-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B3eEdxyH2kiMn2FTGkT92uWnaDQfdvnPWrQHQZnfsE7ypaEJ16Fze+qtBXhgKusS AHTiFsmwxWbMeXbRkydzAA== 0000950159-01-500350.txt : 20020410 0000950159-01-500350.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950159-01-500350 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REPUBLIC FIRST BANCORP INC CENTRAL INDEX KEY: 0000834285 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 232486815 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-17007 FILM NUMBER: 1786096 BUSINESS ADDRESS: STREET 1: 1608 WALNUT ST STREET 2: STE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 BUSINESS PHONE: 2157354422 MAIL ADDRESS: STREET 1: 1608 WALNUT ST STREET 2: STE 1000 CITY: PHILADELPHIA STATE: PA ZIP: 19103 FORMER COMPANY: FORMER CONFORMED NAME: EXECUFIRST BANCORP INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST EXECUTIVE BANCORP INC DATE OF NAME CHANGE: 19881113 FORMER COMPANY: FORMER CONFORMED NAME: FIRST REPUBLIC BANCORP INC /DE/ DATE OF NAME CHANGE: 19960617 10-Q 1 frb10q.txt REPUBLIC FIRST 9-01 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 30, 2001 Commission File Number: 0-17007 Republic First Bancorp, Inc. ---------------------------- (Exact name of business issuer as specified in its charter) Pennsylvania 23-2486815 (State or other jurisdiction of IRS Employer Identification incorporation or organization) Number 1608 Walnut Street, Philadelphia, Pennsylvania 19103 (Address of principal executive offices) (Zip code) 215-735-4422 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES X NO ____ ------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. 6,358,126 shares of Issuer's Common Stock, par value $0.01 per share, issued and outstanding as of October 31, 2001 Page 1 of 38 Exhibit index appears on page 36 1 TABLE OF CONTENTS Page Part I: Financial Information Item 1: Financial Statements (unaudited) 3 Item 2: Management's Discussion and Analysis of Financial Condition and 14 Results of Operations Item 3: Quantitative and Qualitative Information about Market Risk 24 Part II: Other Information Item 1: Legal Proceedings 36 Item 2: Changes in Securities and Use of Proceeds 36 Item 3: Defaults Upon Senior Securities 36 Item 4: Submission of Matters to a Vote of Security Holders 36 Item 5: Other Information 36 Item 6: Exhibits and Reports on Form 8-K 36 2 PART I - FINANCIAL INFORMATION Item 1: Financial Statements (unaudited)
Page Number (1) Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000...................... 4 (2) Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000..................................................................... 5 (3) Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000..................................................................... 6 (4) Notes to Consolidated Financial Statements...................................................... 7
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Republic First Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 dollars in thousands, except share data (unaudited) ASSETS: September 30, 2001 December 31, 2000 ------------------------- ------------------------- Cash and due from banks $25,557 $20,990 Interest -bearing deposits with banks 424 460 Federal funds sold 33,077 29,207 ------------------------- ------------------------- Total cash and cash equivalents 59,058 50,657 Other interest-earning restricted cash 4,323 - Securities available for sale, at fair value 125,533 152,134 Securities held to maturity at amortized cost (fair value of $13,547 and $17,750, respectively) 13,505 17,707 Loans receivable (net of allowance for loan losses of $5,223 and $4,072, respectively) 460,829 418,313 Premises and equipment, net 5,369 5,153 Accrued income and other assets 10,211 11,673 ------------------------- ------------------------- Total Assets $678,828 $655,637 ========================= ========================= LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Deposits: Demand - non-interest-bearing $65,925 $44,281 Demand - interest-bearing 48,594 29,784 Money market and savings 114,813 76,510 Time under $100,000 161,743 175,834 Time $100,000 or more 84,823 99,142 ------------------------- ------------------------- Total Deposits 475,898 425,551 Other borrowed funds 142,500 176,442 Accrued expenses and other liabilities 12,491 10,614 ------------------------- ------------------------- Total Liabilities 630,889 612,607 ------------------------- ------------------------- Shareholders' Equity: Common stock par value $0.01 per share, 20,000,000 Shares authorized; shares issued 6,358,126 as of September 30, 2001 and December 31, 2000 63 63 Additional paid in capital 32,117 32,117 Retained earnings 16,500 14,446 Treasury stock at cost (175,172 shares At September 30, 2001 and December 31, 2000) (1,541) (1,541) Accumulated other comprehensive income (loss) 800 (2,055) ------------------------- ------------------------- Total Shareholders' Equity 47,939 43,030 ------------------------- ------------------------- Total Liabilities and Shareholders' Equity $678,828 $655,637 ========================= ========================= (See notes to consolidated financial statements)
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Republic First Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations For the Three and Nine Months Ended September 30, dollars in thousands, except per share data (unaudited) Quarter to Date Year to Date September 30, September 30, 2001 2000 2001 2000 ---- ---- ---- ---- Interest income: Interest and fees on loans $9,671 $9,111 $28,294 $24,739 Interest and dividend income on federal funds sold and other 134 231 1,190 298 interest-earning balances Interest on investments 2,190 2,958 7,119 9,225 ------------------- ----------------- ------------- --------------- Total interest income 11,995 12,300 36,603 34,262 ------------------- ----------------- ------------- --------------- Interest expense: Demand interest-bearing 199 189 494 387 Money market and savings 728 800 2,442 1,942 Time $100,000 or more 1,241 1,365 4,374 3,412 Time under $100,000 2,517 2,699 8,071 7,137 Other borrowed funds 2,265 2,709 7,047 8,711 ------------------- ----------------- ------------- ---------------- Total interest expense 6,950 7,762 22,428 21,589 ------------------- ----------------- ------------- --------------- Net interest income 5,045 4,538 14,175 12,673 ------------------- ----------------- ------------- ---------------- Provision for loan losses 570 200 1,347 600 ------------------- ----------------- ------------- --------------- Net interest income after provision for loan losses 4,475 4,338 12,828 12,073 ------------------- ----------------- ------------- --------------- Non-interest income: Service charges 562 413 1,608 1,048 Gains on securities sold - - 13 - Tax refund revenue - - 253 181 Other income 32 24 78 82 ------------------- ----------------- ------------- --------------- 594 437 1,952 1,311 Non-interest expenses: Salaries and benefits 2,081 1,855 6,120 5,034 Occupancy and equipment 586 490 1,717 1,409 Legal expenses 310 254 429 373 Other expenses 1,116 1,061 3,449 2,637 ------------------- ----------------- ------------- --------------- 4,093 3,660 11,715 9,453 ------------------- ----------------- ------------- --------------- Income before income taxes 976 1,115 3,065 3,931 Provision for income taxes 322 368 1,011 1,297 ------------------- ----------------- ------------- --------------- Net income $654 $747 $2,054 $2,634 =================== ================= ============= =============== Net income per share: ------------------- ----------------- ------------- --------------- Basic $0.11 $0.12 $0.33 $0.43 =================== ================= ============= =============== ------------------- ----------------- ------------- --------------- Diluted $0.10 $0.12 $0.32 $0.42 =================== ================= ============= =============== (See notes to consolidated financial statements)
5 Republic First Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Nine Months Ended September 30, Dollars in thousands (unaudited)
2001 2000 --------------- ---------------- Cash flows from operating activities: Net income $2,054 $2,634 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,347 600 Loss on sale of other real estate owned - 53 Depreciation and amortization 949 456 Decrease in loans held for sale - 4,857 Decrease (increase) in accrued income and other assets (8) 489 Increase in accrued expenses and other 1,877 1,122 liabilities Net increase in deferred fees 54 155 --------------- ---------------- Net cash provided by operating activities 6,273 10,366 --------------- ---------------- Cash flows from investing activities: Purchase of securities held to maturity (3,529) (1,100) Proceeds from principal collected on securities 24,732 17,799 Proceeds from calls of held to maturity securities 5,831 - Proceeds from sale of available for sale securities 7,842 - Net increase in loans (43,917) (51,420) Increase in other interest-earning restricted cash (4,323) - Net proceeds from sale of other real estate owned - 590 Premises and equipment expenditures (913) (466) --------------- ---------------- Net cash (used in) investing activities (14,277) (34,597) --------------- ---------------- Cash flows from financing activities: Net increase in demand, money market and savings deposits 78,757 37,264 Net decrease in borrowed funds less than 90 days (16,442) (6,600) Repayment of borrowed funds greater than 90 days (17,500) (50,000) Net increase (decrease) in time deposits (28,410) 68,803 --------------- ---------------- Net cash provided by financing activities 16,405 49,467 --------------- ---------------- Increase in cash and cash equivalents 8,401 25,236 Cash and cash equivalents, beginning of period 50,657 21,110 --------------- ---------------- Cash and cash equivalents, end of period $59,058 $46,346 =============== ================ Supplemental disclosure: Interest paid $23,969 $21,375 =============== ================ Taxes paid $1,750 $ 500 =============== ================ Non-cash transactions: Change in unrealized gain/(loss) on securities available for sale, net of tax $ 2,855 $1,717 Change in deferred taxes due to change in unrealized gain on securities available for sale (1,471) (884) (See notes to consolidated financial statements)
