85% 14,184 4.00% 21,277 6.00% Republic First Bank of DE........ 3,387 17.96% 754 4.00% 1,132 6.00% Republic First Bancorp, Inc...... 44,835 11.99% 14,958 4.00% 22,438 6.00% Tier one leveraged capital First Republic Bank.............. 38,471 6.19% 31,060 5.00% 31,060 5.00% Republic First Bank of DE........ 3,387 12.15% 1,394 5.00% 1,394 5.00% Republic First Bancorp, Inc...... 44,835 6.91% 32,446 5.00% 32,446 5.00% At December 31, 1999 Total risk based capital First Republic Bank.............. $37,591 11.37% $26,446 8.00% $33,058 10.00% Republic First Bank of DE........ 3,086 33.49% 737 8.00% 922 10.00% Republic First Bancorp, Inc...... 44,646 13.33% 26,803 8.00% 33,504 10.00% Tier one risk based capital First Republic Bank.............. 34,469 10.43% 13,223 4.00% 19,835 6.00% Republic First Bank of DE........ 3,000 32.55% 369 4.00% 553 6.00% Republic First Bancorp, Inc...... 41,438 12.37% 13,402 4.00% 20,103 6.00% Tier one leveraged capital First Republic Bank.............. 34,469 6.08% 28,333 5.00% 28,333 5.00% Republic First Bank of DE........ 3,000 40.70% 369 5.00% 369 5.00% Republic First Bancorp, Inc...... 41,438 7.23% 28,638 5.00% 28,638 5.00%
13. Retirement Plan: The Company maintains a Supplemental Retirement Plan for its former Chief Executive Officer which provides for payments of approximately $100,000 a year, commencing for a ten-year period upon retirement or death. A life insurance contract has been purchased to insure against all or a portion of the payments which may be required prior to the anticipated retirement date of the officer. The Bank has a defined contribution plan pursuant to the provision of 401(k) of the Internal Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan provides for elective employee contributions with a matching contribution from the Banks' limited to 3%. The total expense relating to the plan was $149,000, $117,000 and $103,000 in 2000, 1999 and 1998, respectively. 56 | REPUBLIC FIRST BANCORP 14. Fair Value of Financial Instruments: The disclosure of the fair value of all financial instruments is required, whether or not recognized on the balance sheet, for which it is practical to estimate fair value. In cases where quoted market prices are not available, fair values are based on assumptions including future cash flows and discount rates. Accordingly, the fair value estimates cannot be substantiated, may not be realized, and do not represent the underlying value of the Company. The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents, Accrued Interest Receivable and Accrued Interest Payable: The carrying value is a reasonable estimate of fair value. Securities Held to Maturity and Securities Available for Sale: For investment securities with a quoted market price, fair value is equal to quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans (including loans held for sale): For variable-rate loans that reprice frequently and with no significant change in credit risk, fair value is the carrying value. For other categories of loans such as commercial and industrial loans, real estate mortgage and consumer loans, fair value is estimated based on using the present value of the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar collateral and credit ratings and for similar remaining maturities. Deposit Liabilities: For checking, savings and money market accounts, fair value is the amount payable on demand at the reporting date. For time deposits, fair value is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings: Fair values on borrowings are based on using the present value of estimated cash flows, using current rates, at which similar borrowings could be obtained by the Bank with similar maturities. Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparts. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar arrangements. REPUBLIC FIRST BANCORP | 57 At December 31, 2000, the carrying amount and the estimated fair value of the Company's financial instruments are as follows:
