-----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, QaYdIRI0N67aIMxJefN5ORkLz77F+bvEM31f1j2TwBcxMCLhRC/jz+c2ElWDZx2b zQvvUvLbXLW3xb0EcF+1eA== 0000950159-99-000322.txt : 19991117 0000950159-99-000322.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950159-99-000322 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: SEC FILE NUMBER: 000-17007 FILM NUMBER: 99755596 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: FIRST REPUBLIC BANCORP INC /DE/ DATE OF NAME CHANGE: 19960617 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 10-Q 1 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, 1999 Commission File Number: 0-17007 Republic First Bancorp, Inc. (Exact name of registrant 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. 6,111,705 shares of Issuer's Common Stock, par value $0.01 per share, issued and outstanding as of October 31, 1999 Page 1 of 42 Exhibit index appears on page 40 1 TABLE OF CONTENTS Page Part I: Financial Information Item 1: Financial Statements 3 Item 2: Management's Discussion and Analysis of Financial Condition and 18 Results of Operations Item 3: Quantitative and Qualitative Information about Market Risk 23 Part II: Other Information Item 1: Legal Proceedings 40 Item 2: Changes in Securities and Use of Proceeds 40 Item 3: Defaults Upon Senior Securities 40 Item 4: Submission of Matters to a Vote of Security Holders 40 Item 5: Other Information 40 Item 6: Exhibits and Reports on Form 8-K 40 2 PART I - FINANCIAL INFORMATION Item 1: Financial Statements (unaudited) Page Number (1) Consolidated Balance Sheets as of September 30,1999 and December 31, 1998.................................................... 4 (2) Consolidated Statements of Operations for three and nine months ended September 30, 1999 and 1998........................ 5 (3) Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998............................. 7 (4) Notes to Consolidated Financial Statements........................... 9 3 Republic First Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 (unaudited)
ASSETS: 1999 1998 ------------- ------------- Cash and due from banks $ 15,302,000 $ 18,169,000 Interest bearing deposits with banks 6,024,000 126,000 ------------- ------------- Total cash and cash equivalents 21,326,000 18,295,000 Securities available for sale, at fair value 177,179,000 160,554,000 Securities held to maturity at amortized cost 16,121,000 16,998,000 (fair value of $16,128,000 and $16,982,000, respectively) Loans receivable, (net of allowance for loan losses of $3,051,000 and $2,395,000, respectively) 326,131,000 299,564,000 Loans held for sale 447,000 7,204,000 Premises and equipment, net 4,850,000 3,990,000 Real estate owned 643,000 718,000 Accrued income and other assets 12,040,000 9,038,000 ------------- ------------- Total Assets $ 558,737,000 $ 516,361,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Deposits: Demand - non-interest-bearing $ 27,793,000 $ 32,537,000 Demand - interest-bearing 12,598,000 20,155,000 Money market and savings 47,939,000 35,250,000 Time under $100,000 152,953,000 169,792,000 Time over $100,000 51,250,000 25,350,000 ------------- ------------- Total Deposits 292,533,000 283,084,000 Other borrowed funds 222,363,000 188,009,000 Accrued expenses and other liabilities 8,184,000 8,646,000 ------------- ------------- Total Liabilities 523,138,000 479,739,000 ------------- ------------- Shareholders' Equity: Common stock par value $.01 per share, 20,000,000 shares authorized; shares issued and outstanding 6,111,705 as of September 30, 1999 and 5,883,188 as of December 31, 1998 63,000 59,000 Treasury stock at cost (175,172 and 219,604 shares at September 30, 1999 and December 31, 1998, respectively) (1,542,000) (1,927,000) Additional paid in capital 31,893,000 26,510,000 Retained earnings 10,133,000 11,996,000 Accumulated other comprehensive income/(loss), net of tax (4,890,000) (16,000) ------------- ------------- Total Shareholders' Equity 35,657,000 36,622,000 ------------- ------------- Total Liabilities and Shareholders' Equity $ 558,737,000 $ 516,361,000 ============= =============
(See notes to consolidated financial statements) 4 Republic First Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations For the Three and Nine Months Ended September 30, (unaudited)
Quarter to Date Year to Date September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Interest income: Interest and fees on loans $ 6,855,000 $ 5,737,000 $ 19,670,000 $ 15,841,000 Interest on federal funds sold 16,000 7,000 18,000 214,000 Interest on investments 3,243,000 3,070,000 9,311,000 9,530,000 ------------ ------------ ------------ ------------ Total interest income 10,114,000 8,814,000 28,999,000 25,585,000 ------------ ------------ ------------ ------------ Interest expense: Demand interest-bearing 37,000 84,000 149,000 256,000 Money market and savings 433,000 322,000 1,234,000 861,000 Time over $100,000 698,000 373,000 1,351,000 1,155,000 Time under $100,000 2,202,000 2,609,000 7,035,000 7,496,000 Other borrowed funds 2,882,000 2,031,000 8,161,000 5,557,000 ------------ ------------ ------------ ------------ Total interest expense 6,252,000 5,419,000 17,930,000 15,325,000 ------------ ------------ ------------ ------------ Net interest income 3,862,000 3,395,000 11,069,000 10,260,000 ------------ ------------ ------------ ------------ Provision for loan losses 210,000 80,000 670,000 290,000 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 3,652,000 3,315,000 10,399,000 9,970,000 ------------ ------------ ------------ ------------ Non-interest income: Service fees 325,000 143,000 653,000 347,000 Tax Refund Program revenue 0 0 2,715,000 2,383,000 Other income 29,000 31,000 80,000 82,000 ------------ ------------ ------------ ------------ 354,000 174,000 3,448,000 2,812,000 Non-interest expense: Salaries and benefits 1,430,000 1,390,000 4,112,000 3,788,000 Occupancy/Equipment 460,000 369,000 1,305,000 1,101,000 Loss from Mortgage Affiliate 0 1,032,000 0 1,145,000 Other expenses 898,000 1,057,000 2,846,000 2,347,000 ------------ ------------ ------------ ------------ 2,788,000 3,848,000 8,263,000 8,381,000 ------------ ------------ ------------ ------------ Income/(loss) before income taxes 1,218,000 (359,000) 5,584,000 4,401,000 ------------ ------------ ------------ ------------ Provision for income taxes/(benefit) 403,000 (118,000) 1,839,000 1,457,000 Income before cumulative effect of a change in accounting principle 815,000 (241,000) 3,745,000 2,944,000 Cumulative effect of changes in accounting principle (Note 5) 0 421,000 (63,000) 421,000 ------------ ------------ ------------ ------------ Net income $ 815,000 $ 180,000 $ 3,682,000 $ 3,365,000 ============ ============ ============ ============ Net income per share-basic: Income before cumulative effect of a change in accounting principle $ 0.13 ($ 0.04) $ 0.62 $ 0.49 Cumulative effect of changes in accounting principle (Note 5) 0.00 0.07 (0.01) 0.07 ------------ ------------ ------------ ------------ Net Income $ 0.13 $ 0.03 $ 0.61 $ 0.56 ============ ============ ============ ============
5
Quarter to Date Year to Date September 30, September 30, ------------- ------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net income per share-diluted: Income before cumulative effect of a change in accounting principle $ 0.13 ($ 0.04) $ 0.60 $ 0.45 Cumulative effect of changes in Accounting principle (Note 5) 0.00 0.07 (0.01) 0.07 ------------ ------------ ------------ ------------ Net Income $ 0.13 $ 0.03 $ 0.59 $ 0.52 ============ ============ ============ ============
(See notes to consolidated financial statements) 6 Republic First Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Nine Months Ended September 30, (unaudited)
1999 1998 ------------- ------------- Cash flows from operating activities: Net income $ 3,682,000 $ 3,365,000 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 670,000 290,000 Write down of other real estate owned 75,000 0 Depreciation and amortization 688,000 482,000 Proceeds from sale of trading securities 0 35,143,000 Loss from Mortgage affiliate 0 (1,145,000) Decrease in loans held for sale 6,757,000 0 Increase in accrued income and other assets (241,000) (3,860,000) (Decrease)/increase in accrued expenses and other liabilities (462,000) 2,107,000 ------------- ------------- Net cash provided by/(used) in operating activities 11,169,000 (36,382,000) ------------- ------------- Cash flows from investing activities: Purchase of securities: Available for Sale (44,978,000) (116,664,000) Held to Maturity (5,418,000) (4,083,000) Proceeds from principal receipts, sales, and maturities of securities 27,080,000 46,021,000 Net increase in loans (27,320,000) (55,258,000) Net increase in deferred fees 77,000 466,000 Purchase of other real estate owned 0 0 Premises and equipment expenditures (1,326,000) (1,743,000) ------------- ------------- Net cash used in investing activities (51,885,000) (131,261,000) ------------- ------------- Cash flows from financing activities: Net increase/(decrease) in demand, money market, and savings deposits 388,000 1,414,000 Net increase/(decrease) in borrowed funds less than 90 days (18,246,000) (12,476,000) Net increase in borrowed funds greater than 90 days 52,600,000 88,700,000 Net increase (decrease) in time deposits 9,061,000 21,451,000 Net proceeds from issued common stock 0 0 Purchase of Treasury Stock (1,028,000) (17,000) Net proceeds from exercise of stock options 972,000 81,000 ------------- ------------- Net cash provided by financing activities 43,747,000 99,153,000 ------------- ------------- (Decrease)/increase in cash and cash equivalents 3,031,000 4,274,000 Cash and cash equivalents, beginning of period 18,295,000 6,326,000 ------------- ------------- Cash and cash equivalents, end of period $ 21,326,000 $ 10,600,000 ============= ============= Supplemental disclosure: Interest paid $ 17,862,000 $ 8,901,000 ============= ============= Taxes paid $ 2,075,000 $ 0 ============= ============= Non-cash transactions: Net transfers of loans to real estate owned 0 718,000 Change in unrealized gain/(loss) on securities available for sale, net of tax (4,874,000) 1,059,000 Change in deferred tax liability due to change in unrealized gain on securities available for sale 0 (348,000)
7 Transfer of securities from held to maturity to available for sale and trading 0 $ 138,861,000 ============= =============