6 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) Note 1: Organization Republic First Bancorp, Inc. (the "Company"), is a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiaries, First Republic Bank and First Bank of Delaware offer a variety of banking services to individuals and businesses primarily in Greater Philadelphia, Delaware and Southern New Jersey through their offices and branches in Philadelphia and Montgomery Counties in Pennsylvania and New Castle County in Delaware. These interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Accordingly, these financial statements do not include information or footnotes necessary for a complete presentation of financial statements in accordance with accounting principles generally accepted in the United States of America. In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments (including normal recurring accruals) necessary to present fairly the financial position as of September 30, 2001, the results of operations for the three and nine month periods ended September 30, 2001 and 2000, and the cash flows for the nine month periods ended September 30, 2001 and 2000. The interim results of operations may not be indicative of results of operations for the full year. The accompanying unaudited financial statements should be read in conjunction with the Company's audited financial statements, and the notes thereto, included in the Company's Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission. Note 2: Summary of Significant Accounting Policies: Principles of Consolidation: The consolidated financial statements of the Company include the accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, First Republic Bank and First Bank of Delaware (together the "Banks"). 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 primarily on the earnings of the Banks. The Banks are heavily dependent upon the level of net interest income, which is the difference between interest earned on interest-earning assets, such as loans and investments, and the interest paid on interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of the Banks are subject to the risks and uncertainties resulting from changes in interest rates. The preparation of financial statements 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 may differ from those estimates. Significant estimates are made by management in determining the allowance for loan losses and deferred tax assets. Consideration is given to a variety of factors in establishing the allowance for loan losses, including current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. 7 Since the allowance for loan losses is dependent, to a great extent, on the general economy and other conditions that may be beyond the Banks' control, it is possible that the estimates of the allowance for loan losses may vary materially in the near term. Other interest-earning restricted cash: Other interest-earning restricted cash represents cash to fund an offsite ATM network. The Bank may obtain access to the cash for liquidity, if necessary. Note 3: Legal Proceedings The Company and the Banks are from time to time a party (plaintiff or defendant) to lawsuits in the ordinary course of business. While any litigation involves uncertainty, management, after reviewing pending litigation with counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such litigation will not have a material effect on the financial condition or results of operations of the Company and the Banks. Note 4: Recent Accounting Pronouncements Business Combinations In June 2001, the FASB issued Statement No. 141, "Business Combinations." The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. There is no expected impact on earnings, financial condition, or equity upon adoption of Statement No. 141. Goodwill and Other Intangible Assets In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. 8 The provisions of the Statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. There is no expected significant impact on earnings, financial condition, or equity upon adoption of Statement No. 142. Asset Retirement Obligations In June 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. Earlier application is encouraged. The Company does not expect the adoption of the Statement to have an impact on it's earnings, financial condition, or equity. Impairment or Disposal of Long-Lived Assets In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The provisions of this 9 Statement generally are to be applied prospectively. The Company does not expect the adoption of the Statement to have an impact on it's earnings, financial condition, or equity. Note 5: Segment Reporting The Company's reportable segments represent strategic businesses that offer different products and services. The segments are managed separately because each segment has unique operating characteristics, management requirements and marketing strategies. Republic First Bancorp has four reportable segments: two community banking segments, tax refund products and short-term consumer loans. The community banking segments are primarily comprised of the results of operations and financial condition of the Banks. Tax refund products are comprised of accelerated check refunds ("ACRs") and refund anticipation loan ("RALs") offered on a national basis to customers of Liberty Tax Services, a national tax preparation firm. Short-term consumer loans are loans made to customers which have principal amounts of $1,000 or less and terms of approximately two weeks. These loans typically are made in states outside of the Company's Pennsylvania, New Jersey and Delaware markets and involve rates and fees significantly different than other loan products offered by the Banks. The accounting policies of the segments are the same as those described in the notes to consolidated financial statements from the Company's Form 10-K. The Company evaluates the performance of the community banking segments based upon income before the provision for income taxes, return on equity and return on average assets. Tax refund products and short-term consumer loans are evaluated based upon income before provision for income taxes. Tax refund products and short-term consumer loans are provided to satisfy consumer demands while diversifying the Company's earnings stream. 10
As of and for the nine months ended September 30, (dollars in thousands) 2001 2000 ----------- ------------ First Short- First Short- Republic Delaware Tax term Republic Delaware Tax term Bank Bank Refunds loans Total Bank Bank Refunds loans Total ----------------------------------------------- -------------------------------------------------------------- External customer revenues Interest income $33,321 $1,694 $ - $1,588 $36,603 $ 33,314 $ 948 $ - $ - $ 34,262 Other income 1,317 325 253 57 1,952 1,038 92 181 - 1,311 ------- ------ ---- ------- -------- -------- ----- ---- ---- -------- Total external customer revenues 34,638 2,019 253 1,645 38,555 34,352 1,040 181 - 35,573 ------- ------ ---- ------- -------- -------- ----- ---- ---- -------- Intersegment revenues: Interest income - - - - - - - - - - Other income 57 - - - 57 57 - - - 57 ------- ------ ---- ------- -------- -------- ----- ---- ---- -------- Total intersegment revenues 57 - - - 57 57 - - - 57 ------- ------ ---- ------- -------- -------- ----- ---- ---- -------- Total revenues 34,695 2,019 253 1,645 38,612 34,409 1,040 181 - 35,630 ------- ------ ---- ------- -------- -------- ----- ---- ---- -------- Depreciation and amortization 851 98 - - 949 384 72 - - 456 Other external operating expenses 30,731 2,320 174 1,316 34,541 29,749 1,437 - - 31,186 Intersegment expense: Other operating expense - 57 - - 57 - 57 - - 57 Interest expense - - - - - - - - - - ------- ------ ---- ------- -------- -------- ----- ---- ---- -------- Segment expenses 31,582 2,475 174 1,316 35,547 30,133 1,566 - - 31,699 ------- ------ ---- ------- -------- -------- ----- ---- ---- -------- Segment income (loss) before taxes $ 3,113 $ (456) $79 $ 329 $ 3,065 $ 4,276 $(526) $ 181 $ - $ 3,931 ======= ====== ==== ======= ======== ======== ===== ===== ==== ======== Segment assets 626,945 43,383 - 8,500 678,828 613,425 28,024 - - 641,449 Capital expenditures 739 139 25 10 913 401 65 - - 466
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As of and for the three months ended September 30, (dollars in thousands) 2001 2000 ----------- ------------ First Short- First Short- Republic Delaware Tax term Republic Delaware Tax term Bank Bank Refunds loans Total Bank Bank Refunds loans Total ------------------------------------------------------------ ----------------------------------------------------- External customer revenues: Interest income $10,376 $ 550 $ - $ 1,069 $ 11,995 $ 11,853 $ 447 $ - $ - $ 12,300 Other income 489 105 - - 594 411 26 - - 437 --------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------ Total external customer revenues 10,865 655 - 1,069 12,589 12,264 473 - - 12,737 --------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------ Intersegment revenues: Interest income - - - - - - - - - - Other income 19 - - - 19 19 - - - 19 --------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------ Total intersegment revenues 19 - - - 19 19 - - - 19 --------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------ Total revenues 10,884 655 - 1,069 12,608 12,283 473 - - 12,756 --------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------ Depreciation and amortization 465 31 5 - 501 145 26 - - 171 Other external operating expenses 9,622 773 - 717 11,112 10,811 640 - - 11,451 Intersegment expense: Other operating expense - 19 - - 19 - 19 - - 19 Interest expense - - - - - - - - - - --------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------ Segment expenses 10,087 823 5 717 11,632 10,956 685 - - 11,641 --------- --------- ---------- ---------- ------------ -------------- ------------ -------- ------ ------------ Segment income (loss) before taxes $ 797 $ (168) $ (5) $ 352 $ 976 $ 1,327 $ (212) $ - $ - $ 1,115 ========= ========= ========== ========== ============ ============== ============ ======== ====== ============ Segment assets 626,945 43,383 - 8,500 678,828 613,425 28,024 - - 641,449 Capital expenditures 319 79 25 10 433 250 28 - - 278
12 Note 6: Earnings Per Share: Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSE"). Common stock equivalents consist of dilutive stock options granted through the Company's stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. Common stock equivalents which are not dilutive are not included for purposes of this calculation. At September 30, 2001 and 2000, respectively, 113,440 and 275,310 of CSEs were not dilutive, but may be dilutive in the future. The following table is a comparison of EPS for the three and nine months ended September 30, 2001 and 2000.
