Item
7: Management’s Discussion and
Analysis of Results of Operations and Financial Condition
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”, “would”, “intend”, “probability”,
“risk”, “target”, “objective” and similar expressions or variations on such
expressions. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking
statements. For example, risks and uncertainties can arise with
changes in: general economic conditions, including their impact on
capital expenditures; business conditions in the financial services industry;
the regulatory environment, including evolving banking industry standards;
rapidly changing technology and competition with community, regional and
national financial institutions; new service and product offerings by
competitors, price pressures; and similar items. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management’s analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007, Quarterly Reports on Form 10-Q filed by the
Company in 2007 and any Current Reports on Form 8-K filed by the Company, as
well as similar filings in 2007.
Critical
Accounting Policies, Judgments and Estimates
Discontinued Operations -
In
accordance with SFAS No. 144, the Company has presented the operations of First
Bank of Delaware as discontinued operations starting with the first quarter
2005. On January 31, 2005 the First Bank of Delaware was spun off, effective
January 1, 2005. All assets, liabilities and equity of First Bank of
Delaware were spun off as an independent company, trading on the OTC market
under the stock symbol “FBOD”. Shareholders received one share of
stock in First Bank of Delaware, for every share owned of the
Company. The short-term loan and tax refund lines of business were
accordingly transferred after that date. Republic continued to
purchase tax refund anticipation loans from the First Bank of Delaware through
2006. However, First Bank of Delaware decided not to continue with
this program in 2007.
In
reviewing and understanding financial information for the Company you are
encouraged to read and understand the significant accounting policies used in
preparing our consolidated financial statements. These policies are described in
Note 2 of the notes to our unaudited consolidated financial statements. The
accounting and financial reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. The preparation of the Company’s
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Management evaluates these estimates and assumptions on an ongoing basis
including those related to the allowance for loan losses, other-than-temporary
impairment of securities and deferred income taxes. Management bases its
estimates on historical experience and various other factors and assumptions
that are believed to be reasonable under the circumstances. These form the bases
for making judgments on the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Allowance for Loan Losses—
The
allowance for loan losses is increased by charges to income through the
provision for loan losses and decreased by charge-offs (net of recoveries). The
allowance is maintained at a level that management considers adequate to provide
for losses based upon evaluation of the known and inherent risks in the loan
portfolio. Management’s periodic evaluation of the adequacy of the allowance is
based on the Company’s past loan loss experience, the volume and composition of
lending conducted by the Company, adverse situations that may affect a
borrower’s ability to repay, the estimated value of any underlying collateral,
current economic conditions and other factors affecting the known and inherent
risk in the portfolio. This evaluation is inherently subjective as it requires
material estimates including, among others, the amount and timing of expected
future cash flows on impacted loans, exposure at default, value of collateral,
and estimated losses on our commercial and residential loan portfolios. All of
these estimates may be susceptible to significant change.
The
allowance consists of specific allowances for both impaired loans and all
classified loans which are not impaired and a general allowance on the remainder
of the portfolio. Although we determine the amount of each element of the
allowance separately, the entire allowance for loan losses is available for the
entire portfolio.
We
establish an allowance on certain impaired loans for the amount by which the
discounted cash flows, observable market price or fair value of collateral if
the loan is collateral dependent is lower than the carrying value of the loan. A
loan is considered to be impaired when, based upon current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan. An insignificant delay or
insignificant shortfall in amount of payments does not necessarily result in the
loan being identified as impaired.
We also
establish a specific valuation allowance on classified loans which are not
impaired. We segregate these loans by category and assign allowances to each
loan based on inherent losses associated with each type of lending and
consideration that these loans, in the aggregate, represent an above-average
credit risk and that more of these loans will prove to be uncollectible compared
to loans in the general portfolio. The categories used by the Company include
“Doubtful,” “Substandard” and “Special Mention.” Classification of a loan within
such categories is based on identified weaknesses that increase the credit risk
of the loan.
We
establish a general allowance on non-classified loans to recognize the inherent
losses associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem loans. This general
valuation allowance is determined by segregating the loans by loan category and
assigning allowance percentages based on our historical loss experience,
delinquency trends, and management’s evaluation of the collectibility of the
loan portfolio.
The
allowance is adjusted for significant factors that, in management’s judgment,
affect the collectibility of the portfolio as of the evaluation date. These
significant factors may include changes in lending policies and procedures,
changes in existing general economic and business conditions affecting our
primary lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, loss experience in particular
segments of the portfolio, duration of the current business cycle, and bank
regulatory examination results. The applied loss factors are reevaluated each
reporting period to ensure their relevance in the current economic
environment.
While
management uses the best information available to make loan loss allowance
valuations, adjustments to the allowance may be necessary based on changes in
economic and other conditions, changes in the composition of the loan portfolio
or changes in accounting guidance. In times of economic slowdown, either
regional or national, the risk inherent in the loan portfolio could increase
resulting in the need for additional provisions to the allowance for loan losses
in future periods. An increase could also be necessitated by an increase in the
size of the loan portfolio or in any of its components even though the credit
quality of the overall portfolio may be improving. Historically, our estimates
of the allowance for loan loss have approximated actual losses incurred. In
addition, the Pennsylvania Department of Banking and the FDIC, as an integral
part of their examination processes, periodically review our allowance for loan
losses. The Pennsylvania Department of Banking or the FDIC may require the
recognition of adjustment to the allowance for loan losses based on their
judgment of information available to them at the time of their examinations. To
the extent that actual outcomes differ from management’s estimates, additional
provisions to the allowance for loan losses may be required that would adversely
impact earnings in future periods.