(See notes to consolidated financial statements) 8 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Organization Republic First Bancorp, Inc. (the "Company"), is a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiary, First Republic Bank (the "Bank"), offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and branches in Philadelphia and Montgomery Counties. The Company opened a second wholly-owned banking subsidiary in the state of Delaware. The newly formed Bank, Republic First Bank of Delaware (the "Delaware Bank") is a Delaware State chartered Bank, located at Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County Delaware. The Delaware Bank opened for business on June 1, 1999 and offers many of the same services and financial products as First Republic Bank, described in Part I, Item I of the Company's 1998 Form 10-K. In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments (including normal recurring accruals) necessary to present fairly the financial position as of September 30, 1999, the results of operations for the three and nine months ended September 30, 1999 and 1998, and the cash flows for the nine months ended September 30, 1999 and 1998. These interim financial statements have been prepared in accordance with instructions to Form 10-Q. The interim results of operations may not be indicative of the results of operations for the full year. The accompanying unaudited financial statements should be read in conjunction with the Company's audited financial statements, and the notes thereto, included in the Company's 1998 Form 10-K filed with the Securities and Exchange Commission. Note 2: Summary of Significant Accounting Policies: Principles of Consolidation: The consolidated financial statements of the Company include the accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, First Republic Bank and Republic First Bank of Delaware, (the "Banks"). Such statements have been presented in accordance with generally accepted accounting principles and general practice within the banking industry. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. Risks and Uncertainties and Certain Significant Estimates: The earnings of the Company depend on the earnings of the Banks. The Banks are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of the Banks are subject to risks and uncertainties surrounding their exposure to change in the interest rate environment. Additionally, the Company has derived income from First Republic Bank's participation in a program (the "Tax Refund Program") which indirectly funds consumer loans collateralized by federal income tax refunds, and provides accelerated check refunds. Approximately $2.7 million and $2.4 million in gross revenues were collected on these loans during the nine months ended September 30, 1999 and 1998, respectively. The Bank will not participate in the program beyond 1999. 9 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made by management in determining the allowance for loan losses, carrying values of real estate owned and deferred tax assets. Consideration is given to a variety of factors in establishing the allowance for loan losses, including current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for loan losses and carrying value of real estate owned is dependent, to a great extent, on the general economy and other conditions that may be beyond the Banks' control, it is at least reasonably possible that the estimates of the allowance for loan losses and the carrying values of the real estate owned could differ materially in the near term. Cash and Cash Equivalents: For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold to be cash and cash equivalents. The Bank is required to maintain certain average reserve balances as established by the Federal Reserve Board. The amounts of those balances for the reserve computation periods which include September 30, 1999 and December 31, 1998 were $989,000 and $872,000, respectively. These requirements were satisfied through the restriction of vault cash and balances at the Federal Reserve Bank of Philadelphia. Investment Securities: Debt and equity securities are classified in one of three categories, as applicable, and accounted for as follows: debt securities which the Company has the positive intent and ability to hold to maturity are classified as "securities held to maturity" and are reported at amortized cost; debt and equity securities that are bought and sold in the near term are classified as "trading" and are reported at fair market value with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held to maturity and/or trading securities are classified as "securities available for sale" and are reported at fair market value with net unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Securities are adjusted for amortization of premiums and accretion of discounts over the life of the related security on a level yield method. Securities available for sale include those management intends to use as part of its asset-liability matching strategy or that may be sold in response to changes in interest rates or other factors. Realized gains and losses on the sale of investment securities are recognized using the specific identification method. As described in Note 5, the Company transferred $106.4 million of securities from held to maturity to available for sale and $32.5 million of securities from held to maturity to the trading category during the third quarter of 1998. The Company sold the securities transferred to the trading category during the third quarter and realized a gain on the sale of these securities of $421,000, net of income taxes, as a cumulative effect of a change in accounting. The Company did not realize any gains on trading securities prior to or after the third quarter of 1998. Additionally, the Bank had no securities classified as trading securities, as of the end of any period reported herein. 10 Loans: Loans are stated at the principal amount outstanding, net of deferred loan fees and costs. The amortization of deferred loan fees and costs are accounted for by a method which approximates level yield. Any unamortized fees or costs associated with loans which pay down in full are immediately recognized in the Company's operations. Income is accrued on the principal amount outstanding. Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) of interest and principal by the borrower, in accordance with the contractual terms. While a loan is classified as non-accrual or as an impaired loan and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. Loans Held for Sale: Loans held for sale are carried at the lower of aggregate cost or market value. The Bank currently services all loans classified as held for sale and servicing is released when such loans are sold. Market values were estimated using the present value of the estimated cash flows, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Gains and losses on loans held for sale are included in non-interest income. The Company did not realize any gains or losses during the first, second and third quarters of 1999 or 1998. Allowance for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. The allowance is an amount that management believes will be adequate to absorb known and inherent loan losses on existing loans, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, the results of the most recent regulatory examination and current economic conditions and trends that may affect the borrower's ability to pay. The Company considers residential mortgage loans with balances less than $250,000 and consumer loans, including home equity lines of credit, to be small balance homogeneous loans. These loan categories are collectively evaluated for impairment. Jumbo mortgage loans, those with balances greater than $250,000, commercial business loans and commercial real estate loans are individually measured for impairment based on the present value of expected 11 future cash flows discounted at the historical effective interest rate, except that all collateral dependent loans are measured for impairment based on the fair market value of the collateral. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, using the straight-line method. Repairs and maintenance are charged to current operations as incurred, and renewals and betterments are capitalized. Real Estate Owned: Real estate owned consists of foreclosed assets and is stated at the lower of cost or estimated fair market value less estimated costs to sell the property. Costs to maintain other real estate owned, or deterioration in value of the properties are recognized as period expenses. There is no valuation allowance associated with the Company's other real estate portfolio for the periods presented. Income Taxes: Deferred income taxes are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at the tax rates expected to be in effect when the temporary differences are realized or settled. In addition, a deferred tax asset is recorded to reflect the future benefit of net operating loss carryforwards. The deferred tax assets may be reduced by a valuation allowance if it is probable that some portion or all of the deferred tax assets will not be realized. Earnings Per Share: Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSE"). Common stock equivalents consist of dilutive stock options granted through the Company's stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. Common stock equivalents which are anti-dilutive are not included for purposes of this calculation. At September 30, 1999 and 1998, there were 138,610 and 54,301 CSEs which were antidilutive, respectively. These shares may be dilutive in the future. The Company paid a 10% stock dividend on March 18, 1999 as well as two six for five stock splits effected in the form of a 20% stock dividend on March 27, 1998 and April 15, 1997. All relevant financial data contained herein has been retroactively restated as if the dividend and splits had occurred at the beginning of each period presented herein. 12 The following table is a comparison of EPS for the three and nine months ended September 30, 1999 and 1998.
Quarter to Date Year to Date 1999 1998 1999 1998 --------------------------------------------------------------------------------------- Income before cumulative effect of a change in accounting principle (numerator for both calculations) $815,000 ($241,000) $3,745,000 $2,943,000 --------------------------------------------------------------------------------------- Shares Per Share Shares Per Share Shares Per Share Shares Per Share --------- --------- ------ --------- ------ --------- ------ --------- Weighted average shares For period 6,086,569 6,100,958 5,971,786 6,085,817 Basic EPS $ 0.13 ($ 0.04) $ 0.63 $ 0.49 Add common stock equivalents Representing dilutive stock options 175,525 372,819 267,689 411,634 --------- --------- --------- --------- Effect on basic EPS and CSE (0.00) 0.00 (0.03) (0.04) ------- ------- ------ ------ Equals total weighted average Shares and CSE (diluted) 6,262,094 6,473,777 6,239,475 6,497,451 ========= ========= ========= ========= Diluted EPS $ 0.13 ($ 0.04) $ 0.60 $ 0.45 ======= ======= ====== ======
The impact of the cumulative effect of a change in accounting principle on the quarter-to-date and the year-to-date 1998 EPS was to increase the numerator by $421,000 and the resulting basic and diluted EPS by $0.07. The impact of the cumulative effect of a change in accounting principle on the year-to-date 1999 EPS was to lower the numerator by $63,000 and the resulting basic and diluted EPS by $0.01. Treasury Stock Effective June 21, 1999, the Company's stock repurchase program, originally announced on August 24, 1998 and established for the period through and including June 30, 1999 has been extended to December 31, 1999. The aggregate amount of stock to be repurchased will be determined by market conditions, but will not exceed 4.9% of the Company's issued and outstanding stock, or approximately 297,000 shares. As of September 30, 1999, there were 54,916 shares repurchased pursuant to rule 10b-18 of the Securities and Exchange Commission. There were also an additional 279,088 shares purchased in block transaction purchases, that are not included as part of the stock repurchase program specified under rule 10b-18. The exercise of 158,832 options were funded from such block transaction purchases. Comprehensive Income The following table displays net income and the components of other comprehensive income to arrive at total comprehensive income. For the Company, the only components of other comprehensive income are those related to SFAS Statement No. 115 available for sale securities. 13
(dollar amounts in thousands) Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income $ 815 $ 180 $ 3,682 $ 3,364 Other comprehensive income, net of tax: Unrealized gains/(losses) on securities: Unrealized holding losses during the period (1,545) 705 (4,874) 703 Less: Reclassification adjustment for gains Included in net income 0 0 0 0 ------- ------- ------- ------- Comprehensive (loss)/income ($ 730) $ 885 ($1,192) $ 4,067 ======= ======= ======= =======