Quarter to Date Year to Date 2001 2000 2001 2000 Net income $654,000 $747,000 $2,054,000 $2,634,000 Shares Per Share Share Per Share Shares Per Share Share Per Share ------ --------- ----- --------- ------ --------- ----- --------- Weighted average shares For period 6,182,954 6,168,729 6,182,954 6,168,729 Basic EPS $0.11 $0.12 $0.33 $0.43 Add common stock equivalents 188,372 70,127 174,997 110,760 ------- ------ ------- ------- representing dilutive stock options Effect of dilutive CSE $(0.01) $0.00 $(0.01) $(0.01) ----- ------- Equals total weighted average shares and CSE (diluted) 6,371,326 6,238,856 6,357,951 6,279,489 ========= ========= ========= ========= Diluted EPS $0.10 $0.12 $0.32 $0.42 ----- ===== ----- =====
Note 7: Comprehensive Income The following table displays net income and the components of other comprehensive income to arrive at total comprehensive income. For the Company, the only components of other comprehensive income are those related to available for sale securities.
(dollar amounts in thousands) Three months ended Nine months ended September 30, September 30, ----------------------------------- ----------------------------------- 2001 2000 2001 2000 --------------- ---------------- --------------- --------------- Net income $654 $747 $2,054 $ 2,634 Other comprehensive income, net of tax: Unrealized gains on securities: Unrealized holding gains during the period 2,280 2,149 2,864 1,717 Less: Reclassification adjustment for gains included in net income - - (9) - --------------- ---------------- --------------- --------------- Comprehensive income $2,934 $2,896 $4,909 $4,351 =============== ================ =============== ===============
13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: The following is Management's Discussion and Analysis of the significant changes in the Company's results of operations, financial condition, and capital resources presented in the accompanying consolidated financial statements of Republic First Bancorp, Inc. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements. Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995 and applicable rules of the Securities and Exchange Commission. Such statements typically include the words "may", "believes", "expect", "estimate", "project", anticipate", "should", "intend", "probability", "risk", "target", "objective", "strategy" and similar expressions or variations on such expressions. Any forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; new service and product offerings by competitors and price pressures; and similar items. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2000, Quarterly Reports on Form 10-Q filed by the Company in 2001, Current Reports on Form 8-K filed by the Company, as well as other filings. Financial Condition: September 30, 2001 Compared to December 31, 2000 Total assets increased $23.2 million to $678.8 million at September 30, 2001 versus $655.6 million at December 31, 2000. This increase was driven principally by a $42.5 million increase in net loans, which were funded by deposit growth. Loans: The loan portfolio, which represents the Company's largest asset, 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. Net loans increased $42.5 million, or 10.2%, to $460.8 million at September 30, 2001 from $418.3 million at December 31, 2000. The loan portfolio consists of commercial and industrial ("C&I") loans, commercial and residential construction loans, commercial real estate loans, residential mortgages, short-term consumer loans, home equity loans, lines of credit and others. During 2000, the Company introduced two new products: commercial construction loans and residential construction loans. Commercial construction loans are loans to developers for commercial or residential construction. These loans generally have an appraised loan to value ratio 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, generally to build a primary residence. Upon completion of construction, residential construction loans are repaid by borrowers with the proceeds of permanent first mortgage loans. Consistent with the Company's long-term strategy of increasing the ratio of variable rate loans, rates on most loan originations in the year 2001 were tied to the prime rate of interest. That strategy reflects the repricing characteristics of the majority of the Banks' funding sources which are also variable. At September 30, 2001, the Bank had approximately $5.8 million of short-term consumer loans outstanding. These loans were first offered in the second quarter of 2001 and represent a new business 14 segment. These loans have principal amounts of less than $1,000, and terms of approximately two weeks. These loans are made in states outside of the Company's Pennsylvania, New Jersey and Delaware markets. Securities available for sale and held to maturity: Securities available for sale may be sold in response to changing market and interest rate conditions or for other business purposes. Available for sale securities decreased $26.6 million, or 17.5%, to $125.5 million at September 30, 2001 from $152.1 million at December 31, 2000. This decrease reflected both the sale of an $8.0 million security on which a gain of $13,000 was realized and principal repayments which were partially offset by a $4.3 million increase in market value on securities classified as available-for-sale. 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. Held to maturity securities decreased $4.2 million, or 23.7% to $13.5 million at September 30, 2001 from $17.7 million at December 31, 2000. The decline is primarily due to the redemption of Federal Home Loan Bank stock. Cash and due from banks: Cash and due from banks, interest-bearing deposits and federal funds represent the Company's most liquid assets. The aggregate amount in these three categories increased $8.4 million to $59.1 million at September 30, 2001 from $50.7 million at December 31, 2000, reflecting increases in federal funds sold and due from banks related to the timing of overnight cash letters. Other interest-earning restricted cash: Other interest-earning restricted cash represents funds provided to fund an offsite ATM network for which the Company is compensated. At September 30, 2001, the balance was $4.3 million versus $0 at December 31, 2000. Deposits: Deposits, which include non-interest-bearing demand deposits and interest-bearing time, money market and savings deposits, are the Banks' major source of funding. Deposits are generally solicited from the Company's market area through a variety of products to attract and retain customers, with a primary focus on building and expanding multi-product relationships. Deposits increased $50.3 million, or 11.8%, to $475.9 million at September 30, 2001 from $425.6 million at December 31, 2000. The aggregate of transaction accounts, which include demand, money market and savings accounts, increased $78.8 million, or 52.3%, to $229.3 million at September 30, 2001 from $150.6 million at December 31, 2000. Certificates of deposit decreased by $28.4 million, or 10.3%, to $246.6 million at September 30, 2001 from $275.0 million at December 31, 2000. The Company is emphasizing core deposit growth in 2001 as part of a long-term strategy to reduce reliance on borrowed funds. The decline in time deposits resulted from the Company's decision to let higher costing time deposits mature and replace them with core deposits. 15 Other Borrowed Funds: Other borrowed funds are comprised of overnight federal funds purchased and term FHLB borrowings. Other borrowed funds were $142.5 million at September 30, 2001, a decrease of $33.9 million, or 19.2% when compared to the December 31, 2000 total of $176.4 million. The decrease in borrowed funds was funded primarily with increases in deposit balances, consistent with the Banks' strategy to increase lower cost deposits through focused marketing efforts and decrease higher cost borrowings. The Company's shareholders' equity as of September 30, 2001 and December 31, 2000 was $47.9 million and $43.0 million, respectively. Book value per share of the Company's common stock increased from $6.96 as of December 31, 2000 to $7.75 as of September 30, 2001. This increase was mainly attributable to retained earnings and the $2.9 million increase in market value of the available for sale securities portfolio, net of deferred taxes. Results of Operations: Three Months Ended September 30, 2001 Compared to September 30, 2000 Overview The Company's net income decreased $93,000 to $654,000 for the three months ended September 30, 2001, from $747,000 for the three months ended September 30, 2000. Net interest income in those respective periods increased $507,000, reflecting a 16.6% increase in combined average commercial loans and residential construction loans and a 41.3% increase in average lower costing core deposits and increased short-term loan income. However, significant amounts of the resulting increase in margin were offset by margin contractions resulting from the impact of the 75 basis point drop in the prime rate during the quarter, as a result of Federal Reserve Board rate reductions. That drop compounded the residual effect of comparable rate reductions of 275 basis points in the first two quarters of the year. Specifically, loans tied to the prime rate of interest were adjusted lower immediately, while the reductions in interest expense were significantly dependent upon maturity and repricing of certificates of deposit. The decrease in income also reflected increased operating expenses and a higher provision for loan losses during the quarter resulting from short-term consumer loans and the classification of approximately $5.4 million in loans to one borrower as non-accrual which necessitated the reversal