Other-Than-Temporary Impairment of
Securities
—Securities are evaluated on at least a quarterly basis, and
more frequently when market conditions warrant such an evaluation, to determine
whether a decline in their value is other-than-temporary. To determine whether a
loss in value is other-than-temporary, management utilizes criteria such as the
reasons underlying the decline, the magnitude and duration of the decline and
the intent and ability of the Company to retain its investment in the security
for a period of time sufficient to allow for an anticipated recovery in the fair
value. The term “other-than-temporary” is not intended to indicate that the
decline is permanent, but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be other-than-temporary,
the value of the security is reduced and a corresponding charge to earnings is
recognized.
Income Taxes—
Management makes
estimates and judgments to calculate various tax liabilities and determine the
recoverability of various deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenues and
expenses. Management also estimates a reserve for deferred tax assets if, based
on the available evidence, it is more likely than not that some portion or all
of the recorded deferred tax assets will not be realized in future periods.
These estimates and judgments are inherently subjective. Historically, our
estimates and judgments to calculate our deferred tax accounts have not required
significant revision.
In
evaluating our ability to recover deferred tax assets, management considers all
available positive and negative evidence, including our past operating results
and our forecast of future taxable income. In determining future taxable income,
management makes assumptions for the amount of taxable income, the reversal of
temporary differences and the implementation of feasible and prudent tax
planning strategies. These assumptions require us to make judgments about our
future taxable income and are consistent with the plans and estimates we use to
manage our business. Any reduction in estimated future taxable income may
require us to record a valuation allowance against our deferred tax assets. An
increase in the valuation allowance would result in additional income tax
expense in the period and could have a significant impact on our future
earnings.
Recent
Accounting Pronouncements
In February 2006, the FASB issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments. This statement
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interest in Securitized Financial Assets. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The Company adopted this guidance on January 1, 2007. The adoption did not
have any effect on the Company’s consolidated financial position or results of
operations.
In March 2006, the FASB issued SFAS No.
156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement
No. 140. This statement amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, with respect to
the accounting for separately recognized servicing assets and servicing
liabilities. This statement requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value, if
practicable. It also permits, but does not require, the subsequent measurement
of servicing assets and servicing liabilities at fair value. The Company adopted
this statement effective January 1, 2007. The adoption did not have a material
effect on the Company’s consolidated financial position or results of
operations.
In July 2006, the FASB issued FASB
Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, Accounting for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The adoption did not have any impact on the Company’s
consolidated financial position or results of operations.
In September 2006, the FASB ratified
the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to life
insurance arrangements that provide an employee with a specified benefit that is
not limited to the employee’s active service period, including certain
bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to
recognize a liability and related compensation costs for future benefits that
extend to postretirement periods. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007, with earlier application permitted. The
Company is continuing to evaluate the impact of this consensus, which may
require the Company to recognize an additional liability and compensation
expense related to its deferred compensation agreements.
In September 2006, the FASB ratified
the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of
Life Insurance – Determining the Amount That Could Be Realized in Accordance
with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance. Technical Bulletin No. 85-4 states that an entity should report as an
asset in the statement of financial position the amount that could be realized
under the insurance contract. EITF 06-5 clarifies certain factors
that should be considered in the determination of the amount that could be
realized. EITF 06-5 is effective for fiscal years beginning after December 15,
2006, with earlier application permitted under certain circumstances. The
Company adopted this guidance on January 1, 2007. The adoption did
not have any effect on the Company’s consolidated financial position or results
of operations.
In September 2006, the FASB issued FASB
Statement No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value under GAAP, and expands
disclosures about fair value measurements. FASB Statement No. 157 applies
to other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and for interim
periods
within those fiscal years. The Company does not anticipate any material impact
on its consolidated financial position or results of operations.
In December 2007, the FASB issued
proposed FASB Staff Position (FSP) 157-b, Effective Date of FASB Statement
No. 157, that would permit a one-year deferral in applying the measurement
provisions of statement No. 157 to non-financial assets and non-financial
liabilities (non-financial items) that are not recognized or disclosed at fair
value in an entity’s financial statements on a recurring basis (at least
annually). Therefore, if the change in fair value of a non-financial item is not
required to be recognized or disclosed in the financial statements on an annual
basis or more frequently, the effective date of application of statement 157 to
that item is deferred until fiscal years beginning after November 15, 2008
and interim periods within those fiscal years. This deferral does not apply,
however, to an entity that applies statement 157 in interim or annual financial
statements before proposed FSP 157-b is finalized. The Company is currently
evaluating the impact, if any, that the adoption of FSP 157-b will have on the
Company’s consolidated financial position or results of operations.