Note 3: Legal Proceedings The Company and the Banks are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. Note 4: Recent Accounting Pronouncements: Accounting for Derivative Instruments and Hedging Activities In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133"). This Statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and those used for hedging activities, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. The statement categorized derivatives used for hedging purposes as either fair value hedges, cash flow hedges, foreign currency fair value hedges, foreign currency cash flow hedges, or hedges of certain foreign currency exposures. The statement generally provides for matching of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, so long as the hedge is effective. Prospective application of Statement No. 133, as amended by Statement No. 137, is required for all fiscal years beginning after June 15, 2000, however earlier application is permitted. Currently, the Company does not use any derivative instruments, nor does it engage in any hedging activities. The Company adopted Statement No. 133 effective July 1, 1998, which permitted the Company to transfer certain securities originally designated as held-to-maturity, to available-for-sale and trading. A portion of these securities were subsequently sold during the third quarter of 1998. In accordance with Statement No. 133, the Company recorded the gross gain of $628,000 as a cumulative change in accounting principle, net of a $207,000 provision for income tax. 14 Reporting on the Costs of Start-Up Activities In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). This statement requires costs of startup activities, including organization costs, to be expensed as incurred. SOP 98-5 is effective for the Company's financial statements for fiscal years beginning after December 15, 1998. As of December 31, 1998 the Company had deferred costs relating to start-up activities of $94,000, remaining in the balance of other assets in the Consolidated Balance Sheets. The Company adopted SOP 98-5 effective January 1, 1999, and accordingly, expensed $94,000 of costs of start-up activities in the first quarter of 1999. Note 5: Cumulative Effect of a Change in Accounting Principle The Company adopted SFAS Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" on July 1, 1998. As permitted by SFAS Statement No. 133, the Company transferred $106.4 million of securities from held to maturity to available for sale and $32.5 million of securities from held to maturity to the trading category. The Company sold the securities transferred to the trading category during the third quarter 1998 and realized a gain on the sale of these securities of $421,000, net of income taxes, as a cumulative effect of a change in accounting principle. The Company sold these securities as part of a portfolio-restructuring program, which reduced the Company's risk of prepayment on its mortgage-backed securities portfolio due to the sharp decline in interest rates during the third quarter of 1998. During the first quarter of 1999, the Company expensed $94,000 which represented all of its business start-up costs, upon the adoption of the Statement of Position 98-5 "Reporting on the Costs of Startup Activities", on January 1, 1999. This resulted in a $63,000 charge, net of an income tax benefit of $31,000, which was recorded as a cummulative effect of a change in accounting principle. Note 6: Segment Reporting The Company's reportable segments represent strategic businesses that offer different products and services. The segments are managed separately because each segment has unique operating characteristics, management requirements and marketing strategies. Republic First Bancorp has four reportable segments; two community banking segments, its mortgage banking affiliate and the Tax Refund Program. The community banking segments are primarily comprised of the results of operation and financial condition of the Company's wholly owned banking subsidiaries, First Republic Bank and Republic First Bank of Delaware. The mortgage banking segment represents the Company's equity investment in Fidelity Bond and Mortgage, a mortgage banking operation which services and originates residential mortgage loans. Such investment is accounted for as an equity investment as the Company does not have control over Fidelity Bond and Mortgage. The Tax Refund Program enables the Bank to provide accelerated check refunds ("ACRs") and refund anticipation loan ("RALs") on a national basis to customers of Jackson Hewitt, a national tax preparation firm. The accounting policies of the segments are the same as those described in Note 2. The Company evaluates the performance of the community banking segment based upon income before the provision for income taxes, return on equity and return on average assets. The mortgage banking segment is evaluated based upon return on average equity and the Tax Refund Program is evaluated based upon income before provision for income taxes. 15 The Tax Refund Program and the mortgage banking affiliate were developed as business segments to further expand the Company's products and services offered to consumers and businesses. The segment information presented below reflects that the Delaware Bank originated in 1999, and that the Company's investment in their Mortgage Banking Affiliate was reduced to $0 as of December 31, 1998. Accordingly, the Mortgage Banking Affiliate no longer represents a segment in 1999.
As of and for the nine months ended September 30, (dollars in thousands) 1999 1998 First Tax First Mortgage Tax Republic Delaware Refund Republic Banking Refund Bank Bank Program Total Bank Affiliate Program Total External customer revenues: Interest Income $28,924 $75 $0 $28,999 $25,649 $0 $0 $25,649 Other Income 730 3 2,715 3,448 433 0 2,349 2,782 Total external customer revenues 29,654 78 2,715 32,447 26,082 0 2,349 28,431 Intersegment revenues: Interest Income 0 0 0 0 0 0 0 0 Other Income 25 0 0 25 0 0 0 0 Total intersegement revenues 25 0 0 25 0 0 0 0 Total Revenue 29,679 78 2,715 32,472 26,082 0 2,349 28,431 Depreciation and amortization 672 16 0 688 482 0 0 482 Other operating expenses - external 25,557 443 150 26,150 22,299 1,145 105 23,549 Other operating expenses - intersegment 0 25 0 25 0 0 0 0 Segment expenses 26,229 484 150 26,863 22,781 1,145 105 24,031 Segment income before taxes and extraordinary items $3,425 ($406) $2,565 $5,584 $3,301 (1,145) $2,244 $4,400 Segment assets $552,474 $6,263 $0 $558,737 $480,093 $662 $0 $480,755 Capital expenditures $341 $986 $0 $1,327 $1,745 $0 $0 $1,745
16
As of and for the three months ended September 30, (dollars in thousands) 1999 1998 First Tax First Mortgage Tax Republic Delaware Refund Republic Banking Refund Bank Bank Program Total Bank Affiliate Program Total External customer revenues: Interest Income $10,071 $43 $0 $10,114 $8,814 $0 $0 $8,814 Other Income 332 3 0 335 174 0 0 174 Total external customer revenues 10,403 46 0 10,449 8,988 0 0 8,988 Intersegment revenues: Interest Income 0 0 0 0 0 0 0 0 Other Income 19 0 0 19 0 0 0 0 Total intersegement revenues 19 0 0 19 0 0 0 0 Total Revenue 10,422 46 0 10,468 8,988 0 0 8,988 Depreciation and amortization 192 13 0 205 267 0 0 267 Other operating expenses - external 8,766 260 0 9,026 8,048 1,032 0 9,080 Other operating expenses - intersegment 0 19 0 19 0 0 0 0 Segment expenses 8,958 292 0 9,250 8,315 1,032 0 9,347 Segment income before taxes and extraordinary items $1,464 ($246) $0 $1,218 $673 ($1,032) $0 ($359) Segment assets $552,474 $6,263 $0 $558,737 $480,093 $662 $0 $480,755 Capital expenditures $238 $149 $0 $387 $495 $0 $0 $495
17 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the significant changes in the Company's results of operations, financial condition, and capital resources presented in the accompanying consolidated financial statements of Republic First Bancorp, Inc. This discussion should be read in conjunction with the accompanying notes to the consolidated financial statements. Certain statements in this document may be considered to be "forward-looking statements" as that term is defined in the U.S. Private Securities Litigation Reform Act of 1995, such as statements that include the words "may", "believes", "expect", "estimate", "project", anticipate", "should", "intend", "probability", "risk", "target", "objective" and similar expressions or variations on such expressions. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, risks and uncertainties cas 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 no 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-KSB for the year ended December 31, 1998, Quarterly Reports on Form 10-Q, filed by the Company in 1999, and any Current Reports on Form 8-K filed by the Company, as well as similar filings. Quarter Ended September 30, 1999 Compared to September 30, 1998 Results of Operations: Overview The Company's net income increased $635,000, to $815,000 for the quarter ended September 30, 1999, from $180,000 for the quarter ended September 30, 1998. This increase was primarily the result of a write down of the Company's equity investment in its mortgage banking affiliate of $1,032,000, partially offset by gains recognized on trading securities of $628,000, during the third quarter of 1998. Diluted earnings per share for the quarter ended September 30, 1999 was $0.13 compared to $0.03, for the quarter ended September 30, 1998, primarily due to the increase in net income. Analysis of Net Interest Income Historically, the Company's earnings have depended primarily upon the Bank's net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The Company's net interest income increased $467,000, or 13.8%, to $3.9 million for the quarter ended September 30, 1999 from $3.4 million for the quarter ended September 30, 1998. The increase in net interest income was 18 primarily due to an increase in average interest-earning assets of $87.7 million due primarily to increased commercial and real estate loan production. This increase was partially offset by a decrease in the average rate of interest earning assets of 40 basis points, from 8.04% as of September 30, 1998 to 7.64% as of September 30, 1999. This decrease was mainly due to the sale of higher yielding investment securities during the third quarter of 1998. The Company's total interest income increased $1.3 million, or 14.7%, to $10.1 million for the quarter ended September 30, 1999 from $8.8 million for the quarter ended September 30, 1998. Interest and fees on loans increased $1.1 million, or 19.5%, to $6.9 million for the quarter ended September 30, 1999 from $5.7 million for the quarter ended September 30, 1998. This increase was due primarily to an increase in average loans outstanding for the period of $72.6 million. Interest and dividend income on securities increased $173,000, or 5.6%, to $3.2 million for the quarter ended September 30, 1999 from $3.1 million for the quarter ended September 30, 1998. This increase in investment income was primarily the result of an increase in the average balance of securities owned by $14.3 million, or 7.8% to $197.7 million for the quarter ended September 30, 1999 from $183.4 million for the quarter ended September 30, 1998. The Company's total interest expense increased $833,000, or 15.4%, to $6.3 million for the quarter ended September 30, 1999 from $5.4 million for the quarter ended September 30, 1998. This increase was due to an increase in the volume of average interest-bearing liabilities of $82.9 million, or 21.0%, to $477.0 million for the quarter ended September 30, 1999 from $394.2 million for the quarter ended September 30, 1998. The average rate paid on interest-bearing liabilities decreased 31 basis points to 5.20% for the quarter ended September 30, 1999 from 5.51% for the quarter ended September 30, 1998 due primarily to the decrease in average rates paid on other borrowed funds and deposit accounts. Interest expense on time deposits decreased $82,000 or 2.7%. This decrease was primarily due to a decrease in the average rate paid on time deposit of 38 basis points from 6.17% at September 30, 1998 to 5.79% at September 30, 1999. The average volume of certificates of deposit increased by $4.8 million, or 2.4%, to $198.6 million for the quarter ended September 30, 1999 from $193.8 million for the quarter ended September 30, 1998. Interest expense on FHLB advances and overnight federal funds purchased was $2.9 million for the quarter ended September 30, 1999 compared to $2.0 million for the quarter ended September 30, 1998. This increase was due to an increase in the average volume of other borrowed funds of $70.3 million to $219.0 million for the quarter ended September 30, 1999 from $148.7 million for the quarter ended September 30, 1998. This increase was partially offset by a decrease in the average rate of interest paid on other borrowed funds of 26 basis points from 5.48% at September 30, 1998 to 5.22% at September 30, 1999. At September 30, 1999, FHLB advances funded purchases of securities and origination of loans as part of an ongoing leveraged funding program designed to increase earnings while also managing interest rate risk and liquidity. Provision for Loan Losses The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered appropriate by management. The level of the allowance for loan losses is determined by management based upon its evaluation of the known as well as inherent risks within the Company's loan portfolio. Management's periodic evaluation is based upon an examination of the portfolio, past loss experience, current economic conditions, the results of the most recent regulatory examinations and other relevant factors. The provision for loan losses was $210,000 and $80,000 for the quarters ended September 30, 1999 and 1998, respectively. This increase is due primarily to an increase in loans outstanding of $62.2 million from September 30, 1998 to September 30, 1999. 