of $342,000 in accrued interest income. Diluted earnings per share for the three months ended September 30, 2001 were $0.10 compared to $0.12 for the prior year period due to the decrease in net income. Return on average assets and equity were 0.41% and 5.57% respectively, compared to 0.48% and 6.78%, respectively, for the corresponding period in 2000. Analysis of Net Interest Income Net interest margin (net interest income as a percentage of average interest-earning assets) was 3.31% for the three months ended September 30, 2001 compared to 3.03% for the three months ended September 30, 2000. This increase reflected the 16.6% loan growth, the 41.3% core deposit growth and an increase in short-term consumer loan fees as these fees contributed $1.1 million in interest income and resulted in a 70 basis point increase in margin. Overall, the Company was negatively impacted by the 75 basis point decline in the prime rate of interest during the quarter and the continuing net effect of the 275 basis point decline in the first two quarters of the year. In addition, the margin was negatively impacted 22 basis points resulting from the reversal of 16 $342,000 in interest income as a loan to one borrower was placed on non-accrual status in the third quarter of 2001. Net interest income increased $507,000, or 11.2%, to $5.0 million for the three months ended September 30, 2001 from $4.5 million for the three months ended September 30, 2000. This increase resulted from growth in commercial and residential construction loans, core deposit growth and the addition of the short-term consumer loans as noted above. These benefits were partially offset by the impact of a decline in rates on loans tied to the prime rate of interest and the effect of the interest reversal for the non-accrual loan. As shown in the following Rate Volume table, the increase in net interest income was due to the positive effect of volume changes totaling $1.9 million partially offset by the negative impact of rate changes of $1.4 million. The positive impact from volume changes was attributable to an increase in average interest-earning assets, which increased $9.4 million (on average) to $608.7 million during the quarter ended September 30, 2001, from $599.9 million for the prior comparable period. The negative effect of the rate changes was driven by the decline in the prime commercial loan rate resulting from Federal Reserve Board rate cuts, as previously noted. The Company's total interest income decreased $305,000 or 2.5%, to $12.0 million for the three months ended September 30, 2001 from $12.3 million for the three months ended September 30, 2000, reflecting the lower rate environment. Interest and fees on loans increased $560,000, or 6.2%, to $9.7 million for the three months ended September 30, 2001 from $9.1 million for the prior comparable period. This increase was driven by the 16.6% commercial and residential construction loan growth and the addition of $1.1 million in short-term loan fees which were not present in the prior comparable period. Average loans increased $49.8 million, or 12.4% to $451.2 million. This was partially offset by a decline in the rates earned on commercial loans tied to the prime rate of interest resulting from Federal Reserve Board rate cuts and the reversal of accrued interest on the non-accrual loans. Interest and dividend income on securities decreased $768,000, or 26.0%, to $2.2 million for the three months ended September 30, 2001 from $3.0 million for the prior comparable period reflecting a decrease in the gross average balance of securities owned of $41.8 million, or 22.7%, to $142.3 million for the three months ended September 30, 2001 from $184.1 million for the prior comparable period. This decline reflects the Company's continuing strategy to reduce securities and redeploy the proceeds into higher yielding assets. In addition to the reduced average outstandings, the yield earned on these securities decreased 27 basis points to 6.16% due to the amortization, maturity and sale of higher yielding securities. Federal funds sold and other interest earning balances income decreased due to the lower interest rate environment. Interest expense decreased $812,000 or 10.5%, to $6.9 million for the three months ended September 30, 2001 from $7.8 million for the prior comparable period. Interest-bearing liabilities averaged $528.0 million, a decrease of $8.4 million, or 1.6%, from $536.4 million for the prior year comparable period. The net decline in interest-bearing liabilities contributed $409,000 to the decrease in expense while the 52 basis point decline in rates paid on interest-bearing liabilities contributed the remaining $403,000 of the decrease. The decline in interest-bearing liabilities reflected the repayment of other borrowed funds which was funded with $41.3 million growth in average deposits. The average rate paid on interest-bearing liabilities decreased to 5.22% for the three months ended September 30, 2001 from 5.74% for the prior comparable period, reflecting the lower interest rate environment resulting from the Federal Reserve Board rate cuts. Certificates of deposit (time deposit) interest expense decreased $306,000 or 7.5%. This decrease was primarily due to a decline in the average volume of certificates of deposit of $12.1 million, or 4.7%, to $243.3 million for the three months ended September 30, 2001 from $256.3 million for the three months ended September 30, 2000. That decline resulted in $205,000 of the decrease. The decrease in average rate of interest paid on time deposits contributed the remaining $101,000 of the decrease in interest expense. This decline reflected the lower interest rate environment as mentioned previously. 17 Interest expense on FHLB advances and overnight federal funds purchased was $2.3 million for the three months ended September 30, 2001 compared to $2.7 million for the prior comparable period, a decline of $444,000, or 16.4%. This decrease reflected a decrease in the average volume of other borrowed funds of $39.0 million, or 21.0% to $147.0 million for the three months ended September 30, 2001 from $186.0 million for the prior comparable period as borrowings were replaced with core deposits. The decline in volume more than offset the 33 basis point increase in average rate paid for borrowed funds, which rose from 5.78% at September 30, 2000 to 6.11% at September 30, 2001. The rate increased in a decreasing rate environment as lower yielding shorter term advances were repaid while long-term advances at higher rates remained outstanding. The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volumes and rates during the period. Changes that are not due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Rate/Volume Table
Three months ended September 30, 2001 versus 2000 (dollars in thousands) Due to change in: Volume Rate Total ------------ ------------ ------------ Interest earned on: Federal funds sold $ 20 $ (117) $ (97) Securities (648) (120) (768) Loans 2,124 (1,564) 560 - --------------------------------------------------------------------------------------------------------- Total interest-earning assets 1,496 (1,801) (305) Interest Expense of Deposits Interest-bearing demand deposits (108) 98 (10) Money market and savings (283) 355 72 Time deposits 205 101 306 - --------------------------------------------------------------------------------------------------------- Total deposit interest expense (186) 554 368 Other borrowed funds 595 (151) 444 - --------------------------------------------------------------------------------------------------------- Total interest expense 409 403 812 - --------------------------------------------------------------------------------------------------------- Net interest income $ 1,905 $(1,398) $ 507 - ---------------------------------------------------------------------------------------------------------
Provision for Loan Losses The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects known and estimated inherent losses in the portfolio. The level of the allowance for loan losses is determined by management based upon its evaluation of the known and inherent risks within the Company's loan portfolio. Management's periodic evaluation is based upon an examination of the portfolio, past loss experience, current economic conditions, the results of the most recent regulatory examinations and other relevant factors. The provision for loan losses was $570,000 and $200,000 for the three months ended September 30, 2001 and 2000, respectively. Approximately $355,000 of the provision reflected the impact of the short-term consumer loan program. As of September 30, 2001 and 2000, the ratio of the allowance for loan losses to total loans, net of deferred loan fees was 1.12% and 0.93%, respectively. 18 Non-Interest Income Total non-interest income increased $157,000 to $594,000 for the three months ended September 30, 2001 from $437,000 for the prior comparable period. This increase reflects increased loan advisory fees and increased service charges on deposit accounts resulting from higher service charge rates and growth in the number of core deposit accounts. Non-Interest Expenses Total non-interest expenses increased $433,000 or 11.8% to $4.1 million for the three months ended September 30, 2001 as compared to the prior year comparable period. Salaries and benefits increased $226,000 or 12.2% to $2.1 million for the three months ended September 30, 2001 from $1.9 million for the comparable prior year period. Higher health insurance costs of $63,000 related to a change on benefit plans, a decline of $50,000 in loan cost deferrals, normal merit increases and expansion of the commercial loan department contributed to the increase. Occupancy and equipment expenses increased $96,000, or 19.6%, to $586,000 for the three months ended September 30, 2001 from $491,000 for the comparable prior year period. The increase resulted primarily from increased depreciation expense associated with the Company's internal computer network and other technology expenditures. Other non-interest expenses including legal increased $111,000, or 8.5%, to $1.4 million for the three months ended September 30, 2001 from $1.3 million for the comparable prior year period in 2000. This increase reflected increased legal fees, primarily related to loan collections. Provision for Income Taxes The provision for income taxes decreased $46,000, or 12.5%, to $322,000 for the three months ended September 30, 2001 from $368,000 for the comparable prior year period. This decrease is the result of the decrease in pre-tax income from the comparable prior year period. The effective tax rate for both periods was approximately 33.0%. 