In September 2006, the SEC issued SAB
No. 108, Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB No. 108, companies might evaluate the materiality of
financial-statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new
misstatements added in the current year, and the balance sheet approach focusing
on the cumulative amount of misstatement present in a company’s balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB No. 108 now
requires that companies view financial statement misstatements as material if
they are material according to either the income statement or balance sheet
approach. The Company adopted this guidance on January 1, 2007. The
adoption did not have any effect on the Company’s consolidated financial
position or results of operations.
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. An entity shall report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. This statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
The Company does not anticipate any material impact on its consolidated
financial position or results of operations.
In March 2007, the FASB ratified
Emerging Issues Task Force Issue No. 06-10, Accounting for Collateral Assignment
Split-Dollar Life Insurance Agreements (EITF 06-10). EITF 06-10 provides
guidance for determining a liability for the postretirement benefit obligation
as well as recognition and measurement of the associated asset on the basis of
the terms of the collateral assignment agreement. EITF 06-10 is effective for
fiscal years beginning after December 15, 2007. The Company is currently
assessing the impact of EITF 06-10 on its consolidated financial position and
results of operations.
In December 2007, the FASB issued SFAS
No. 141 (R), Business Combinations. This statement establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The guidance will become effective as of the beginning of
a company’s fiscal year beginning after December 15, 2008. This new
pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51. This statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the
beginning of a company’s fiscal year beginning after December 15, 2008. The
Company is currently evaluating the potential impact the new pronouncement will
have on its consolidated financial statements.
In December 2007, the SEC issued SAB
No. 110 which amends and replaces Question 6 of Section D.2 of Topic 14,
Share-Based Payment, of
the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the
“simplified”
method for estimating the expected term of “plain vanilla” share option grants
after December 31, 2007. SAB 110 is effective January 1,
2008. The Company does not anticipate any material impact on its
consolidated financial position or results of operations.
In December 2007, the SEC issued SAB
No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings
expresses the views of the staff regarding written loan commitments that are
accounted for at fair value through earnings under generally accepted accounting
principles. To make the staff's views consistent with current authoritative
accounting guidance, the SAB revises and rescinds portions of SAB No. 105,
Application of Accounting Principles to Loan
Commitments. Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its consolidated
financial statements.
In June 2007, the EITF reached a
consensus on Issue No. 06-11, Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 states
that an entity should recognize a realized tax benefit associated with dividends
on nonvested equity shares, nonvested equity share units and outstanding equity
share options charged to retained earnings as an increase in additional paid in
capital. The amount recognized in additional paid in capital should be
included in the pool of excess tax benefits available to absorb potential future
tax deficiencies on share-based payment awards. EITF 06-11 should be
applied prospectively to income tax benefits of dividends on equity-classified
share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The Company expects that EITF 06-11 will not have
an impact on its consolidated financial statements.
In May 2007, the FASB issued FASB Staff
Position (FSP) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48
(FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax
position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1,
2007. The implementation of this standard did not have a material impact on the
Company’s consolidated financial position or results of operations.
In February 2007, the FASB issued
FASB Staff Position (FSP) FAS 158-1, Conforming Amendments to the
Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the
Related Staff Implementation Guides. This FSP makes conforming amendments to
other FASB statements and staff implementation guides and provides technical
corrections to SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans. The conforming amendments in this FSP
were adopted as of the effective date of SFAS No. 158. The adoption
did not have a material impact on the Company’s consolidated financial
statements or disclosures.
Results
of Operations for the years ended December 31, 2007 and 2006
Overview
The Company’s net income decreased $3.2
million, or 32.0%, to $6.9 million or $0.65 per diluted share for the year ended
December 31, 2007, compared to $10.1 million, or $0.95 per diluted share for the
prior year. There was a $5.6 million, or 8.9%, increase in total
interest income, reflecting a 12.6% increase in average loans outstanding and a
67.4% increase in average investment securities while interest expense increased
$9.6 million reflecting a 11.6% increase in average interest bearing deposits
outstanding and higher rates as well as a 50.2% increase in average borrowings
outstanding. Accordingly, net interest income decreased $4.0
million. Contributing to the $4.0 million decrease in net interest
income was the impact of $1.6 million in net interest income related to tax
refund loans in 2006 which was not earned in 2007 due to the discontinuation of
the program. Also there were interest reductions due to the increase
in non-performing loans in 2007. The provision for loan losses in
2007 increased $226,000 to $1.6 million, compared to $1.4 million in 2006,
reflecting the impact of a 2007 increase in non-accrual loans as well as an
increase in reserves on certain loans due to a downturn in the housing market
which was offset by $283,000 in net tax refund recoveries in 2007 versus
$359,000 in net tax refund charge-offs in 2006. Non-interest income
decreased $567,000 to $3.1 million in 2007 compared to $3.6 million in
2006. Non-interest expenses increased $347,000 to $21.4 million
compared to $21.1 million in 2006. Return on average assets and
average equity of 0.71% and 8.86% respectively in 2007 compared to 1.19% and
14.59% respectively in 2006.