19 Non-Interest Income Total non-interest income increased $180,000 to $354,000 for the quarter ended September 30, 1999 from $174,000 for the quarter ended September 30, 1998. This increase is due primarily to an increase in service fee income of $182,000 related to deposit accounts as well as non-recurring pre-payment penalties and expired commitment fees on loans. Non-Interest Expenses Total non-interest expenses decreased $1.1 million, to $2.8 million for the quarter ended September 30, 1999 from $3.8 million for the quarter ended September 30, 1998. This decrease was due primarily to the Company's write down of its equity interest in its mortgage banking affiliate during the third quarter of 1998 for $1,032,000. Salaries and benefits increased $40,000, or 2.9%, to $1.4 million for the quarter ended September 30, 1999 from $1.3 million for the quarter ended September 30, 1998. Occupancy and equipment expenses increased $91,000, or 24.7%, to $460,000 for the quarter ended September 30, 1999 from $369,000 for the quarter ended September 30, 1998. These increases were due primarily to an increase in staff and costs related to the opening of the Delaware Bank on June 1, 1999. Other non-interest expense decreased $159,000, to $898,000 for the quarter ended September 30, 1999 from $1,057,000 for the same period in 1998. This was mainly due to an decrease in legal expenses associated with loans in workout, advertising costs and MAC expenses. Provision for Income Taxes The provision for income taxes increased to $403,000 for the quarter ended September 30, 1999 from a benefit of $118,000 for the quarter ended September 30, 1998. This increase is the result of the increase in pre-tax income in 1999 from a pre-tax loss in 1998. In 1998 the Company recorded income tax expense of $207,000 in connection with the Cumulative Effect of a Change in Accounting Principle upon the adoption of SFAS Statement No. 133. Nine Months Ended September 30, 1999 Compared to September 30, 1998 Results of Operations: Overview The Company's net income increased $318,000, or 9.5%, to $3.7 million for the nine months ended September 30, 1999, from $3.4 million for the nine months ended September 30, 1998. Diluted earnings per share for the nine months ended September 30, 1999 was $0.59 compared to $0.52, for the nine months ended September 30, 1998, due to the increase in net income. Analysis of Net Interest Income Historically, the Company's earnings have depended primarily upon the Banks' net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net 20 interest income is affected by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. The Company's net interest income increased $809,000, or 7.9%, to $11.1 million for the nine months ended September 30, 1999 from $10.3 million for the nine months ended September 30, 1998. The increase in net interest income was primarily due to an increase in average interest-earning assets of $85.8 million due to increased commercial and real estate loan production. This increase was partially offset by a decrease in the average rate on interest earning assets of 45 basis points, from 7.96% as of September 30, 1998 to 7.51% as of September 30, 1999. This decrease was mainly due to the sale of higher yielding investment securities during the third quarter of 1998. The Company's total interest income increased $3.4 million, or 13.1%, to $29.0 million for the nine months ended September 30, 1999 from $25.6 million for the nine months ended September 30, 1998. Interest and fees on loans increased $3.8 million, or 24.2%, to $19.7 million for the nine months ended September 30, 1999 from $15.8 million for the nine months ended September 30, 1998. This increase was due primarily to an increase in average loans outstanding for the period of $81.9 million. Interest and dividend income on securities decreased $219,000, or 2.30%, to $9.3 million for the nine months ended September 30, 1999 from $9.6 million for the nine months ended September 30, 1998. This decrease in investment income was the result of a decrease in yield on the securities portfolio of 34 basis points due primarily to the sale of higher yielding investment securities during the third and fourth quarters of 1998, partially offset by an increase in the average balance of securities owned of $5.3 million, to $192.7 million for the nine months ended September 30, 1999 from $187.4 million for the nine months ended September 30, 1998. The Company's total interest expense increased $2.6 million, or 17.0%, to $17.9 million for the nine months ended September 30, 1999 from $15.3 million for the nine months ended September 30, 1998. This increase was due to an increase in the volume of average interest-bearing liabilities of $88.3 million, or 23.7%, to $460.2 million for the nine months ended September 30, 1999 from $372.0 million for the nine months ended September 30, 1998. The average rate paid on interest-bearing liabilities decreased 30 basis points to 5.21% for the nine months ended September 30, 1999 from 5.51% for the nine months ended September 30, 1998 due primarily to the decrease in average rates paid on other borrowings and certain deposit accounts. Interest expense on time deposits decreased $266,000 or 3.1%. This decrease was primarily due to a decrease in the average rate of interest paid on time deposits 26 basis points from 6.12% at September 30, 1998 to 5.86% at September 30, 1999. The average volume of certificates of deposit increased in the amount of $2.2 million, or 1.2%, to $191.2 million for the nine months ended September 30, 1999 from $189.0 million for the nine months ended September 30, 1998. Interest expense on FHLB advances and overnight federal funds purchased was $8.2 million for the nine months ended September 30, 1999 compared to $5.6 million for the nine months ended September 30, 1998. This increase was due to an increase in the average volume of other borrowed funds of $74.4 million to $210.3 million for the nine months ended September 30, 1999 from $135.9 million for the nine months ended September 30, 1998. This increase was partially offset by a decrease in the average rate of interest paid on other borrowed funds 28 basis points from 5.47% at September 30, 1998 to 5.19% at September 30, 1999. At September 30, 1999, FHLB advances funded purchases of securities and origination of loans as part of an ongoing leveraged funding program designed to increase earnings while also managing interest rate risk and liquidity. 21 Provision for Loan Losses The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered appropriate by management. The level of the allowance for loan losses is determined by management based upon its evaluation of the known as well as inherent risks within the Company's loan portfolio. Management's periodic evaluation is based upon an examination of the portfolio, past loss experience, current economic conditions, the results of the most recent regulatory examinations and other relevant factors. The provision for loan losses was $670,000 and $290,000 for the nine months ended September 30, 1999 and 1998, respectively. This increase is due primarily to an increase in loans outstanding of $62.9 million from September 30, 1998 to September 30, 1999. Non-Interest Income Total non-interest income increased $666,000 or 23.9%, to $3.4 million for the nine months ended September 30, 1999 from $2.8 million for the nine months ended September 30, 1998. This was mainly attributable to a $366,000 increase in revenues related to the Tax Refund Program, as well as an increase in service fee income related to deposit accounts and pre-payment penalty and forfeited commitment fees on loans Non-Interest Expenses Total non-interest expenses decreased $119,000, or 1.42% to $8.3 million for the nine months ended September 30, 1999 from $8.4 million for the nine months ended September 30, 1998. Salaries and benefits increased $323,000, or 8.5%, to $4.1 million for the nine months ended September 30, 1999 from $3.8 million for the nine months ended September 30, 1998. The increase was due primarily to an increase in staff as a result of the addition of a branch banking office, as well as the opening of the Delaware Bank. Occupancy and equipment expenses increased $204,000, or 18.5%, to $1.3 million for the nine months ended September 30, 1999 from $1.1 million for the nine months ended September 30, 1998 as a result of the addition of a branch banking office, as well as the opening of the Delaware Bank on June 1, 1999. Other non-interest expense increased $499,000, to $2.8 million for the nine months ended September 30, 1999 from $2.3 million for the same period in 1998. This was mainly due to the accrual of a legal settlement for $233,000. The Company also recorded a write-down of its only property held in other real estate owned, of $75,000, during the first quarter of 1999. The remaining expenses were due to growth of the Company and business development costs. Provision for Income Taxes The provision for income taxes increased $382,000, or 26.2%, to $1.8 million for the nine months ended September 30, 1999 from $1.5 million for the nine months ended September 30, 1998. This increase is mainly the result of the increase in pre-tax income from 1998 to 1999. The Company also recorded a $31,000 income tax benefit in 1999 in connection with the Cumulative Effect of a Change in Accounting Principle, upon the adoption of SOP 98-5. In 1998 the Company recorded income tax expense of $207,000 in connection with the Cummulative Effect of a Change in Accounting Principle, upon the adoption of FASB Statement No. 133. 