December 31, 2000 December 31, 1999 --------------------------------------------------------------------- Carrying Fair Carrying Fair (Dollars in thousands) Amount Value Amount Value --------------------------------------------------------------------- Balance Sheet Data: Financial Assets: Cash and cash equivalents $ 50,657 $ 50,657 $ 21,110 $ 21,110 Securities available for sale 152,134 152,134 169,285 169,285 Securities held to maturity 17,707 17,750 18,023 18,038 Loans receivable, net 418,313 427,767 354,748 354,519 Loans held for sale -- -- 4,857 4,857 Accrued interest receivable 4,632 4,632 3,946 3,946 Financial Liabilities: Deposits: Demand, savings and money market $150,575 $150,575 $103,894 $103,894 Time 274,976 277,245 201,899 202,286 Borrowings 176,442 179,090 236,640 233,511 Accrued interest payable 7,092 7,092 6,756 6,756 December 31, 2000 December 31, 1999 --------------------------------------------------------------------- Notional Fair Notional Fair Amount Value Amount Value --------------------------------------------------------------------- Off Balance Sheet Data: Commitments to extend credit $ 60,321 $ 603 $ 17,500 $ 175 Letters of credit 3,785 38 2,394 24
15. Parent Company Financial Information The following financial statements for Republic First Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the other notes related to the consolidated financial statements. 58 | REPUBLIC FIRST BANCORP BALANCE SHEETS December 31, 2000 and 1999 (dollars in thousands)
2000 1999 ASSETS: Cash ........................................... $ 2,102 $ 3,688 Investment in subsidiaries ..................... 40,320 31,041 Other assets ................................... 608 311 -------- -------- Total Assets ............................. $ 43,030 $ 35,040 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Total Liabilities ........................ $-- $-- Shareholders' Equity: Common stock ................................ 63 63 Additional paid in capital .................. 32,117 32,083 Retained earnings ........................... 14,446 11,082 Treasury Common at cost (175,172 shares) .... (1,541) (1,541) Accumulated other comprehensive income/(loss) (2,055) (6,647) -------- -------- Total Shareholders' Equity ............... 43,030 35,040 -------- -------- Total Liabilities and Shareholders' Equity $ 43,030 $ 35,040 ======== ========
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 2000, 1999 and 1998 (dollars in thousands) 2000 1999 1998 ------- ------- ------- Income..................................................... $ 68 $ 106 $ 265 Expenses................................................... 11 -- -- Equity in undistributed income of subsidiary............... 3,307 4,528 3,533 ------- ------- ------- Net income................................................. 3,364 4,634 3,798 ------- ------- ------- Shareholders' equity, beginning of year.................... 35,040 36,622 34,622 Exercise of stock options.................................. 34 1,161 152 Purchase of treasury stock................................. -- (1,028) (1,929) Tax effect of stock options exercised...................... -- 282 -- Change in unrealized gain on securities available for sale. 4,592 (6,631) (21) ------- ------- ------- Shareholders' equity, end of year.......................... $43,030 $35,040 $36,622 ======= ======= =======
REPUBLIC FIRST BANCORP | 59
STATEMENTS OF CASH FLOWS For the years ended December 31, 2000, 1999 and 1998 (dollars in thousands) 2000 1999 1998 ------- ------- ------- Cash flows from operating activities: Net income.............................................. $ 3,364 $ 4,634 $ 3,798 Adjustments to reconcile net income to net cash Provided by operating activities: Increase in other assets.......... (297) -- -- Equity in undistributed income of subsidiaries.... (3,307) (4,528) (3,533) ------- ------- ------- Net cash provided by (used in) operating activities......................... (240) 106 265 ------- ------- ------- Cash flows from investing activities: Purchase of subsidiary common stock..................... (1,380) (3,432) -- ------- ------- ------- Net cash provided by investing activities...... (1,380) (3,432) -- ------- ------- ------- Cash from Financing Activities: Exercise of stock options............................... 34 1,162 110 Purchase of treasury stock.............................. -- (1,028) (1,929) ------- ------- ------- Net cash provided by financing activities...... 34 134 (1,819) ------- ------- ------- Increase/(decrease) in cash................................ (1,586) (3,192) (1,554) Cash, beginning of period.................................. 3,688 6,880 8,434 ------- ------- ------- Cash, end of period........................................ $ 2,102 $ 3,688 $ 6,880 ======= ======= =======