Analysis
of Net Interest Income
Historically, the Company’s earnings
have depended primarily upon Republic’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 following table provides an analysis of net interest income on
an annualized basis, setting forth for the periods (i) average assets,
liabilities, and shareholders’ equity, (ii) interest income earned on
interest-earning assets and interest expense on interest-bearing liabilities,
(iii) average yields earned on interest-earning assets and average rates on
interest-bearing liabilities, and (iv) Republic’s net interest margin (net
interest income as a percentage of average total interest-earning assets).
Averages are computed based on daily balances. Non-accrual loans are included in
average loans receivable. Yields are adjusted for tax equivalency in 2007 and
2006, as Republic had tax-exempt income. Republic had no tax exempt
income on securities in 2005.
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Yield/
Rate
(1)
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Yield/
Rate
(1)
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Yield/
Rate
(1)
|
|
(Dollars
in thousands)
|
For
the Year
Ended
December
31, 2007
|
|
For
the Year
Ended
December
31, 2006
|
|
For
the Year
Ended
December
31, 2005
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-earning
assets
|
$ 13,923
|
|
$ 686
|
|
4.93%
|
|
$ 25,884
|
|
$ 1,291
|
|
4.99%
|
|
$ 36,587
|
|
$ 1,078
|
|
2.95%
|
|
Investment securities and
restricted
stock
|
95,715
|
|
5,752
|
|
6.01%
|
|
57,163
|
|
3,282
|
|
5.74%
|
|
51,285
|
|
1,972
|
|
3.85%
|
|
Loans
receivable
|
820,380
|
|
62,184
|
|
7.58%
|
|
728,754
|
|
58,254
|
|
7.99%
|
|
602,031
|
|
42,331
|
|
7.03%
|
|
Total
interest-earning
assets
|
930,018
|
|
68,622
|
|
7.38%
|
|
811,801
|
|
62,827
|
|
7.74%
|
|
689,903
|
|
45,381
|
|
6.58%
|
|
Other
assets
|
39,889
|
|
|
|
|
|
36,985
|
|
|
|
|
|
41,239
|
|
|
|
|
|
Total
assets
|
$
969,907
|
|
|
|
|
|
$
848,786
|
|
|
|
|
|
$
731,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand - non-interest
bearing
|
$ 78,641
|
|
$ -
|
|
N/A
|
|
$ 82,233
|
|
$ -
|
|
N/A
|
|
$ 88,702
|
|
$ -
|
|
N/A
|
|
Demand –
interest-bearing
|
38,850
|
|
428
|
|
1.10%
|
|
53,073
|
|
565
|
|
1.06%
|
|
49,118
|
|
332
|
|
0.68%
|
|
Money market &
savings
|
266,706
|
|
11,936
|
|
4.48%
|
|
240,189
|
|
9,109
|
|
3.79%
|
|
238,786
|
|
6,026
|
|
2.52%
|
|
Time
deposits
|
361,120
|
|
18,822
|
|
5.21%
|
|
304,375
|
|
14,109
|
|
4.64%
|
|
211,972
|
|
6,789
|
|
3.20%
|
|
Total
deposits
|
745,317
|
|
31,186
|
|
4.18%
|
|
679,870
|
|
23,783
|
|
3.50%
|
|
588,578
|
|
13,147
|
|
2.23%
|
|
Total
interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing
deposits
|
666,676
|
|
31,186
|
|
4.68%
|
|
597,637
|
|
23,783
|
|
3.98%
|
|
499,876
|
|
13,147
|
|
2.63%
|
|
Other
borrowings
|
133,122
|
|
7,121
|
|
5.35%
|
|
88,609
|
|
4,896
|
|
5.53%
|
|
75,875
|
|
3,076
|
|
4.05%
|
|
Total
interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
liabilities
|
799,798
|
|
38,307
|
|
4.79%
|
|
686,246
|
|
28,679
|
|
4.18%
|
|
575,751
|
|
16,223
|
|
2.82%
|
|
Total
deposits and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
borrowings
|
878,439
|
|
38,307
|
|
4.36%
|
|
768,479
|
|
28,679
|
|
3.73%
|
|
664,453
|
|
16,223
|
|
2.44%
|
|
Non-interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
13,734
|
|
|
|
|
|
10,981
|
|
|
|
|
|
8,242
|
|
|
|
|
|
Shareholders’
equity
|
77,734
|
|
|
|
|
|
69,326
|
|
|
|
|
|
58,447
|
|
|
|
|
|
Total
liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
$
969,907
|
|
|
|
|
|
$
848,786
|
|
|
|
|
|
$
731,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
(2)
|
|
|
$
30,315
|
|
|
|
|
|
$
34,148
|
|
|
|
|
|
$
29,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest
spread
|
|
|
|
|
2.59%
|
|
|
|
|
|
3.56%
|
|
|
|
|
|
3.76%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin
(2)
|
|
|
|
|
3.26%
|
|
|
|
|
|
4.20%
|
|
|
|
|
|
4.23%
|
|
__________
(1) Yields
on investments are calculated based on amortized cost.