19 Nine Months Ended September 30, 2001 Compared to September 30, 2000 Overview The Company's net income decreased $580,000 to $2.1 million for the nine months ended September 30, 2001 from $2.6 million for the nine months ended September 30, 2000. Net interest income for those respective periods increased $1.5 million, reflecting a 20.5% increase in combined average commercial and residential construction loans, the addition of higher yielding consumer loans, and a 48.0% increase in average lower costing core deposits. However, significant amounts of the resulting increase in margin were offset by margin contractions resulting from the impact of the 350 basis point drop in the prime rate of interest during the first nine months of the year, resulting from Federal Reserve Board rate reductions. Specifically, loans tied to the prime rate of interest were adjusted lower immediately, while the reductions in interest expense were significantly dependent upon maturity and repricing of certificates of deposit. The decrease in earnings also reflected increased operating expenses as a result of continued expansion of the commercial banking group and operational support for expanded product offerings. Earnings were also negatively impacted by higher provisions for loan losses during the year relating to short-term consumer loans. Finally, the classification of $5.4 million in loans to one borrower as non-accrual necessitated a $342,000 reversal of previously accrued interest income, as well as an additional provision for loan loss. Diluted earnings per share for the nine months ended September 30, 2001 were $0.32 compared to $0.42 for the nine months ended September 30, 2000, due primarily to the decrease in net income. Return on average assets and average equity were 0.42% and 6.00% respectively, compared to 0.59% and 8.25% respectively, for the same period in 2000. The decline in these ratios is due to lower net income. Analysis of Net Interest Income Net interest margin (net interest income as a percentage of average interest-earning assets) was 3.03% for the nine months ended September 30, 2001 versus 2.94% for the comparable prior year. This increase resulted from 20.5% average growth in commercial and residential construction loans, the 48.0% increase in average lower costing core deposits and the addition of the short-term consumer loans as noted above. The modest increase in net interest margin reflected the positive impact of fees on short-term consumer loans in the second and third quarter of 2001 which offset the negative influence of the lower interest rate environment. These fees totaled $1.6 million and contributed approximately 34 basis points to the margin in 2001. The Company was negatively impacted by the 350 basis point decline in the prime rate in the year 2001 which immediately impacted the yield on interest-earning assets, especially in loans tied to the prime rate of interest, in advance of repricing certificates of deposit as well as the reversal of $342,000 in interest income for a loan placed on non-accrual status during the third quarter of 2001. The Company's net interest income increased $1.5 million, or 11.9%, to $14.2 million for the nine months ended September 30, 2001 from $12.7 million for the comparable prior year period. This increase resulted from the above mentioned growth in commercial and residential construction loans, core deposit growth and the addition of the short-term consumer loans as noted above. These increases offset the reduction in interest income earned on securities. As shown in the Rate Volume table below, the increase in net interest income was due to the positive effect of volume changes of approximately $4.1 million partially offset by the effect of lower interest rates which totaled $2.6 million. The positive impact of volume changes was attributable to a $48.2 million increase in average interest earning assets of 8.4%, to $623.8 million for the nine months ended September 30, 2001, from $575.6 million for the comparable prior year period. The Company's total interest income increased $2.3 million, or 6.8%, to $36.6 million for the nine months ended September 30, 2001 from $34.3 million for the prior comparable period. This increase reflected loan growth as 20 described previously. The impact of the loan growth was partially offset by the reduction in the prime interest rate of 350 basis points and lower income from securities resulting from lower average balances outstanding. Interest and fees on loans increased $3.6 million, or 14.4%, to $28.3 million for the nine months ended September 30, 2001 from $24.7 million for the comparable prior year period. This increase reflected an increase in average loans of $59.1 million, or 15.6%, to $438.5 million and the addition of the short-term consumer loan product, which was partially offset by the impact of the lower prime rate of interest. Interest and dividend income on securities decreased $2.1 million, or 22.8%, to $7.1 million for the nine months ended September 30, 2001 from $9.2 million for the comparable prior year period. This decline was due to the $37.1 million, or 19.5% decrease in volume to an average of $153.0 million and a decline in rate of 27 basis points to 6.20%. The decline in securities reflects the Company's continuing strategy to reduce securities and redeploy the proceeds into higher yielding assets. Federal funds sold and other interest earning balances income increased by $892,000 to $1.2 million. Cash inflows from deposit generation and securities reductions exceeding loan growth and repayments of borrowed funds were invested as federal funds. The Company's total interest expense increased $839,000 or 3.9%, to $22.4 million for the nine months ended September 30, 2001 from $21.6 million for the prior comparable period. Interest-bearing liabilities averaged $543.6 million, an increase of $27.7 million, or 5.4%, from $515.5 million for the comparable prior year period. Total interest-bearing deposits on average increased $75.8 million or 24.2% to $389.8 million due to the success of the Company's deposit generation strategies. A portion of these funds was used to pay down other borrowed funds which declined $48.2 million on average. Interest expense on time deposits increased $1.9 million or 18.0% to $12.4 million. This increase was primarily due to an increase in average certificates of deposit of $31.7 million, or 13.7%, to $263.4 million for the nine months ended September 30, 2001 from $231.6 million for the comparable prior year period. The average rate of interest on time deposits increased to 6.32% at September 30, 2001 versus 6.07% at September 30, 2000 due to the higher interest rate environment during periods in the year 2000 when most of these certificates were originated. Interest expense on other borrowed funds (FHLB advances and overnight federal funds purchased) declined $1.7 million, or 19.1% to $7.0 million for the nine months ended September 30, 2001 compared to $8.7 million for the comparable prior year period. This decrease reflected a $48.2 million, or 23.9% decrease in the average volume of other borrowed funds to $153.8 million for the nine months ended September 30, 2001 from $201.9 million for the comparable prior year period. This decline was partially offset by the increase in the average rate on other borrowed funds which increased 38 basis points from 5.75% at September 30, 2000 to 6.13% at September 30, 2001. The maturity of lower cost borrowings resulted in an increase in the average rate. 21 The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volumes and rates during the nine month period ending September 30, 2001 versus the comparable period for 2000. Changes that are not due to volume or rate variances have been allocated proportionally to both, based on their relative absolute values. Rate/Volume Table
Nine months ended September 30, 2001 versus 2000 (dollars in thousands) Due to change in: Volume Rate Total ------------------ ------------- ------------- Interest Income Federal Funds $ 978 $ (86) $ 892 Securities (1,738) (368) (2,106) Loans 5,380 (1,825) 3,555 - -------------------------------------------------------------------------------------------------------------- Total interest-earning assets 4,620 (2,279) 2,341 Interest Expense Deposits Interest-bearing demand deposits (299) 192 (107) Money market and savings (971) 471 (500) Time deposits (1,499) (397) (1,896) - -------------------------------------------------------------------------------------------------------------- Total deposit interest expense (2,769) 266 (2,503) Other borrowed funds 2,208 (544) 1,664 - -------------------------------------------------------------------------------------------------------------- Total interest expense (561) (278) (839) - -------------------------------------------------------------------------------------------------------------- Net interest income $ 4,059 $ (2,557) $ 1,502 - --------------------------------------------------------------------------------------------------------------