22 Financial Condition: September 30, 1999 Compared to December 31, 1998 Total assets increased $42.4 million, or 8.2%, to $558.8 million at September 30, 1999 from $516.4 million at December 31, 1998. The increase in assets was the result of higher levels of loans and securities, which were funded by a net increase in other borrowed funds. Net loans (including loans held for sale) increased $19.8 million, or 6.1%, to $326.6 million at September 30, 1999 from $306.8 million at December 31, 1998. Investment securities increased $15.7 million, or 8.9%, to $193.3 million at September 30, 1999 from $177.6 million at December 31, 1998. Cash and due from banks, interest-bearing deposits, and federal funds sold are all liquid funds. The aggregate amount in these three categories increased by $3.0 million, or 16.6%, to $21.3 million at September 30, 1999 from $18.3 million at December 31, 1998. Premises and equipment, net of accumulated depreciation, increased $860,000 to $4.9 million at September 30, 1999 from $4.0 at December 31, 1998. The increase was mainly attributable to the construction and furnishing of the Delaware Bank. Total liabilities increased $43.4 million, or 9.0%, to $523.1 million at September 30, 1999 from $479.7 million at December 31, 1998. Deposits, the Company's primary source of funds, increased $9.5 million, 3.4% to $292.6 million at September 30, 1999 from $283.1 million at December 31, 1998. The aggregate of transaction accounts, which include demand, money market and savings accounts, increased $446,000, to $88.4 million at September 30, 1999 from $87.9 million at December 31, 1998. Certificates of deposit increased by $9.1 million, or 4.6%, to $204.2 million at September 30, 1999 from $195.1 million at December 31, 1998. Other borrowed funds were $222.4 million at September 30, 1999 as compared to $188.0 million at December 31, 1998. The increase was primarily the result of the Company's leveraged funding strategy of utilizing short-term and long-term FHLB advances to purchase investment securities and to fund new loan originations. 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 Bank typically defines interest-sensitive assets and interest-sensitive liabilities as those that reprice within one year or less. Maintaining an appropriate match is a method of avoiding wide fluctuations in net interest margin during periods of changing interest rates. The difference between interest-sensitive assets and interest-sensitive liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP occurs when interest-sensitive assets exceed interest-sensitive liabilities repricing in the same time periods, and a negative GAP occurs when interest-sensitive liabilities exceed interest-sensitive assets repricing in the same time periods. A negative GAP ratio suggests that a financial institution may be better positioned to take advantage of declining interest rates rather than increasing interest rates, and a positive GAP ratio suggests the converse. Static gap analysis describes interest rate sensitivity at a point in time. However, it alone does not accurately measure the magnitude of changes in net interest income since changes in interest rates do not impact all categories 23 of assets and liabilities equally or simultaneously. Interest rate sensitivity analysis also involves assumptions on certain categories of assets and deposits. For purposes of interest rate sensitivity analysis, assets and liabilities are stated at either their contractual maturity, estimated likely call date, or earliest repricing opportunity. Mortgage-backed securities and amortizing loans are scheduled based on their anticipated cash flow which also considers prepayments based on historical data and current market trends. Savings accounts, including passbook, statement savings, money market, and NOW accounts, do not have a stated maturity or repricing term and can be withdrawn or repriced at any time. This may impact the Company's margin if more expensive alternative sources of deposits are required to fund loans or deposit runoff. Management projects the repricing characteristics of these accounts based on historical performance and assumptions that it believes reflect their rate sensitivity. Therefore, for purposes of the gap analysis, these deposits are not considered to reprice simultaneously. Accordingly, a portion of the deposits are moved into time brackets exceeding one year. Shortcomings are inherent in a simplified and static GAP analysis that may result in an institution with a negative GAP having interest rate behavior associated with an asset-sensitive balance sheet. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Furthermore, repricing characteristics of certain assets and liabilities may vary substantially within a given time period. In the event of a change in interest rates, prepayment and early withdrawal levels could also deviate significantly from those assumed in calculating GAP in the manner presented in the table below. The Bank attempts to manage its assets and liabilities in a manner that stabilizes net interest income under a broad range of interest rate environments. Management uses gap analysis and simulation models to attempt to monitor efforct of its interest sensitive assets and liablilitis. Adjustments to the mix of assets and liabilities are made periodically in an effort to provide dependable and steady growth in net interest income regardless of the behavior of interest rates. The following tables present a summary of the Bank's interest rate sensitivity GAP at September 30, 1999. For purposes of these tables, the Bank has used assumptions based on industry data and historical experience to calculate the expected maturity of loans because, statistically, certain categories of loans are prepaid before their maturity date, even without regard to interest rate fluctuations. Additionally certain prepayment assumptions were made with regard to investment securities based upon the expected prepayment of the underlying collateral of the mortgage backed securities. 24
Republic First Bancorp Interest Sensitive Gap (dollars in thousands) as of December 31, 1998 0 - 90 91 - 180 181 - 365 1 - 2 2 - 3 Days Days Days Years Years ---- ---- ---- ----- ----- Interest sensitive assets: Securities and interest bearing balances due from banks $ 32,862 $ 10,185 $ 18,202 $ 28,690 $ 20,906 Average interest rate 6.53% 7.00% 7.01% 7.03% 7.04% Loans receivable (1) 91,885 9,453 18,526 39,278 33,195 Average interest rate 8.53% 8.33% 8.33% 8.19% 8.20% Total 124,747 19,638 36,728 67,968 54,101 --------- --------- --------- --------- --------- Cumulative total $ 124,747 $ 144,385 $ 181,113 $ 249,081 $ 303,182 ========= ========= ========= ========= ========= Interest sensitive liabilities: Demand interest bearing $ 2,320 $ 457 $ 1,476 $ 1,829 $ 1,829 Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50% Savings accounts 675 63 128 255 255 Average interest rate 2.50% 2.50% 2.50% 2.50% 2.50% Money market accounts 19,687 652 1,305 2,610 2,610 Average interest rate 4.42% 2.75% 2.75% 2.75% 2.75% FHLB borrowings 40,609 7,400 -- -- -- Average interest rate 5.00% 6.32% 0.00% 0.00% 0.00% Time deposits 35,549 26,134 86,620 39,424 2,885 Average interest rate 5.51% 5.70% 5.82% 6.43% 5.93% Totals $ 98,840 $ 34,706 $ 89,529 $ 44,118 $ 7,579 --------- --------- --------- --------- --------- Cumulative total $ 98,840 $ 133,546 $ 223,075 $ 267,193 $ 274,772 ========= ========= ========= ========= ========= Interest Rate sensitivity GAP $ 25,907 $ (15,068) $ (52,801) $ 23,850 $ 46,522 Cumulative GAP $ 25,907 $ 10,839 $ (41,962) $ (18,112) $ 28,410 Interest Sensitive Assets/ Interest Sensitive Liabilities 1.3x 1.1x 0.8x 0.9 1.1 Cumulative GAP/ Total Earning Assets 5.3% 2.2% -8.7% -3.7% 5.9% Total earning assets $ 484,446 ========= Off balance sheet items notional value: Commitments to extend credit $ 430 $ 21,534 --------- --------- Average interest rate 7.75% 8.25%
3 - 4 4 - 5 More than 5 Years Years Years Total Fair Value ----- ----- ----- ----- ---------- Interest sensitive assets: Securities and interest bearing balances due from banks $ 15,855 $ 12,038 $ 38,940 $ 177,678 $ 177,662 Average interest rate 7.03% 7.02% 6.94% Loans receivable (1) 31,220 29,488 53,723 306,768 311,775 Average interest rate 8.23% 8.27% 7.55% Total 47,075 41,526 92,663 484,446 485,613 --------- --------- --------- --------- --------- Cumulative total $ 350,257 $ 391,783 $ 484,446 ========= ========= ========= Interest sensitive liabilities: Demand interest bearing $ 1,829 $ 1,829 $ 8,586 $ 20,155 20,155 Average interest rate 2.50% 2.50% 2.50% Savings accounts 255 255 1,280 3,166 3,166 Average interest rate 2.50% 2.50% 2.50% Money market accounts 2,610 2,610 -- 32,084 32,084 Average interest rate 2.75% 2.75% 0.00% FHLB borrowings 40,000 50,000 50,000 188,009 191,684 Average interest rate 5.59% 4.99% 5.15% Time deposits 2,262 2,262 6 195,142 188,009 Average interest rate 5.92% 5.92% 5.30% Totals $ 46,956 $ 56,956 $ 59,872 438,556 435,098 --------- --------- --------- --------- --------- Cumulative total $ 321,728 $ 378,684 $ 438,556 ========= ========= ========= Interest Rate sensitivity GAP $ 119 $ (15,430) $ 32,791 $ 45,890 Cumulative GAP $ 28,529 $ 13,099 $ 45,890 Interest Sensitive Assets/ Interest Sensitive Liabilities 1.1 1.0x 1.1x Cumulative GAP/ Total Earning Assets 5.9% 2.7% 9.5% Total earning assets Off balance sheet items notional value: Commitments to extend credit $ 21,534 $ 220 --------- --------- Average interest rate (1) Includes loans held for sale
25
Republic First Bancorp Interest Sensitive Gap (dollars in thousands) as of September 30, 1999 0 - 90 91 - 180 181 - 365 1 - 2 2 - 3 Days Days Days Years Years ---- ---- ---- ----- ----- Interest Sensitive Assets: Securities and interest bearing balances due from banks $ 33,152 $ 7,989 $ 15,469 $ 27,008 $ 25,337 Average interest rate 5.41% 6.37% 6.38% 6.47% 6.47% Loans receivable (1) 108,321 11,931 22,022 42,851 36,915 Average interest rate 8.48% 8.07% 8.04% 8.03% 8.13% Total 141,473 19,920 37,491 69,859 62,252 --------- --------- --------- --------- --------- Cumulative Totals $ 141,473 $ 161,393 $ 198,884 $ 268,743 $ 330,995 ========= ========= ========= ========= ========= Interest Sensitive Liabilities: Demand Interest Bearing $ 4,810 $ 281 $ 568 $ 1,156 $ 1,183 Average interest rate 1.25% 1.25% 1.25% 1.25% 1.25% Savings Accounts 1,316 102 206 419 428 Average interest rate 2.00% 2.00% 2.00% 2.00% 2.00% Money Market Accounts 7,616 2,153 4,317 5,885 5,957 Average interest rate 3.73% 4.69% 4.69% 4.69% 4.69% Time Deposits 58,704 35,367 38,784 64,969 1,944 Average interest rate 5.51% 5.80% 5.59% 5.60% 5.77% FHLB Borrowings 87,363 25,000 25,000 42,500 17,500 Average interest rate 5.33% 5.29% 4.82% 5.68% 5.58% Total 159,810 62,903 68,875 114,928 27,012 --------- --------- --------- --------- --------- Cumulative Totals $ 159,810 $ 222,713 $ 291,588 $ 406,516 $ 433,528 ========= ========= ========= ========= ========= Interest Rate sensitivity GAP $ (18,337) $ (42,983) $ (31,384) $ (45,069) $ 35,240 Cumulative GAP $ (18,337) $ (61,320) $ (92,704) $(137,773) $(102,533) Interest Sensitive Assets/ Interest Sensitive Liabilities 88.53% 31.67% 54.43% 60.79% 230.46% Cumulative GAP/ Total Earning Assets -3.49% -11.66% -17.63% -26.20% -19.50% Total Earning Assets $ 525,901 ========= Off balance sheet items notional value: Commitments to extend credit $ 404 $ 23,160 --------- --------- Average interest rate 7.75% 8.25%
3 - 4 4 - 5 More than 5 Years Years Years Total Fair Value ----- ----- ----- ----- ---------- Interest Sensitive Assets: Securities and interest bearing balances due from banks $ 12,273 $ 10,937 $ 67,158 $ 199,323 $ 199,623 Average interest rate 6.52% 6.52% 6.53% Loans receivable (1) 31,140 28,476 44,922 326,578 328,676 Average interest rate 8.15% 8.01% 7.38% Total 43,413 39,413 112,080 525,901 528,299 --------- --------- --------- --------- --------- Cumulative Totals $ 374,408 $ 413,821 $ 525,901 ========= ========= ========= Interest Sensitive Liabilities: Demand Interest Bearing $ 1,210 $ 1,238 $ 2,151 $ 12,598 $ 12,598 Average interest rate 1.25% 1.25% 1.25% Savings Accounts 438 449 $ 779 4,137 4,137 Average interest rate 2.00% 2.00% 2.00% Money Market Accounts 6,030 6,105 $ 5,737 43,801 43,801 Average interest rate 4.69% 4.69% 4.69% Time Deposits 1,486 2,941 7 204,202 204,669 Average interest rate 5.90% 5.69% 5.41% FHLB Borrowings 25,000 -- -- 222,363 222,476 Average interest rate 5.72% 0.00% 0.00% Total 34,165 10,733 8,675 487,101 487,681 --------- --------- --------- --------- --------- Cumulative Totals $ 467,693 $ 478,426 $ 487,101 ========= ========= ========= Interest Rate sensitivity GAP $ 9,248 $ 28,680 $ 103,405 Cumulative GAP $ (93,285) $ (64,605) $ 38,800 Interest Sensitive Assets/ Interest Sensitive Liabilities 127.07% 367.21% 1291.99% Cumulative GAP/ Total Earning Assets -17.74% -12.28% 7.38% Total Earning Assets Off balance sheet items notional value: Commitments to extend credit $ 23,564 $ 236 --------- --------- Average interest rate (1) Includes loans held for sale.