(2) The
net interest margin is calculated by dividing net interest income by average
total interest earning assets. Both net interest income and net
interest margin were increased in 2007 and 2006 over the financial statement
amount, to adjust for tax equivalency.
Rate/Volume Analysis of Changes in Net
Interest Income
Net interest income may also be
analyzed by segregating the volume and rate components of interest income and
interest expense. The following table sets forth an analysis of volume and rate
changes in net interest income for the periods indicated. For purposes of this
table, changes in interest income and expense are allocated to volume and rate
categories based upon the respective changes in average balances and average
rates.
|
|
Year
ended December 31,
2007
vs. 2006
|
|
|
Year
ended December 31,
2006
vs. 2005
|
|
|
|
|
|
|
Change
due to
|
|
|
|
|
|
|
|
|
Change
due to
|
|
|
|
|
(Dollars
in thousands)
|
|
Average
Volume
|
|
|
Average
Rate
|
|
|
Total
|
|
|
Average
Volume
|
|
|
Average
Rate
|
|
|
Total
|
|
Interest
earned on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal funds sold and
other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interest-earning
assets
|
|
$
|
(589
|
)
|
|
$
|
(16
|
)
|
|
$
|
(605
|
)
|
|
$
|
(534
|
)
|
|
$
|
747
|
|
|
$
|
213
|
|
Securities
|
|
|
2,317
|
|
|
|
153
|
|
|
|
2,470
|
|
|
|
337
|
|
|
|
973
|
|
|
|
1,310
|
|
Loans
|
|
|
6,945
|
|
|
|
(3,015
|
)
|
|
|
3,930
|
|
|
|
10,130
|
|
|
|
5,793
|
|
|
|
15,923
|
|
Total
interest earning assets
|
|
$
|
8,673
|
|
|
$
|
(2,878
|
)
|
|
$
|
5,795
|
|
|
$
|
9,933
|
|
|
$
|
7,513
|
|
|
$
|
17,446
|
|
Interest
expense of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand
deposits
|
|
$
|
157
|
|
|
$
|
(20
|
)
|
|
$
|
137
|
|
|
$
|
(42
|
)
|
|
$
|
(191
|
)
|
|
$
|
(233
|
)
|
Money market and
savings
|
|
|
(1,187
|
)
|
|
|
(1,640
|
)
|
|
|
(2,827
|
)
|
|
|
(53
|
)
|
|
|
(3,030
|
)
|
|
|
(3,083
|
)
|
Time deposits
|
|
|
(2,958
|
)
|
|
|
(1,755
|
)
|
|
|
(4,713
|
)
|
|
|
(4,283
|
)
|
|
|
(3,037
|
)
|
|
|
(7,320
|
)
|
Total
deposit interest expense
|
|
|
(3,988
|
)
|
|
|
(3,415
|
)
|
|
|
(7,403
|
)
|
|
|
(4,378
|
)
|
|
|
(6,258
|
)
|
|
|
(10,636
|
)
|
Other borrowings
|
|
|
(2,381
|
)
|
|
|
156
|
|
|
|
(2,225
|
)
|
|
|
(704
|
)
|
|
|
(1,116
|
)
|
|
|
(1,820
|
)
|
Total
interest expense
|
|
|
(6,369
|
)
|
|
|
(3,259
|
)
|
|
|
(9,628
|
)
|
|
|
(5,082
|
)
|
|
|
(7,374
|
)
|
|
|
(12,456
|
)
|
Net interest
income
|
|
$
|
2,304
|
|
|
$
|
(6,137
|
)
|
|
$
|
(3,833
|
)
|
|
$
|
4,851
|
|
|
$
|
139
|
|
|
$
|
4,990
|
|
Net
Interest Income
The
Company’s tax equivalent net interest margin decreased 94 basis points to 3.26%
for 2007 compared to 4.20% in 2006. Excluding the impact of tax
refund loans, which were substantially all a first quarter 2006 event, the net
interest margin was 3.26% in 2007 and 4.04% in 2006.
While
yields on interest-bearing assets decreased 36 basis points to 7.38% in 2007
from 7.74% in 2006, the yield on total deposits and other borrowings increased
63 basis points to 4.36% in 2007 from 3.73% in 2006. The decrease in
yields on assets resulted primarily from the high yield tax refund loans
recorded in 2006 as well as interest reductions due to the increase in non
accrual loans in 2007 and rate reductions in the last four months of 2007 on
variable rate loans as a result of actions taken by the Federal
Reserve. The increase in yields on deposits was due to the repricing
of maturing time deposits at higher rates and increases in rates on money market
and savings deposits. The cost of overnight borrowings decreased
slightly as a result of actions taken by the Federal Reserve but those actions
had limited immediate impact in reducing the cost of deposits.
The
Company’s tax equivalent net interest income decreased $3.8 million, or 11.2%,
to $30.3 million for 2007 from $34.1 million for 2006. As shown in
the Rate Volume table above, the decrease in net interest income was due
primarily to higher rates on deposits and lower rates on loans as discussed in
the previous paragraph. These factors more than offset the impact of
the growth in average interest-earning assets, primarily
loans. Average interest-earning assets amounted to $930.0 million for
2007 and $811.8 million for 2006. The $118.2 million increase
resulted from loan growth of $91.6 million and securities growth of $38.6
million.