Provision for Loan Losses The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects known and estimated inherent losses in the portfolio. The level of the allowance for loan losses is determined by management based upon its evaluation of the known and inherent risks within the Company's loan portfolio. Management's periodic evaluation is based upon an examination of the portfolio, past loss experience, current economic conditions, the results of the most recent regulatory examinations and other relevant factors. The provision for loan losses was $1.3 million and $600,000 for the nine months ended September 30, 2001 and 2000, respectively. The increase was impacted by the classification of $5.4 million in loans to a single borrower as substandard. Approximately $535,000 of the increased provision reflected the results of the short-term consumer loan program. As of September 30, 2001 and 2000, the ratio of the allowance for loan losses to total loans, net of deferred loan fees was 1.12% and 0.93%, respectively. 22 Non-Interest Income Total non-interest income increased $641,000 to $2.0 million for the nine months ended September 30, 2001 from $1.3 million for the comparable prior year period. This was mainly attributable to an increase in non-interest income from loan advisory fees, increased deposit service charges and fees earned on participated loans. The increase in service fees on deposits is the result of increases in transaction based accounts and an increase in service charge rates. Non-Interest Expenses Total non-interest expenses increased $2.3 million to $11.7 million for the nine months ended September 30, 2001 from $9.5 million for the prior year comparable period. Salaries and benefits increased $1.1 million or 21.6%, to $6.1 million for the nine months ended September 30, 2001 from $5.0 million for the prior year comparable period. The increase reflected an expansion of the commercial and residential construction loan departments and operational support for expanded product offerings. In addition to continued loan production, the commercial construction and residential construction loan departments generate non-interest income by generating related fees. Higher health insurance costs of $203,000 due to a change in benefit plans and increased costs, a decline of $168,000 in loan cost deferrals and normal merit increases also contributed to the rise in salaries and benefits. Occupancy and equipment expenses increased $308,000, or 21.9%, to $1.7 million for the nine months ended September 30, 2001 from $1.4 million for the prior year comparable period. The increase resulted primarily from increased depreciation expense associated with the Company's internal computer network and other technology expenditures. Other expenses including legal increased $868,000 to $3.9 million for the nine months ended September 30, 2001 from $3.0 million for the same period in 2000. This increase reflected increased legal fees, primarily related to loan collections. In addition, audit and accounting, telephone, professional fees, correspondent service charges, FDIC assessment charges and printing and supplies were higher due to the overall growth of the company. Also, advertising expense increased due to a continuation of the Company's branding campaign which began in the fall of 2000. Provision for Income Taxes The provision for income taxes decreased $286,000, or 22.0%, to $1.0 million for the nine months ended September 30, 2001 from $1.3 million for the prior year comparable period. This decrease is the result of the decrease in pre-tax income. The effective tax rate for both years was approximately 33.0%. 23 ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK Interest Rate Risk Management Interest rate risk management involves managing the extent to which interest-sensitive assets and interest-sensitive liabilities are matched. The Company typically defines interest-sensitive assets and interest-sensitive liabilities as those that reprice within one year or less. Maintaining an appropriate match is a method of avoiding wide fluctuations in net interest margin during periods of changing interest rates. The difference between interest-sensitive assets and interest-sensitive liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities repricing in the same time periods and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets repricing in the same time periods. A negative GAP ratio suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a positive GAP ratio suggests the converse. Static GAP analysis describes interest rate sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in net interest income since changes in interest rates do not impact all categories of assets and liabilities equally or simultaneously. Interest rate sensitivity analysis also requires arbitrary 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 likely 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, 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, some of the deposits are reclassified from time frames of more than one year. However, management may choose not to reprice liabilities proportionately to change in market interest rates, for competitive or other reasons. 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 ways to changes in market interest rates. Furthermore, repricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayment and early withdrawal levels could also deviate significantly from those assumed in calculating GAP in the manner presented in the table below. The Company attempts to manage its assets and liabilities in a manner that optimizes net interest income. Management uses GAP analysis and simulation models to attempt to monitor behavior of its interest sensitive assets and liabilities. Adjustments to the mix of assets and liabilities are made periodically in an effort to optimize net interest income. The following tables present a summary of the Company's interest rate sensitivity GAP at September 30, 2001. For purposes of these tables, the Company has used assumptions based on industry data and historical experience to calculate the expected maturity of loans because, statistically, certain categories of loans are prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of the mortgage backed securities. 24
Republic First Bancorp Interest Sensitivity Gap (dollars in thousands) As of September 30, 2001 ------------------------------------------------------------------------------------------------------ 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, interest- bearing balances and due from banks $ 60,618 $ 11,155 $18,204 $ 31,458 $ 22,775 $ 13,286 $7,273 $12,093 $176,862 $176,904 Average interest rate 3.93% 5.82% 5.96% 6.04% 6.03% 5.94% 5.79% 6.05% Loans receivable 197,729 27,595 40,049 60,677 47,877 34,260 19,417 33,225 460,829 478,905 Average interest rate 6.68% 8.28% 8.15% 8.12% 7.95% 8.06% 7.70% 6.54% Total 258,347 38,750 58,253 92,135 70,652 47,546 26,690 45,318 637,691 655,809 ------------------------------------------------------------------------------------------------------- Cumulative Totals $258,347 $297,097 $355,350 $447,485 $518,137 $565,683 $592,373 $637,691 =================================================================================== Interest Sensitive Liabilities: Demand Interest Bearing $ 28,822 $ 933 $ 617 $ 1,234 $ 1,234 $ 1,234 $ 14,520 $ - $48,594 $48,594 Average interest rate 0.89% 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 0.00% Savings Accounts 3,935 127 84 169 168 168 1,982 $ - 6,633 6,633 Average interest rate 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 1.53% 0.00% Money Market Accounts 64,163 2,077 1,374 2,747 2,747 2,747 32,325 $ - 108,180 108,180 Average interest rate 2.97% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% -% Time Deposits 85,085 55,851 73,443 18,882 4,103 8,024 1,168 10 246,566 249,390 Average interest rate 5.67% 5.78% 5.37% 4.89% 6.07% 6.89% 6.17% 4.59% FHLB Borrowings - 12,500 5,000 - 25,000 100,000 - - 142,500 151,420 Average interest rate -% 5.39% 6.05% -% 5.83% 6.28% 0.00% 0.00% Total 182,005 71,488 80,518 23,032 33,252 112,173 49,995 10 552,473 564,217 ------------------------------------------------------------------------------------------------------- Cumulative Totals $182,005 $253,493 $334,011 $357,043 $390,295 $502,468 $552,463 $552,473 =================================================================================== Interest Rate Sensitivity GAP $ 76,342 $(32,739) $(22,265) $69,103 $37,400 $(64,627) $(23,305) $45,308 Cumulative GAP $ 76,342 $43,604 $21,339 $90,442 $127,842 $63,215 $39,910 $ 85,218 Interest Sensitive Assets/ Interest Sensitive Liabilities 142% 117% 106% 125% 133% 113% 107% 115% Cumulative GAP/ Total Earning Assets 12% 7% 3% 14% 20% 10% 6% 13% Total Earning Assets $637,691 ========== Off balance sheet items Notional value: Commitments to extend credit $ 3,777 $53,394 -------------------- Average interest rate 7.00% 7.00%