16. Stock Options The Company maintains a Stock Option Plan (the "Plan") under which the Company grants options to its employees and directors. Under the terms of the plan, 1.4 million shares of common stock are reserved for such options. The Plan provides that the exercise price of each option granted equals the market price of the Company's stock on the date of grant. Any option granted vests within one to five years and has a maximum term of ten years. All options are granted upon approval of the Stock Option Committee of the Board of Directors, consisting of three disinterested members. Stock Options are issued to promote the interests of the Company by providing incentives to (i) designated officers and other employees of the Company or a Subsidiary Corporation (as defined herein), (ii) non-employee members of the Company's Board of Directors and (iii) independent contractors and consultants who may perform services for the Company. The Company believes that the Plan causes participants to contribute materially to the growth of the Company, thereby benefiting the Company's shareholders. Prior to the merger of Republic Bancorporation and ExecuFirst Bancorp, Inc., various grants of stock options were issued pursuant to the then existing plans of each Corporation. In addition to the shares reserved under the Plan, 134,669 options were granted outside of the Plan to a director of the Company, as a result of the merger between Republic Bancorporation and ExecuFirst Bancorp, Inc. These options have a grant date of June 7, 1996. These options are fully vested, and will expire on June 7, 2006. Shares outstanding under option and option price per share have been retroactively restated (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any differences in par value of the issuer's and acquirer's stock. These options and option prices have also been restated as a result of the 10% stock dividend paid on March 18, 1999 as well as two separate six-for-five stock splits effected in the form of 20% stock dividends. These dividends were paid on April 15, 1998 and March 27, 1997. Changes in total shares are as follows: 60 | REPUBLIC FIRST BANCORP
December 31, 2000: Weighted Average Weighted Remaining Range of Average Contractual Shares Exercise Prices Exercise Price Life (Years) -------------------------------------------------------------------- Outstanding at beginning of year............... 184,227 $1.95 to $2.65 $ 2.31 3.3 135,463 $3.00 to $4.02 $ 4.01 6.4 135,040 $4.85 to $6.62 $ 5.38 7.6 139,930 $7.63 to $10.45 $ 8.81 8.9 Granted during year............................ 297,250 $3.56 to $5.38 $ 3.94 Exercised during year.......................... 14,288 $1.95 to $2.65 $ 2.33 Forfeited during year.......................... 107,910 $4.85 to $10.94 $ 8.81 --------- Outstanding at end of year..................... 170,731 $1.95 to $3.00 $ 2.31 2.3 408,921 $3.56 to $4.50 $ 3.90 8.4 145,120 $4.85 to $6.62 $ 5.41 7.0 44,940 $7.00 to $9.09 $ 7.91 8.5 --------- 769,712 $ 4.07 6.8 ========= Options exercisable at end of year............. 170,731 $1.95 to $3.00 $ 2.31 2.3 206,546 $3.56 to $4.50 $ 4.04 7.0 108,579 $4.85 to $6.62 $ 5.17 6.4 28,940 $7.00 to $9.09 $ 7.98 8.4 --------- 514,796 $ 3.93 5.4 ========= December 31, 1999: Weighted Average Weighted Remaining Range of Average Contractual Shares Exercise Prices Exercise Price Life (Years) -------------------------------------------------------------------- Outstanding at beginning of year............... 425,649 $1.95 to $2.65 $ 2.50 4.3 236,958 $3.00 to $4.50 $ 3.77 5.1 153,648 $4.85 $ 4.85 7.8 63,030 $9.55 to $10.45 $10.26 9.4 Granted during year............................ 123,500 $6.62 to $8.18 $ 7.60 Exercised during year.......................... 399,941 $2.31 to $4.86 $ 2.91 Forfeited during year.......................... 8,404 $5.34 to $10.94 $ 9.18 --------- Outstanding at end of year..................... 184,227 $1.95 to $2.65 $ 2.31 3.3 135,463 $3.00 to $4.02 $ 4.01 6.4 135,040 $4.85 to $6.62 $ 5.38 7.6 139,930 $7.63 to $10.45 $ 8.81 8.9 --------- 594,660 $ 4.93 6.3 ========= Options exercisable at end of year............. 184,227 $1.95 to $2.65 $ 2.31 3.3 135,463 $3.00 to $4.02 $ 4.01 6.4 135,040 $4.85 to $6.62 $ 5.38 7.6 48,038 $8.29 to $10.45 $10.16 8.5 --------- 502,768 $ 