26 Capital Resources The Company is required to comply with certain "risk-based" capital adequacy guidelines issued by the FRB and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the "credit-equivalent" amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts. Under these guidelines, banks are expected to meet a minimum target ratio for "qualifying total capital" to weighted risk assets of 8%, at least one-half of which is to be in the form of "Tier 1 capital". Qualifying total capital is divided into two separate categories or "tiers". "Tier 1 capital" includes common stockholders' equity, certain qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited in the aggregate to one-half of total qualifying capital) includes allowances for credit losses (within limits), certain excess levels of perpetual preferred stock and certain types of "hybrid" capital instruments, subordinated debt and other preferred stock. Applying the federal guidelines, the ratio of qualifying total capital to weighted-risk assets, was 13.08% and 12.54% at September 30, 1999 and December 31, 1998 , respectively, and as required by the guidelines, at least one-half of the qualifying total capital consisted of Tier l capital elements. Tier l risk-based capital ratios on September 30, 1999 and December 31, 1998 was 12.15% and 11.76%, respectively. At December 31, 1998, and 1997, the Company exceeded the requirements for risk-based capital adequacy under both federal and Pennsylvania State guidelines. Under FRB and FDIC regulations, a bank is deemed to be "well capitalized" when it has a "leverage ratio" ("Tier l capital to total assets") of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%, and a total capital to weighted-risk assets ratio of at least 10%. At September 30, 1999 and December 31, 1998 , the leverage ratio was 7.33% and 7.50%, respectively. Accordingly, at September 30, 1999 and December 31, 1998, the Company was considered "well capitalized" under FRB and FDIC regulations. The Company's shareholders' equity as of September 30, 1999 and December 31, 1998 was $35,657,000 and $36,622,000, respectively. Book value per share of the Company's common stock decreased from $6.22 as of December 31, 1998 to $5.83 as of September 30, 1999. These decreases were attributable to the change in unrealized losses of $4.9 million on available for sale securities, partially offset by net income of $3,682,000. Regulatory Restrictions on Dividends Dividend payments by the Bank to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act, and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under the FRB's regulations, the Bank cannot pay dividends that exceed its net income from the current and the preceding two years. Under the FDIA, an insured bank may pay no dividends if the bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking laws, the Bank would be limited to $10.9 million year to date of dividends in 1999. State and federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Adherence to such standards futher limits the ability of the Bank to pay dividends to the Company. Other regulatory requirments and policies may also affect the payment of dividends to the Company by the Bank. If, in the opinion of the FRB, the Bank is engaged in, or is about to engage in, an unsafe or unsound practive (which, depending on the financial condition of the Bank, could include the payment of dividends), the FRB may require, after notice and hearing, that the Bank cease and desist from such practice. The FRB has formal and informal policies 27 providing that insured banks and bank holding companies should generally pay dividends only out of current operating earnings. Regulatory Capital Requirements Federal banking agencies impose three minimum capital requirements on the Company's risk-based capital ratios based on total capital, "Tier 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level of earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks. The following table presents the Company's capital regulatory ratios at September 30, 1999 and December 31, 1998:
To be well For capital Capitalized under FRB Actual Adequacy purposes capital guidelines (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of September 30, 1999: Total risk based capital $43,348 13.08% $26,523 8.00% $33,153 10.00% Tier I capital 40,297 12.15 13,261 4.00 19,892 6.00 Tier I (leveraged) capital 40,297 7.33 27,492 5.00 27,492 5.00 As of December 31, 1998: Total risk based capital $38,784 12.54% $24,746 8.00% $30,932 10.00% Tier I capital 36,389 11.76 12,373 4.00 18,559 6.00 Tier I (leveraged) capital 36,389 7.50 24,263 5.00 24,263 5.00
Management believes that the Company meets as of September 30, 1999 and December 31, 1998, all capital adequacy requirements to which it is subject. As of September 30, 1999 and December 31, 1998, the most recent notification from the Federal Reserve Bank categorized the Company as well capitalized under the regulatory framework for prompt corrective action provisions of section 3b of the Federal deposit Insurance Act. There are no calculations or events since that notification, that management believes would have changed the Company's category. The Company's ability to maintain the required levels of capital is substantially dependent upon the success of the Banks capital and business plans, the impact of future economic events on the Banks' loan customers, the 28 Banks' ability to manage its interest rate risk and control its growth and other operating expenses. In addition to the above minimum capital requirements, the Federal Reserve Bank approved a rule that became effective on December 19, 1992 implementing a statutory requirement that federal banking regulators take specified "prompt corrective action" when an insured institution's capital level falls below certain levels. The rule defines five capital categories based on several of the above capital ratios. The Banks currently exceed the levels required for a bank to be classified as "well capitalized". However, the Federal Reserve Bank may consider other criteria when determining such classifications, which consideration could result in a downgrading in such classifications. Liquidity Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. Sources of asset liquidity are provided by cash and amounts due from banks, interest-bearing deposits with banks, and federal funds sold. The Company's liquid assets totaled $21.3 million at September 30, 1999 compared to $18.3 million at December 31, 1998. Maturing and repaying loans are another source of asset liquidity. At September 30, 1999, the Company estimated that an additional $63.8 million of loans will mature or repay in the next one year period ending September 30, 2000. Liquidity can be met by attracting deposits with competitive rates, buying federal funds or utilizing the facilities of the Federal Reserve System or the Federal Home Loan Bank System. At September 30, 1999, the Banks had $43.4 million in unused lines of credit available to it under informal arrangements with correspondent banks compared to $55.5 million at December 31, 1998. These lines of credit enable the Banks to purchase funds for short-term needs at current market rates. At September 30, 1999, the Company had outstanding commitments (including unused lines of credit and letters of credit) of $23.2 million. Certificates of deposit which are scheduled to mature within one year totaled $129.8 million at September 30, 1999, and borrowings that are scheduled to mature within the same period amounted to $133.8 million. The Company anticipates that it will have sufficient funds available to meet its current commitments. The Banks' target and actual liquidity levels are determined and managed based on Management's comparison of the maturities and marketability of the Bank's interest-earning assets with its projected future maturities of deposits and other liabilities. Management currently believes that floating rate commercial loans, short-term market instruments, such as 2-year United States Treasury Notes, adjustable rate mortgage-backed securities issued by government agencies, and federal funds, are the most appropriate approach to satisfy the Bank's liquidity needs. The Bank has established a line of credit from its correspondent, in the amount of $7.5 million, to assist in managing the Bank's liquidity position. Additionally, the Bank has established a line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $258.2 million. As of Spetember 30, 1999 and December 31, 1998, the Company had borrowed $222.4 and $180.5, respectively, under its lines of credit. The Company's Board of Directors has appointed an Asset/Liability Committee (ALCO) to assist Management in establishing parameters for investments. The Asset/Liability Committee is responsible for managing the liquidity position and interest sensitivity of the Banks. Such committee's primary objective is to maximize net interest margin in an ever changing rate 29 environment, while balancing the Banks' interest-sensitive assets and liabilities and providing adequate liquidity for projected needs. Management presently believes that the effect on the Banks of any future rise in interest rates, reflected in higher cost of funds, would be detrimental since the amount of the Banks' interest bearing liabilities which would reprice, are greater than the Banks' interest earning assets which would reprice, over the next twelve months. However, a decrease in interest rates generally could have a positive effect on the Banks, due again to the timing difference between repricing the Banks' liabilities, primarily certificates of deposit and other borrowed funds, and the largely automatic repricing of its existing interest-earning assets. As of September 30, 1999, 27% of the Banks' interest-bearing deposits were to mature, and be repriceable, within three months, and an additional 14% were to mature, and be repriceable, within three to six months. Since the assets and liabilities of the Company have diverse repricing characteristics that influence net interest income, management analyzes interest sensitivity through the use of gap analysis and simulation models. Interest rate sensitivity management seeks to minimize the effect of interest rate changes on net interest margins and interest rate spreads, and to provide growth in net interest income through periods of changing interest rates. Securities Portfolio At September 30, 1999, the Company had identified certain investment securities that are being held for indefinite periods of time, including securities that will be used as part of the Company's asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as available-for-sale and are intended to increase the flexibility of the Company's asset/liability management. Available-for-sale securities consist of US Government Agency securities and other investments. The book and market values of securities available-for-sale were $184.6 million and $177.2 million as of September 30, 1999. The net unrealized loss on securities available-for-sale, as of this date, was $7.4 million. The following table represents the carrying and estimated fair values of Investment Securities at September 30, 1999.