25 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 estimated net interest income for the year ending September 30, 2002, based upon the assets, liabilities and off-balance sheet financial instruments in existence at September 30, 2001. The Company has also estimated changes to that estimated net interest income based upon immediate and sustained changes in the interest rates ("rate shocks"). Rate shocks assume that all of the interest rate increases or decreases occur on the first day of the period modeled and remain at that level for the entire period. The following table reflects the estimated percentage change in estimated net interest income for the years ending September 30, 2002 and December 31, 2001. Quarterly changes could be significantly more or less than annual estimates. In fact, certain quarters within a one-year period could show an increase while other quarters might reflect a decrease. Percentage Change Rate shocks to interest rates 9/30/02 12/31/01 ----------------------------- ------- -------- +2% 1.7% (0.3%) +1% 1.1 0.4 -1% (1.4) (2.9) -2% (5.0) (9.8) 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. 26 Regulatory Matters 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 September 30, 2001 and December 31, 2000, First Republic Bank, First Bank of Delaware and Republic First Bancorp, Inc. exceeded all requirements to be considered well capitalized. The following table presents the Company's regulatory capital ratios at September 30, 2001 and December 31, 2000:
Actual For Capital To be well Adequacy purposes capitalized under FRB capital guidelines Amount Ratio Amount Ratio Amount Ratio ------------ ------------ ------------- ----------- ----------- ----------- Dollars in thousands At September 30, 2001 Total risk based capital First Republic Bank 45,318 11.64% 31,152 8.00% 38,940 10.00% First Bank of DE 5,036 20.07% 2,007 8.00% 2,509 10.00% Republic First Bancorp, 52,111 12.59% 33,115 8.00% 41,393 10.00% Inc. Tier 1 risk based capital First Republic Bank 40,432 10.38% 15,576 4.00% 23,364 6.00% First Bank of DE 4,722 18.82% 1,004 4.00% 1,505 6.00% Republic First Bancorp, 46,888 11.33% 16,557 4.00% 24,836 6.00% Inc. Tier 1 leveraged capital First Republic Bank 40,432 6.74% 29,999 5.00% 29.999 5.00% First Bank of DE 4,722 12.95% 1,823 5.00% 1,823 5.00% Republic First Bancorp, 46,888 7.40% 31,666 5.00% 31,666 5.00% Inc. Actual For Capital To be well Adequacy purposes capitalized under FRB capital guidelines Amount Ratio Amount Ratio Amount Ratio ------------ ------------ ------------- ----------- ----------- ----------- At December 31, 2000 Total risk based capital First Republic Bank 42,281 11.92% 28,639 8.00% 35,461 10.00% 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 1 risk based capital First Republic Bank 38,471 10.85% 14,184 4.00% 21,277 6.00% 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 1 leveraged capital First Republic Bank 38,471 6.19% 31,060 5.00% 31,060 5.00% 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%
27 Dividend Policy The Company has not paid any cash dividends on its common stock. The Company does not plan to pay cash dividends to shareholders in the next year and intends to retain all earnings to fund the growth of the Company and the Banks. 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 cash and cash equivalents totaled $59.1 million at September 30, 2001 compared to $50.7 million at December 31, 2000 due to timing issues. Additionally, the majority of its securities are also available to satisfy liquidity requirements through pledges to the FHLB to access its line of credit. Funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds or utilizing the facilities of the Federal Home Loan Bank System. At September 30, 2001, the Bank had $151.3 million in unused lines of credit available to it, substantially all of which was with the Federal Home Loan Bank, compared to $149.6 million at December 31, 2000. These lines of credit enable the Bank to purchase funds for short-term needs at current market rates and require pledging of the securities as noted above. At September 30, 2001, the Company had outstanding commitments (including unused lines of credit and letters of credit) of $57.2 million. Certificates of deposit which are scheduled to mature within one year totaled $214.4 million at September 30, 2001, and other borrowed funds are scheduled to mature within the same period amounted to $17.5 million. The Company anticipates that it will have sufficient funds available to meet its current commitments. The Banks' target liquidity levels are determined by comparisons of the estimated repayment and marketability of the Banks' interest-earning assets, with projected future outflows of deposits and other liabilities. The Bank has established lines of credit from correspondents, in the amount of $10.0 million, as contingent sources of liquidity. Additionally, First Republic Bank has established a line of credit with the Federal Home Loan Bank of Pittsburgh as noted above. As of September 30, 2001 and December 31, 2000, First Republic Bank had borrowed $142.5 million and $176.4 million, respectively, under its lines of credit. 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 through periods of changing interest rates. 28 Securities Portfolio At September 30, 2001, the Company had identified certain investment securities that are being held for indefinite periods of time, including securities that may be used as part of the Company's asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and other factors. Available for sale securities consist of US Government Agency securities and other investments. The book and market values of securities available for sale were $124.3 million and $125.5 million as of September 30, 2001, respectively. The net unrealized gain on securities available for sale, as of that date, was $1.2 million. The following table represents the carrying and estimated fair values of Investment Securities at September 30, 2001.
Gross Gross (Dollars in thousands) Amortized Unrealized Unrealized Available-for-Sale Cost Gain Loss Fair Value ------------------------------------------------------------------------------------------ Mortgage-backed $ 123,318 $ 1,409 $ (209) $ 124,518 U.S. Government Agencies 1,003 12 - 1,015 ------------------------------------------------------------------------------------------ Total Available-for-Sale $ 124,321 $ 1,421 $ (209) $ 125,533 ------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Held-to-Maturity Cost Gain Loss Fair Value ------------------------------------------------------------------------------------------ Mortgage-backed $ 1,563 $ 28 $ - $ 1,591 US Government Agencies 2,732 5 (1) 2,736 Other 9,210 10 - 9,220 ------------------------------------------------------------------------------------------ Total Held-to-Maturity $ 13,505 $ 43 $ (1) $ 13,547 ------------------------------------------------------------------------------------------
Loan Portfolio The Company's loan portfolio includes commercial and industrial loans, commercial and residential construction real estate loans, commercial loans secured by one-to-four family and other residential property, home equity loans, consumer loans, short-term consumer loans and others. 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 but may be secured by other collateral and personal guarantees. The Banks' had a combined legal lending limit of approximately $7.0 million at September 30, 2001. The Company's net loans increased $42.5 million, or 10.2%, to $460.8 million at September 30, 2001 from $418.3 million at December 31, 2000. 29 The following table sets forth the Company's loans by major categories for the periods indicated:
(dollars in thousands) As of September 30, 2001 As of December 31, 2000 ------------------------------------------------------------------------------ Balance % of Total Balance % of Total ------------------------------------------------------------------------------ Commercial: Real estate secured $ 203,619 43.7 $ 181,607 43.0 Non real estate secured 48,410 10.4 39,016 9.2 Unsecured 8,311 1.8 10,543 2.5 ------------------------------------------------------------------------------ 260,340 55.9 231,166 54.7 Residential real estate 197,246 42.3 188,432 44.6 Consumer & other 8,466 1.8 2,787 0.7 ------------------------------------------------------------------------------ Total loans 466,052 100.0% 422,385 100.0% Less: allowance for loan losses (5,223) (4,072) ---------------- ------------------- Net loans $ 460,829 $ 418,313 ================ ===================
Credit Quality The Company's written lending policies require underwriting, documentation and credit analysis standards to be met prior to funding. The Board of Directors reviews selected loans monthly to monitor underwriting standards. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal and/or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of nine months) by the borrower, in accordance with the contractual terms of the loan. While a loan is classified as nonaccrual or as an impaired loan and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. For non-accrual loans partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the remaining recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. 30 The following summary shows information concerning loan delinquency and other non-performing assets at the dates indicated.
September 30, 2001 December 31, 2000 --------------------------------------------- (dollars in thousands) Loans accruing, but past due 90 days or more $355 $91 Non-accrual loans 8,062 1,350 Restructured loans - 1,982 --------------------------------------------- Total non-performing loans (1) 8,417 3,423 Foreclosed real estate - - --------------------------------------------- Total non-performing assets (2) $8,417 $3,423 ============================================= Non-performing loans as a percentage of total loans net of unearned Income 1.81% 0.81% Non-performing assets as a percentage of total assets 1.24% 0.52% (1) Non-performing loans are comprised of (i) loans that are on a nonaccrual basis (ii) accruing loans that are 90 days or more past due and (iii) restructured loans. (2) Non-performing assets are composed of non-performing loans and foreclosed real estate (assets acquired in foreclosure).