The
Company’s total tax equivalent interest income increased $5.8 million, or 9.2%,
to $68.6 million for 2007 from $62.8 million for 2006. Interest and
fees on loans increased $3.9 million, or 6.7%, to $62.2 million for 2007 from
$58.3 million for 2006. The increase in interest and fees on loans of
$3.9 million resulted from a 12.6% increase in average loans outstanding less
interest reductions due to an increase in non-performing loans in 2007 and rate
reductions on variable rate loans in the last four months of
2007. Also, $1.9 million in interest on tax refund loans was realized
in 2006. Interest and dividends on investment securities increased
$2.5 million to $5.8 million for 2007 from $3.3 million for 2006. The
increase reflected an increase in average securities outstanding of $38.6
million, or 67.4%, to $95.7 million for 2007 from $57.2 million for
2006. Interest on federal funds sold and other interest earning
assets decreased $605,000, or 46.9%, to $686,000 for 2007
from $1.3
million for 2006. The decrease reflected a $12.0 million decrease in
average balances to $13.9 million for 2007 from $25.9 million for
2006.
The
Company’s total interest expense increased $9.6 million, or 33.6%, to $38.3
million for 2007 from $28.7 million for 2006. Interest-bearing
liabilities averaged $799.8 million for 2007 from $686.2 million for 2006, or an
increase of $113.6 million. The increase reflected additional funding
for loan and securities growth. Average deposit balances increased
$65.4 million while there was a $44.5 million increase in average other
borrowings. The average rate paid on interest-bearing liabilities
increased 61 basis points to 4.79% for 2007 from 4.18% for
2006. Interest expense on time deposit balances increased $4.7
million to $18.8 million for 2007 from $14.1 million for 2006. Money
market and savings interest expense increased $2.8 million to $11.9 million for
2007 from $9.1 million for 2006. The majority of the increase in
interest expense on deposits reflected the higher average deposit balances as
well as the higher short term interest rate environment for the first eight
months of 2007. The 100 basis point decrease in short term interest
rates from September 2007 through December 2007 had minimal effect on deposit
rates in 2007. Accordingly, rates on total interest-bearing deposits
increased 70 basis points in 2007 compared to 2006.
Interest
expense on other borrowings increased $2.2 million to $7.1 million for 2007 from
$4.9 million for 2006, as a result of increased average
balances. Average other borrowings, primarily overnight FHLB
borrowings, increased $44.5 million, or 50.2%, between those respective
periods. Increases in balances were utilized to fund loan
growth. Rates on other borrowings, primarily due to the 100 basis
point decrease in short-term interest rates from September 2007 through December
2007 decreased to 5.35% for 2007 from 5.53% for 2006. Interest
expense on other borrowings also included the impact of $8.8 million of average
trust preferred securities.
Provision for Loan
Losses
The
provision for loan losses is charged to operations in an amount necessary to
bring the total allowance for loan losses to a level that reflects the known and
inherent losses in the portfolio. The provision for loan losses
amounted to $1.6 million for 2007 compared to $1.4 million for
2006. The 2006 provision reflected $359,000 for net charge-offs of
tax refund loans, which were more than offset by $1.6 million in related net
revenues. The comparable 2007 provision reflected $283,000 for net
recoveries on tax refund loans. This favorable variance was more than
offset by an increase in the 2007 provision for loan losses of $1.4 million for
loans transferred to non-accrual status in 2007 and $638,000 for increases in
reserves on certain loans due to a downturn in the housing
market. Those increases were partially offset by the reversal of
reserves on loans which were paid down or otherwise disposed of. The
remaining provisions in both both periods also reflected amounts required to
increase the allowance for loan growth in accordance with the Company’s
methodology. Non-accrual loans increased from $6.9 million at
December 31, 2006 to $22.3 million at December 31, 2007.
Non-Interest Income
Total
non-interest income decreased $567,000 to $3.1 million for 2007 compared to $3.6
million for 2006, primarily due to a decrease of $292,000 related to service
fees on deposit accounts. The decrease in service fees on deposit
accounts reflected the termination of services to several large
customers. In addition, other income decreased $329,000 primarily due
to fee recoveries recorded in 2006. Loan advisory and servicing fees decreased
$57,000 which was partially offset by a $56,000 increase in bank owned life
insurance income and a $55,000 increase in gain on sales of other real estate
owned.
Non-Interest Expenses
Total
non-interest expenses increased $347,000, or 1.7%, to $21.4 million for 2007
from $21.0 million in 2006. Salaries and employee benefits decreased
$1.0 million, or 8.7%, to $10.6 million for 2007 from $11.6 million in
2006. That decrease reflected a reduction in bonuses and incentives
expense of $1.0 million.
Occupancy
expense increased $533,000, or 28.2%, to $2.4 million for 2007 compared to $1.9
million for 2006. The increase reflected two additional branches
which opened in the second and third quarters of 2006 as well as the corporate
headquarters move in second quarter 2007 and an additional branch which opened
in the third quarter of 2007.