4.36 5.8 ========= REPUBLIC FIRST BANCORP | 61 December 31, 1998: Weighted Average Weighted Remaining Range of Average Contractual Shares Exercise Prices Exercise Price Life (Years) -------------------------------------------------------------------- Outstanding at beginning of year............... 478,010 $1.95 to $2.65 $ 2.50 5.3 218,740 $3.00 to $4.50 $ 3.77 6.0 155,232 $4.85 $ 4.85 8.8 Granted during year............................ 63,030 $9.55 to $10.45 $10.26 Exercised during year.......................... 35,721 $1.95 to $4.85 $ 2.44 Forfeited during year.......................... -- N/A N/A --------- Outstanding at end of year..................... 425,649 $1.95 to $2.65 $ 2.31 4.3 236,958 $3.00 to $4.02 $ 3.68 5.1 153,648 $4.85 $ 4.85 7.8 63,030 $9.55 to $10.45 $10.26 9.4 --------- 879,285 $ 3.69 --------- Options exercisable at end of year............. 425,649 $1.95 to $2.65 $ 2.31 4.3 236,958 $3.00 to $4.02 $ 3.68 5.1 153,648 $4.85 $ 4.85 7.8 --------- 816,255 $ 3.18 5.2 ---------
Year ended Year ended Year ended December 31, 2000 December 31, 1999 December 31, 1998 ------------------------------------------------------------------------------------------- As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ------------------------------------------------------------------------------------------- Net income................. $3,364 $3,068 $4,634 $4,176 $3,798 $3,675 Basic earnings per share... $ 0.55 $ 0.50 $ 0.77 $ 0.69 $ 0.63 $ 0.61 Diluted earnings per share. $ 0.54 $ 0.49 $ 0.74 $ 0.67 $ 0.59 $ 0.57
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ("SFAS No. 123"), "Accounting for Stock Based Compensation", but applies APB Opinion No. 25, "Accounting for Stock Issued to Employees and related Interpretations in accounting for its Plan. Accordingly, no compensation has been recognized for options granted under the Plan. If the Company had elected to recognize compensation based on the fair value at the grant dates for awards under its Plan, consistent with the method prescribed by SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts indicated above: The proforma compensation expense is based upon the fair value of the option at grant date. The weighted average fair value of the options granted in 2000, 1999 and 1998 were $1.81, $3.60 and $4.63, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grant in 2000, 1999 and 1998, respectively; dividend yield of 0% for all three periods, expected volatility 35% for all three periods, risk-free interest rate of 6.3%, 6.4% and 5.3%, respectively and an expected life of 6.3 years for all periods. 62 | REPUBLIC FIRST BANCORP 17. Comprehensive Income The tax effects allocated to each component of "Comprehensive Income" are as follows:
For the year ended December 31, 2000 (dollars in thousands) Before Tax Net of Tax Amount Benefit Tax Amount ---------- ------- ---------- Unrealized gains on securities: Unrealized holding gains arising during the period..................................... $ 6,957 $ (2,365) $ 4,592 Less: Reclassification adjustment for gains included in net income......................... -- -- -- ------- -------- ------- Other comprehensive income..................... $ 6,957 $ (2,365) $ 4,592 ======= ======== ======= For the year ended December 31, 1999 (dollars in thousands) Before Tax Net of Tax Amount Benefit Tax Amount ---------- ------- ---------- Unrealized gains on securities: Unrealized holding gains arising during the period..................................... $(10,046) $ 3,415 $ (6,631) Less: Reclassification adjustment for gains included in net income......................... -- -- -- -------- ------- -------- Other comprehensive income........................... $(10,046) $ 3,415 $ (6,631) ======== ======= ======== For the year ended December 31, 1998 (dollars in thousands) Before Tax Net of Tax Amount Benefit Tax Amount ---------- ------- ---------- Unrealized gains on securities: Unrealized holding gains arising during the period..................................... $ (48) $ 16 $ (32) Less: Reclassification adjustment for gains included in net income......................... 16 (5) 11 ----- ---- ----- Other comprehensive income........................... $ (32) $ 11 $ (21) ===== ==== =====