Gross Gross Amortized Unrealized Unrealized Available-for-Sale Cost Gain Loss Fair Value ---------------------------------------------------------------- Mortgage-backed $181,688,000 $31,000 ($7,427,000) $174,292,000 U.S. Government Agencies 2,900,000 9,000 (22,000) 2,887,000 ---------------------------------------------------------------- Total Available-for-Sale $184,588,000 $40,000 ($7,449,000) $177,179,000 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Held-to-Maturity Cost Gain Loss Fair Value ---------------------------------------------------------------- Mortgage-backed $939,000 $15,000 $0 $954,000 US Government Agencies 1,895,000 1,000 (9,000) 1,887,000 Other 13,287,000 0 0 13,287,000 ---------------------------------------------------------------- Total Held-to-Maturity $16,121,000 $16,000 ($9,000) $16,128,000 ----------------------------------------------------------------
30 Loan Portfolio The Company's loan portfolio consists of commercial loans, commercial real estate loans, commercial loans secured by one-to-four family residential property, as well as residential, home equity loans and consumer loans. Commercial loans are primarily term loans made to small-to-medium-sized businesses and professionals for working capital purposes. The majority of these commercial loans are collateralized by real estate and further secured by other collateral and personal guarantees. The Company's commercial loans generally range from $250,000 to $1,000,000 in amount. The Company's net loans increased $19.8 million, or 6.5%, to $326.6 million at September 30, 1999 from $306.8 million at December 31, 1998, which were primarily funded by an increase in other borrowed funds. The following table sets forth the Company's gross loans by major categories for the periods indicated:
(dollars in thousands) As of September 30, 1999 As of December 31, 1998 ------------------------------------------------------------ Balance % of Total Balance % of Total ------------------------------------------------------------ Real Estate: 1-4 Family (1) $145,895 44.3% $133,158 43.1% Multi-Family 23,502 7.1 21,800 7.0 Commercial Real Estate 120,784 36.6 110,385 35.7 ------------------------------------------------------------ Total Real Estate 290,181 88.0 265,343 85.8 Commercial 37,566 11.4 42,644 13.8 Other 1,882 0.6 1,176 0.4 ------------------------------------------------------------ Total Loans (1) 329,629 100.0% 309,163 100.0% Less allowance for loan losses (3,051) (2,395) -------- -------- Net loans $326,578 $306,768 ======== ======== (1) Includes loans held for sale
Credit Quality The Company's written lending policies require underwriting, loan documentation, and credit analysis standards to be met prior to funding. In addition, a senior loan officer reviews all loan applications. The Board of Directors reviews the status of loans monthly to ensure that proper standards are maintained. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal and/or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. 31 Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of the loan. While a loan is classified as nonaccrual or as an impaired loan and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the remaining recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. The following summary shows information concerning loan delinquency and other non-performing assets at the dates indicated.
September 30, December 31, 1999 1998 ------------------------------ Loans accruing, but past due 90 days or more $586,000 $121,000 Non-accrual loans 1,061,000 1,002,000 ------------------------------ Total non-performing loans (1) 1,647,000 1,123,000 Foreclosed real estate 643,000 718,000 ------------------------------ Total non-performing assets (2) $2,290,000 $1,841,000 ============================== Non-performing loans as a percentage of total loans net of unearned income (3) 0.50% 0.36% Non-performing assets as a percentage of total assets 0.41% 0.36% (1) Non-performing loans are comprised of (i) loans that are on a nonaccrual basis; (ii) accruing loans that are 90 days or more past due and (iii) restructured loans. (2) Non-performing assets are composed of non-performing loans and foreclosed real estate (assets acquired in foreclosure). (3) Includes loans held for sale
Total non-performing loans increased by $524,000 to $1,647,000 at September 30, 1999 from $1,123,000 at December 31, 1998. Total non performing assets increased by $449,000 at September 30, 1999 to $2,290,000 from $1,841,000 at December 31, 1998. At September 30, 1999, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to real estate agents and managers in the aggregate amount of $82.6 million, which represented 25.3% of gross loans receivable. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged 32 in similar activities that would cause them to be similarly impacted by economic or other conditions. Real estate owned is initially recorded at the lower or cost or fair value, net of estimated selling costs at the date of foreclosure. After foreclosure, management periodically performs valuations and any subsequent deteriations in fair value, and all other revenue and expenses are charged against operating expenses in the period in which they occur. Potential problem loans consist of loans that are included in performing loans, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At September 30, 1999, all identified potential problem loans are included in the preceding table. The Company had no credit exposure to "highly leveraged transactions" at September 30, 1999, as defined by the FRB. Allowance for Loan Losses A detailed analysis of the Company's allowance for loan losses for the nine months ended September 30, 1999, and 1998 and the twelve months ended December 31, 1998:
For the nine months For the twelve months For the nine months ended ended ended September 30, 1999 December 31, 1998 September 30, 1998 ------------------ ---------------------- ------------------- Balance at beginning of period ............ $2,395,000 $2,028,000 $2,028,000 Charge-offs: Commercial ........................... 27,000 76,000 55,000 Real estate .......................... 0 0 0 Consumer ............................. 97,000 34,000 0 ------------ ------------ ------------ Total charge-offs ................ 124,000 110,000 55,000 ------------ ------------ ------------ Recoveries: Commercial ........................... 93,000 13,000 48,000 Real estate .......................... 0 0 0 Consumer ............................. 17,000 94,000 13,000 ------------ ------------ ------------ Total recoveries ................. 110,000 107,000 61,000 ------------ ------------ ------------ Net charge-offs/(recoveries) .............. 14,000 3,000 (6,000) ------------ ------------ ------------ Provision for loan losses ................. 670,000 370,000 290,000 ------------ ------------ ------------ Balance at end of period ............. $3,051,000 $2,395,000 $2,324,000 ============ ============ ============ Average loans outstanding (1)(2) ..... $318,770,000 $248,479,000 $236,874,000 ============ ============ ============ As a percent of average loans (1)(2): Net charge-offs ...................... 0.01% 0.00% 0.00% Provision for loan losses ............ 0.21% 0.15% 0.12% Allowance for loan losses ............ 0.96% 0.96% 0.98% Allowance for loan losses to: Total loans, net of unearned income .. 0.93% 0.77% 0.87% Total non-performing loans ........... 185.25% 213.27% 141.79% (1) Includes nonaccruing loans. (2) Includes loans held for sale.
33 Management makes a monthly determination as to an appropriate provision from earnings necessary to maintain an allowance for loan losses that is adequate based upon the loan portfolio composition, classified problem loans, and general economic conditions. The Company's Board of Directors periodically reviews the status of all nonaccrual and impaired loans and loans criticized by the Company's regulators and internal loan review officer. The internal loan review officer reviews both the loan portfolio and the overall adequacy of the loan loss reserve. During the review of the loan loss reserve, the Board of Directors considers specific loans, pools of similar loans, and historical charge-off activity. The sum of these components is compared to the loan loss reserve balance. Any additions deemed necessary to the loan loss reserve balance are charged to operations. The Company has an existing loan review program, which monitors the loan portfolio on an ongoing basis. Loan review is conducted by a loan review officer and is reported quarterly to the Board of Directors. The Board of Directors reviews the finding of the loan review program on a monthly basis. Determining the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required. The Company's management considers the entire allowance for loan losses to be adequate, however, to comply with regulatory reporting requirements, management has allocated the allowance for loan losses as shown in the table below into components by loan type at each period end. Through such allocations, management does not intend to imply that actual future charge-offs will necessarily follow the same pattern or that any portion of the allowance is restricted.
At September 30, 1999 At December 31, 1998 --------------------- -------------------- Percent of Loans Percent of Loans In Each Category In Each Category Amount To Loans (1) Amount to Loans (1) ------ ------------ ------ ------------ Allocation of allowance for loan losses: Commercial $1,849,000 55.17% $1,638,000 56.33% Residential real estate 419,000 44.26% 391,000 43.07% Consumer and other 91,000 0.57% 71,000 0.60% Unallocated 692,000 295,000 ---------- ---------- Total 3,051,000 100.00% $2,395,000 100.00% ========== ==========
The unallocated allowance increased $397,000 to $692,000 at September 30, 1999 from $295,000 at December 31, 1998. This increase is due primarily to a recent increase in non-performing loans of $524,000 to $1.6 million at September 30, 1999 from $1.1 million at December 31, 1998, and to the growth of the loan portfolio. (1) Includes loans held for sale 34 The Company had delinquent loans as of September 30, 1999 and December 31, 1998 as follows; (i) 30 to 59 days past due, consisted of commercial, and consumer and home equity loans in the aggregate principal amount of $398,000 and $1.2 million respectively; and (ii) 60 to 89 days past due, consisted of commercial and consumer loan in the aggregate principal amount of $2.0 million and $386,000 respectively. In addition, the Company has classified certain loans as substandard and doubtful (as those terms are defined in applicable Bank regulations). At September 30, 1999 and December 31, 1998, substandard loans totaled approximately $899,000 and $1,382,000 respectively; and doubtful loans totaled approximately $334,000 and $0 respectively. Deposit Structure Total deposits at September 30, 1999 consisted of approximately $27.8 million in non-interest-bearing demand deposits, approximately $12.6 million in interest-bearing demand deposits, approximately $48.0 million in savings deposits and money market accounts, approximately $153.0 million in time deposits under $100,000, and approximately $51.2 million in time deposits greater than $100,000. In general, the Bank pays higher interest rates on time deposits over $100,000 in principal amount. Due to the nature of time deposits and changes in the interest rate market generally, it should be expected that the Company's deposit liabilities may fluctuate from period-to-period. The following table is a distribution of the balances of the Company's average deposit balances and the average rates paid therein for the nine months ended September 30, 1999 and the year ended December 31, 1998.