Total non-performing loans increased $5.0 million at September 30, 2001 when compared to December 31, 2000 due principally to an increase in non-accrual loans. The increase reflected $5.4 million of loans to a single borrower which were classified as non-accrual during the third quarter. The latest appraisals available on these loans indicate that the collateral value exceeds unpaid principal as of September 30, 2001. However, there can be no assurance that if the Bank is required to liquidate the collateral, recoveries will not be significantly below appraised amounts, resulting in losses. The restructured loan of $2.0 million at December 31, 2000 has been repaid. The Company had delinquent loans as of September 30, 2001 and December 31, 2000 as follows: (i) 30 to 59 days past due, consisting of commercial, consumer and home equity loans in the aggregate principal amount of $1.8 million and $1.5 million respectively; and (ii) 60 to 89 days past due, consisting of commercial and consumer loans in the aggregate principal amount of $1.3 million and $435,000 respectively. These loans are believed to be adequately collateralized and in the process of collection. In addition, the Company has classified certain loans as substandard and doubtful (as those terms are defined in applicable Bank regulations). At September 30, 2001 and December 31, 2000, respectively, substandard loans totaled approximately $9.9 million and $4.0 million and doubtful and loss loans totaled $119,000 and $113,000 respectively. The increase in substandard loans was primarily the result of the classification of the $5.4 million of loans previously noted as substandard. The loans to this borrower are also reflected in the non-accrual category above. 31 The recorded investment in loans for which impairment has been recognized totaled $7.9 million and $3.3 million at September 30, 2001 and December 31, 2000, respectively, of which $7.7 million and $3.1 million respectively, related to loans with no valuation allowance. Loans with valuation allowances at September 30, 2001, and December 31, 2000 were $215,000 and $175,000, respectively, with the allowances totaling $137,000 and $139,000, respectively. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein. At September 30, 2001, 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 $89.4 million, which represented 19.4% of gross loans receivable and loans to various non-residential building operators totaling $69.3 million or 15.0% 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 management believes would cause them to be similarly impacted by economic or other conditions. Real estate owned is initially recorded at the lower of cost or estimated fair value, net of estimated selling costs at the date of foreclosure. After foreclosure, management periodically performs valuations and any subsequent reductions in fair value, and all other revenue and expenses are charged against operating expenses in the period in which they occur. The Company had no real estate owned for any periods presented herein. 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 September 30, 2001, all identified potential problem loans are included in the preceding table with the exception of loans classified as substandard but still accruing which totaled $1.9 million as of September 30, 2001. The Company had no credit exposure to "highly leveraged transactions" at September 30, 2001, as defined by the Federal Reserve Bank. 32 Allowance for Loan Losses An analysis of the Company's allowance for loan losses for the nine months ended September 30, 2001 and 2000, and the twelve months ended December 31, 2000 is as follows:
For the nine months For the twelve months For the nine months ended ended ended (dollars in thousands) September 30, 2001 December 31, 2000 September 30, 2000 ---------------------- ----------------------- ----------------------- Balance at beginning of period........... $4,072 $3,208 $3,208 Charge-offs: Commercial............................ 33 66 34 Real estate........................... - - - Consumer and short-term............... 435 90 49 ---------------------- ----------------------- ----------------------- Total charge-offs 468 156 83 ---------------------- ----------------------- ----------------------- Recoveries: Commercial............................ 255 340 77 Real estate........................... - - Consumer and short-term............... 17 14 2 ---------------------- ----------------------- ----------------------- Total recoveries................... 272 354 79 ---------------------- ----------------------- ----------------------- Net charge-offs/(recoveries)............. 196 (198) 4 ---------------------- ----------------------- ----------------------- Provision for loan losses................ 1,347 666 600 ---------------------- ----------------------- ----------------------- Balance at end of period.............. $5,223 $4,072 $3,804 ====================== ======================= ======================= Average loans outstanding (1)......... $438,464 $389,156 379,351 ====================== ======================= ======================= As a percent of average loans (1): Net charge-offs/recoveries............ 0.04% (0.05)% 0.0% Provision for loan losses............. 0.31% 0.17% 0.16% Allowance for loan losses............. 1.19% 1.05% 1.00% Allowance for loan losses to: Total loans, net of unearned income at period end......................... 1.12% 0.96% 0.93% Total non-performing loans at period end................................ 62.05% 118.96% 108.23% (1) Includes nonaccruing loans.
Management makes a quarterly estimate as to the provision from earnings necessary to maintain an allowance for loan losses that is adequate based upon its assessment of loan portfolio composition, classified problem loans, general economic conditions and other factors. The Company's Board of Directors periodically reviews the status of all nonaccrual and impaired loans and loans criticized by the Company's regulators and internal loan review officer. The internal loan review officer reviews both the loan portfolio and the overall adequacy of the loan loss reserve. During the review of the loan loss reserve, management considers specific loans, pools of similar loans, historical charge-off activity and other factors in determining the loan loss reserve requirements. Any additions deemed necessary to the loan loss reserve balance are charged to operations. The Company has an existing loan review program, to monitor the loan portfolio on an ongoing basis. The loan review officer reports his findings quarterly to the Board of Directors. Management believes that the reserve for loan losses is adequate to absorb known and inherent losses. 33 Significant estimates are made by management in determining the allowance for loan losses. Consideration is given to a variety of factors in establishing the allowance for loan losses, including current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, the present value of future cash flows and other relevant factors. Since the allowance for loan losses is dependent to a great extent, on the general economy and other conditions that may be beyond the Banks' control, estimates of the allowance for loan losses may differ materially in the near term. There can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required. The Company's management considers the entire allowance for loan losses to be adequate however, to comply with regulatory reporting requirements, management has allocated the allowance for loan losses as shown in the table below into components by loan type at each period end. Through such allocations, management does not intend to imply that actual future charge-offs will necessarily follow the same pattern or that any portion of the allowance is restricted.
At September 30, 2001 At December 31, 2000 --------------------- -------------------- Percent of Loans Percent of Loans Amount In Each Category Amount In Each Category (in 000's) To Loans (in 000's) to Loans Allocation of allowance for loan losses: Commercial $4,229 55.9% $3,055 54.7% Residential real estate 213 42.3% 224 44.6% Consumer and other... 366 1.8% 246 0.7% Unallocated 415 -% 547 -% ----------------------------------------------------------------------- Total $5,223 100.00% $4,072 100.00% ============ ===========
The unallocated allowance decreased $132,000 to $415,000 at September 30, 2001 from $547,000 at December 31, 2000. This decline resulted from the classification of loans to one borrower as substandard which necessitated an increase in the amount allocated to these loans. The Company's reserve methodology requires all loan categories to have specific reserves, and all classified credits to have higher specific reserves, even though management may believe the loan to be adequately collateralized. The unallocated loan loss reserves represent inherent losses in the portfolio based on several considerations including general economic conditions. 34 Commitments In the normal course of its business, the Company makes commitments to extend credit and issues standby letters of credit. Generally, such commitments are provided as a service to its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The type and amount of collateral obtained, if deemed necessary upon extension of credit, are based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers and is based on Management's evaluation of the creditworthiness of the borrower and the quality of the collateral. At September 30, 2001 and December 31, 2000, firm loan commitments approximated $53.4 million and $60.3 million respectively, and commitments for standby letters of credit approximated $3.8 million and $3.8 million, respectively. Effects of Inflation The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is the necessity to structure the Company's balance sheet to optimize the net interest margin. 35 Part II Other Information Item 1: Legal Proceedings The Company and the Banks are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. Item 2: Changes in Securities and Use of Proceeds None Item 3: Defaults upon Senior Securities None Item 4: Submission of Matters to a Vote of Securities Holders None. Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an annual report on Form 10-K) 36 Exhibit No. 10 Amended and Restated Material Contracts.- None 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. First Bank of Delaware (the "Delaware Bank") is also a wholly-owned subsidiary of the Company, and commenced operations on June 1, 1999. The Delaware Bank is a commercial bank chartered pursuant to the laws of the State of Delaware. The Bank and the Delaware Bank are both members of the Federal Reserve System and their primary federal regulators are the Board of Governors of the Federal Reserve Board. All other schedules and exhibits are omitted because they are not applicable or because the required information is set out in the financial statements or the notes hereto. **Incorporated by reference in the Company's Form 10-K, filed March 23, 2001. Reports on Form 8-K No reports on form 8-K have been filed during the quarter for which this Form 10-Q is filed. 37 SIGNATURES Pursuant to the requirements 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. Republic First Bancorp, Inc., Registrant Jere A. Young President and Chief Executive Officer Paul Frenkiel Executive Vice President and Chief Financial Officer Dated: November 14, 2001 38 -----END PRIVACY-ENHANCED MESSAGE-----