18. Segment Reporting The Company's reportable segments represent strategic businesses that offer different products and services. The segments are managed separately because each segment has unique operating characteristics, management requirements and marketing strategies. At December 31, 2000 and 1999, Republic First Bancorp has three reportable segments; First Republic Bank, the Delaware Bank and the Tax Refund Program. The Tax Refund Program enabled the Bank to provide accelerated check refunds ("ACRs") and refund anticipation loan ("RALs") on a national basis to customers of Jackson Hewitt, a national tax preparation firm. The mortgage banking segment represented the Company's equity investment in Fidelity Bond and Mortgage, a mortgage banking operation which serviced and originated residential mortgage loans. Such investment was accounted for as an equity investment as the Company did not have control over Fidelity Bond and Mortgage. In 1998, the Company also had the mortgage banking segment, and did not have the Delaware Bank segment. REPUBLIC FIRST BANCORP | 63 The accounting policies of the segments are the same as those described in Note 1. The Company evaluates the performance of the community banking segments based upon income before the provision for income taxes, return on equity and return on average assets. The mortgage banking segment is evaluated based upon return on average equity and the Tax Refund Program is evaluated based upon income before provision for taxes. The Tax Refund Program and the mortgage banking affiliate were developed as business segments to further expand the Company's products and services offered to consumers and businesses. The segment information presented below reflects that the Delaware Bank originated in 1999, and that the Company's investment in their Mortgage Banking Affiliate was reduced to $0 as of December 31, 1998. Accordingly, the Mortgage Banking Affiliate no longer represents a segment in 1999 or 2000. Segment information for the years ended December 31, 2000, 1999 and 1998 is as follows: As of and for the years ended December 31, (dollars in thousands)
2000 1999 1998 ---------------------------------- ----------------------------------- ---------------------------------- First Tax First Tax First Tax Mortgage Republic Delaware Refund Republic Delaware Refund Republic Refund Bank Bank Bank Program Total Bank Bank Program Total Bank Program Affiliate Total ---------------------------------- ----------------------------------- ---------------------------------- External customer revenues: Interest Income $ 45,392 $ 1,495 $-- $46,887 $39,333 $ 115 $-- $39,448 $34,404 $-- $-- $34,404 Other Income 1,253 290 181 1,724 1,057 33 2,715 3,805 760 2,490 -- 3,250 ------ ----- --- ------ ------ --- ----- ------ ------ ----- ------ ------ Total external customer revenues 46,645 1,785 181 48,611 40,390 148 2,715 43,253 35,164 2,490 -- 37,654 Intersegment revenues: Interest Income 71 41 -- 112 9 56 -- 65 -- -- -- -- Other Income 77 -- -- 77 44 -- -- 44 -- -- -- -- ------ ----- --- ------ ------ --- ----- ------ ------ ----- ------ ------ Total intersegment revenues 148 41 -- 189 53 56 -- 109 -- -- -- -- ------ ----- --- ------ ------ --- ----- ------ ------ ----- ------ ------ Total revenue 46,793 1,826 181 48,800 40,443 204 2,715 43,362 35,164 2,490 -- 37,654 ====== ===== === ====== ====== === ===== ====== ====== ===== ==== ====== Depreciation and amortization 615 97 -- 712 540 44 -- 584 432 -- -- 432 Other operating expenses - external (non-interest expense) 11,796 1,290 -- 13,086 10,359 649 150 11,158 9,623 105 -- 9,728 Interest expense 28,997 795 -- 29,792 24,410 102 -- 24,512 20,845 -- -- 20,845 Equity interest in mortgage banking affiliate -- -- -- -- -- -- -- -- -- -- 1,617 1,617 Interest expense intersegment 41 71 -- 112 56 9 -- 65 -- -- -- -- Other operating expenses intersegment -- 77 -- 77 -- 44 -- 44 -- -- -- -- ------ ----- --- ------ ------ --- ----- ------ ------ ----- ------ ------ Segment expenses 41,449 2,330 -- 43,779 35,365 848 150 36,363 30,900 105 1,617 32,622 Segment income before taxes and extraordinary items 5,344 (504) 181 5,021 5,078 (644) 2,565 6,999 4,264 2,385 (1,617) 5,032 ====== ===== === ====== ====== === ===== ====== ====== ===== ====== ====== Segment assets 627,220 28,417 -- 655,637 575,373 10,957 -- 586,330 516,361 -- -- 516,361 Capital expenditures 716 136 -- 852 499 1,108 -- 1,607 1,888 -- 1,617 3,505
64 | REPUBLIC FIRST BANCORP