Depreciation
expense increased $352,000, of 34.9%, to $1.4 million for 2007 compared to $1.0
million for 2006. The increase was primarily due to the impact of the
three additional branch locations and the corporate headquarters
move.
Legal
fees increased $96,000, or 14.7%, to $750,000 for 2007 compared to $654,000 for
2006 resulting from increased fees on a number of different
matters.
Advertising
expenses increased $9,000, or 1.8%, to $503,000 for 2007 compared to $494,000
for 2006. The increase was primarily due to higher levels of print
advertising.
Data
processing increased $197,000, or 39.7%, to $693,000 for 2007 compared to
$496,000 for 2006, primarily due to Check 21 related expenses and other system
enhancements.
Insurance
expense increased $45,000, or 12.7%, to $398,000 for 2007 compared to $353,000
for 2006, resulting from the overall growth of the Company.
Professional
fees decreased $20,000, or 3.6%, to $542,000 for 2007 compared to $562,000 for
2006, reflecting decreases in recruiting expenses.
Taxes,
other increased $79,000, or 10.7%, to $820,000 for 2007 compared to $741,000 for
2006. The increase reflected an increase in Pennsylvania shares tax,
which is assessed at an amount of 1.25% on a 6 year moving average of regulatory
capital. The full amount of the increase resulted from increased
capital.
Other
expenses increased $60,000, or 1.9%, to $3.2 million for 2007 compared to $3.2
million for 2006, which reflected the impact of the three additional branch
locations.
Provision
for Income Taxes
The
provision for income taxes decreased $1.9 million to $3.3 million from $5.2
million for 2006. That decrease was primarily the result of the
decrease in pre-tax income. The effective tax rates in those periods
were 32% amd 34%, respectively.
Results
of Operations for the years ended December 31, 2006 and 2005
Overview
The Company's net income increased $1.2
million, or 13.8%, to $10.1 million or $1.04 per diluted share for the year
ended December 31, 2006, compared to $8.9 million, or $0.93 per diluted share
for the prior year. The improvement reflected a $17.4 million, or 38.3%,
increase in total interest income, due primarily to a 21.0% increase in average
loans outstanding and secondarily to higher rates. Interest expense
increased $12.5 million, also reflecting higher rates, a 15.5% increase in
average deposits outstanding and a 16.8% in average borrowings
outstanding. Accordingly, net interest income increased $4.9
million. Partially offsetting the increase in net interest income
were the provision for loan losses (up approximately $200 thousand),
non-interest income (level with 2005 at $3.6 million), and non-interest expenses
(up $2.8 million). The decrease in return on average assets and
average equity from 1.19% and 14.59% respectively in 2006 compared to 1.22% and
15.22% respectively in 2005, resulted primarily from increased funding
costs.
Net
Interest Income
The
Company’s tax equivalent net interest margin decreased 3 basis points to 4.20%
for 2006 compared to 4.23% for 2005. While yields on interest-earning
assets increased 116 basis points to 7.74% in 2006 from 6.58% in 2005, the yield
on total deposits and other borrowings increased 129 basis points to 3.73% from
2.44% between 2006 and 2005. The increases in yields on assets and
cost of funds resulted primarily from the 300 basis points of increases in
short-term interest rates between the two periods. The resulting
decrease in margin reflected an increase in interest bearing assets of $121.9
million, while interest bearing liabilities increased $110.5
million.
The
Company's tax equivalent net interest income increased $5.0 million, or 17.1%,
to $34.1 million for 2006 from $29.2 million for 2005. As shown in the Rate
Volume table above, the increase in net interest income was due primarily to the
increased volume of loans. Higher rates on loans resulted primarily from
variable rate loans which immediately adjust to increases in the prime
rate. Interest expense increased primarily as a result of higher
rates, resulting from the higher short-term interest rate environment, and also
reflected the impact of the increase in higher cost time deposit
balances.
The
Company's total tax equivalent interest income increased $17.4 million, or
38.4%, to $62.8 million for 2006, from $45.4 million for 2005. Interest and fees
on loans increased $15.9 million to $58.3 million for 2006, from $42.3 million
for 2005. The majority of the increase resulted from a 21.0% increase
in average loan balances. For 2006, average loan balances amounted to $728.8
million, compared to $602.0 million in 2005. The balance of the increase in
interest on loans resulted
primarily
from the repricing of the variable rate loan portfolio to higher short term
market interest rates. Tax equivalent interest and dividends on
investment securities increased $1.2 million to $3.3 million for 2006, from $2.0
million for 2005. This increase reflected rate increases on variable rate
securities as well as an increase in average securities outstanding to $57.2
million for 2006 from $51.3 million for 2005. Interest on
federal funds sold and other interest-earning assets increased $213,000, or
19.8%, to $1.3 million for 2006 from $1.1 million for 2005 as increases in short
term market interest rates more than offset the $10.7 million
decrease in average balances to $25.9 million for 2006 from $36.6 million for
2005.