Deposit Table For the nine months ended For the twelve months ended September 30, 1999 December 31, 1998 ------------------------------ ------------------------------ Average Average Balance Rate Balance Rate Non-interest-bearing balances $29,627,000 0.00% $31,260,000 0.00% ============================================================== Money market and savings deposits $44,870,000 3.68% $41,157,000 2.85% Time deposits 191,234,000 5.86 191,829,000 6.09 Demand deposits, interest-bearing 13,844,000 1.44 13,727,000 2.50 -------------------------------------------------------------- Total interest-bearing deposits $249,948,000 5.23% $246,713,000 5.35% ==============================================================
35 The following is a breakdown, by contractual maturities, of the Company's time deposits issued in denominations of $100,000 or more as of September 30, 1999 and December 31, 1998.
September 30, December 31, 1999 1998 --------------------------------- Maturing in: Three months or less $13,175,000 $14,229,000 Over three months through six months 10,127,000 7,756,000 Over six months through twelve months 8,796,000 3,365,000 Over twelve months 22,754,000 0 --------------------------------- Total $54,852,000 $25,350,000 =================================
Commitments In the normal course of its business, the Company makes commitments to extend credit and issues standby letters of credit. Generally, such commitments are provided as a service to its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirement. The Company evaluates each customer's creditworthiness on a case-by-case basis. The type and amount of collateral obtained, if deemed necessary upon extension of credit, are based on Management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers and is based on Management's evaluation of the creditworthiness of the borrower and the quality of the collateral. At September 30, 1999 and December 31, 1998, firm loan commitments approximated $23.2 million and $20.1 million respectively and commitments of standby letters of credit approximated $1,455,000 and $1,912,000, respectively. Effects of Inflation The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is the Company's need and ability to react to changes in interest rates. As discussed previously, management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations. Year 2000 Issue The following section contains forward-looking statements which involve risks and uncertainties. The actual impact on the Company of the year 2000 issue could materially differ from that which is anticipated in the forward looking statements as a result of certain factors identified below. 36 Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by or at the Year 2000. The Year 2000 issue affects virtually all companies and organizations. The Company is subject to various regulations and oversight by regulatory authorities, including the Federal Reserve Bank, the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation (FDIC). These regulatory agencies have coordinated various regulatory examinations focusing on the year 2000 issues, and report their findings to the Company's management and the Board of Directors. Company's State of Readiness The Company's management is committed to ensuring that the Company's daily operations suffer little impact as a result of the date change at the end of the century. The Company is following the Federal Financial Institutions Examination Council's (FFIEC), Interagency Guidelines. The guidelines identify a process in which year 2000 issues are addressed, such as awareness, assessment, remediation, testing and implementation. The Company has identified key areas for which management is focusing its efforts. These areas include data center, desktop environment and networks, branch environment and services, financial applications, facilities, legal, insurance, and outside services. For each of these areas identified, the Company is employing a process which will compile inventories of all identified areas which could be affected by the year 2000, including information technology ("IT") systems and non-information technology systems such as phone systems, fax machines and alarm systems. A testing schedule is defined and the identified systems are tested, and results evaluated. A remedy process is then defined, and implemented and testing is performed again. The process is repeated until repairs are complete. All identified critical applications have been tested. Non-critical testing validation and repair were performed and completed during the first quarter of 1999. The Company has relationships with third parties including its borrowers, which are also subject to the year 2000 uncertainties. Management has identified relationships which are considered material, and would have an adverse effect on the Bank and the Company if such third parties were not year 2000 compliant. Management has solicited year 2000 certifications from significant vendors, and also completed its own year 2000 due diligence. No borrower or third party vendor has given the Company a response that indicates that they will not be year 2000 compliant. However, one borrower has yet to receive a year 2000 certification from a major supplier of business, and the bank is closely monitoring the situation. It is anticipated that all identified third party vendors will be compliant, however, no assurance can be given with regard to their compliance with year 2000. Also, no assurances can be given that a third party vendor or borrower will not have a material effect on the Company or Bank, due to their non-compliance with the year 2000 issue. While no assurance can be given to actual system operations upon the turn of the century, based upon information currently known to it, and upon consideration of its testing efforts to date, management believes that in the worse case scenario, the Company will suffer only a slight interruption of business, as a result of minor application failures of its IT and non-IT systems and software as a result of the year 2000. However, if the appropriate modifications are not made, or are not completed on a timely basis, the year 2000 issue could have a material impact on the operations of the Bank and the Company. 37 Costs of Year 2000 The Company has spent approximately $175,000 and estimates that the future dollar cost to the Company to be in compliance with the year 2000 issue will range from $25,000 to $50,000 by December 31, 1999. These costs include new equipment and software purchases, in addition to testing applications prior to the year 2000. Risks of the Company's Year 2000 Issues Management believes that it has addressed the major areas with respect to Year 2000 compliance. Management also believes its progress of remedying year 2000 issues is being completed according to plan. However, there can be no assurances that the Company will not be impacted by Year 2000 complications. Contingency Plans The Company has prepared contingency plans for each major area of business identified above. The plans will utilize in part alternative procedures, other third party vendors and manual intervention, to compensate for the loss of certain computer systems. As of September 30, 1999, all such plans have been substantially completed. Recent Accounting Pronouncements: Accounting for Derivative Instruments and Hedging Activities In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement No. 133"). This Statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and those used for hedging activities, by requiring that an entity recognize those items as assets or liabilities in the statement of financial position and measure them at fair value. The statement categorized derivatives used for hedging purposes as either fair value hedges, cash flow hedges, foreign currency fair value hedges, foreign currency cash flow hedges, or hedges of certain foreign currency exposures. The statement generally provides for matching of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk, so long as the hedge is effective. Prospective application of Statement No. 133, as amended by statement No. 137, is required for all fiscal years beginning after June 15, 2000, however earlier application is permitted. Currently, the Company does not use any derivative instruments, nor does it engage in any hedging activities. The Company adopted Statement No. 133 effective July 1, 1998, which permitted the Company to transfer certain securities originally designated as held-to-maturity, to available-for-sale and trading. A portion of these securities were subsequently sold during the third quarter of 1998. In accordance with Statement No. 133, the Company recorded the gross gain of $628,000 as a cumulative change in accounting principle, net of a $207,000 provision for income tax. 38 Reporting on the Costs of Start-Up Activities In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). This statement requires costs of startup activities, including organization costs, to be expensed as incurred. SOP 98-5 is effective for the Company's financial statements for fiscal years beginning after December 15, 1998. As of December 31, 1998 the Company had deferred costs relating to start-up activities of $94,000, remaining in the balance of other assets in the Consolidated Balance Sheets. The Company adopted SOP 98-5 effective January 1, 1999, and accordingly, expensed $94,000 of costs of start-up activities in the first quarter of 1999. This amount, net of tax, is presented as a cumulative effect of a change in account principle in the consolidated statement of operations. 39 Part II Other Information Item 1: Legal Proceedings The Company and the Banks are from time to time a party (plaintiff or defendant) to lawsuits that are in the normal course of business. While any litigation involves an element of uncertainty, management, after reviewing pending actions with its legal counsel, is of the opinion that the liability of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. Item 2: Changes in Securities and use of proceeds None Item 3: Defaults upon Senior Securities None Item 4: Submission of Matters to a Vote of Security Holders None Item 5: Other Information None Item 6: Exhibits and Reports on Form 8-K The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an annual report on Form 10-K) Exhibit No. ------------------------------------------------------------ 3(a) Amended and Restated Articles of Incorporation of the Company, as amended.* 3(b) Amended and Restated Bylaws of the Company. * 4(b)(i) Amended and Restated Articles of Incorporation of the Company, as amended.* 4(b)(ii) Amended and Restated Bylaws of the Company.* 10 Amended and Restated Material Contracts.- None 10(a) Amended and Restated Employment Agreement between the Company and Zvi H. Muscal.* 10(b) Agreement and Plan of Merger by and between the Company and Republic Bancorporation, Inc. dated November 17, 1996.* 40 10(c) Employment agreement between the Company and Jere A. Young.** 10(d) Employment agreement between the Company and Robert D. Davis.** 10(e) Agreement between the Company and Harry D. Madonna.** 11 Computation of Per Share Earnings See footnote No. 2 to Notes to Consolidated Financial Statements under Earnings per Share. 21 Subsidiaries of the Company. First Republic Bank (the "Bank"), a wholly-owned subsidiary, commenced operations on November 3, 1988. The Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania. Republic First Bank of Delaware (the "Delaware Bank") is also a wholly-owned subsidiary of the Company, commenced operations on June 1, 1999. The Delaware Bank is a commercial bank chartered pursuant to the laws of the State of Delaware. The Bank and the Delaware Bank are both members of the Federal Reserve System and their primary federal regulators are the Federal Reserve Board of Governors. 27 Financial Data Schedule. All other schedules and exhibits are omitted because they are not applicable or because the required information is set out in the financial statements or the notes hereto. *Incorporated by reference from the Registration Statement on Form S-4 of the Company, as amended, Registration No. 333-673 filed April 29, 1996. **Incorporated by reference in the Company's Form 10-K, filed March 25, 1999. Reports on Form 8-K None 41 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Republic First Bancorp, Inc. /s/ Jere A. Young ------------------------------------- Jere A. Young President and Chief Executive Officer /s/ George S. Rapp ------------------------------------- George S. Rapp Executive Vice President and Chief Financial Officer Dated: November 15, 1999 42 EX-27 2
9 0000834285 REPUBLIC FIRST BANCORP INC. 9-MOS DEC-31-1999 SEP-30-1999 15,302,000 6,024,000 0 0 177,179,000 16,121,000 0 326,131,000 3,051,000 558,737,000 292,533,000 22,363,000 8,184,000 200,000,000 0 0 63,000 35,594,000 558,737,000 19,670,000 9,311,000 18,000 28,999,000 9,769,000 17,930,000 11,069,000 670,000 0 8,263,000 5,584,000 3,745,000 0 (63,000) 3,682,000 0.62 0.61 7.51 1,647,000 2,967,000 1,647,000 0 2,395,000 124,000 110,000 3,051,000 3,051,000 0 692,000
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