The
Company's total interest expense increased $12.5 million, or 76.8%, to $28.7
million for 2006, from $16.2 million for 2005. Interest-bearing
liabilities averaged $686.2 million for 2006, from $575.8 million for 2005, an
increase of $110.5 million. The increase reflected additional funding utilized
for loan growth. Average time deposit (certificates of deposit) balances
increased $92.4 million, or 43.6%, to $304.4 million for 2006 from $212.0
million in 2005 while lower cost average transaction account balances declined
$1.1 million, or 0.3%, to $375.5 million for 2006 from $376.6 million for
2005. The average rate paid on interest-bearing liabilities increased
136 basis points to 4.18% for 2006. Money market and savings expense
increased $3.1 million to $9.1 million for 2006 from $6.0 million for 2005, due
almost entirely to increases in short-term rates as average balances increased
$1.4 million, or 0.6%. Interest expense on time deposits increased
$7.3 million, or 107.8%, to $14.1 million for 2006 from $6.8 million for 2005,
primarily as a result of the increased average balances as well as
rates. As time deposits mature, they frequently reprice at market
rates which are currently 5% or more. Interest expense on other
borrowings increased $1.8 million to $4.9 million for 2006 from $3.1 million for
2005, primarily as a result of higher short term rates. Average other
borrowings, primarily overnight FHLB borrowings, increased $12.7 million, or
16.8%, to $88.6 million for 2006 from $75.9 million for 2005. Rates
on overnight borrowings reflected the higher short-term interest rate
environment as the rate on other borrowings increased to 5.53% for 2006 from
4.05% for 2005. Interest expense on other borrowings also includes
the interest expense on $6.2 million of trust preferred securities which was
approximately $525,000 and $444,000 in 2006 and 2005, respectively.
Provision for Loan
Losses
The
provision for loan losses is charged to operations in an amount necessary to
bring the total allowance for loan losses to a level that reflects the known and
estimated inherent losses in the portfolio. The provision for loan losses
amounted to $1.4 million in 2006. The provision reflected $359,000 for net
losses on tax refund loans, which were more than offset by $1.6 million in
related revenues, and amounts required to increase the allowance for loan growth
in accordance with the Company’s methodology. The prior year provision of $1.2
million reflected $496,000 for net losses on tax refund loans, which more than
offset by $1.2 million in related revenues. In addition, the 2005
provision was reduced as a result of a $250,000 recovery on a commercial loan
which had been charged off in the prior year. That recovery resulted
in an allowance balance which exceeded the level deemed necessary by the
Company’s methodology and the provision was reduced accordingly.
Non-Interest Income
Total
non-interest income increased $26,000 to $3.6 million for 2006. A
$661,000 increase in loan advisory and servicing fees and a $130,000 gain on the
sale of other real estate owned were offset by a decrease of $521,000 in service
fees on deposit accounts, a one time $251,000 award in a lawsuit recorded in
2005, and a $97,000 gain on call of security also recorded in
2005. The $521,000 decrease in service fees on deposit accounts
reflected the termination of services to several large customers.
Non-Interest Expenses
Total
non-interest expenses increased $2.8 million or 15.4% to $21.0 million for 2006,
from $18.2 million for 2005. Salaries and employee benefits increased $2.1
million or 21.5%, to $11.6 million for 2006, from $9.6 million for 2005. That
increase reflected additional salary expense related to commercial loan and
deposit production, including related support staff, and staff for two new
branches. It also reflected annual merit increases which are targeted at
approximately 3.5%.
Occupancy
expense increased $321,000, or 20.5%, to $1.9 million for 2006, versus $1.6
million for 2005. The increase reflected two additional branch locations which
opened in 2006.
Depreciation
expense increased $17,000 or 1.7% to $1.0 million for 2006. 2006
expense reflected the impact of the two additional branch locations, which was
partially offset by the 2005 write-off assets determined to have shorter lives
than originally expected.
Legal
fees decreased $19,000, or 2.8%, to $654,000 in 2006, compared to $673,000 in
2005, resulting from reduced fees on a number of different matters.
Other
real estate expense decreased $34,000, or 77.3%, to $10,000 in 2006, compared to
$44,000 in 2005. The decrease resulted from the timing of property
tax payments.
Advertising
expense increased $302,000, or 157.3%, to $494,000 in 2006, compared to $192,000
in 2005. The increase was primarily due to higher levels of TV,
radio, print, and direct mail advertising including advertising two new branches
and deposit promotions.
Data
processing expense decreased $8,000, or 1.6%, to $496,000 in 2006, compared to
$504,000 in 2005.
Insurance
expense increased $57,000 or 19.3% to $353,000 in 2006, compared to $296,000 in
2005. The increase was primarily due the overall growth of the
Company.
Professional
fees decreased $207,000 or 26.9% to $562,000 in 2006, compared to $769,000 in
2005. The decrease reflected lower expenses connected with
Sarbanes-Oxley compliance.
Taxes,
other than income increased $53,000 or 7.7% to $741,000 for 2006 versus $688,000
for 2005. The increase reflected an increase in Pennsylvania shares tax
resulting from increases in the Company’s capital. The tax is
assessed at an annual rate of 1.25% on a 6 year moving average of regulatory
capital.
Other
expenses increased $268,000, or 9.2% to $3.2 million for 2006, from $2.9 million
for 2005, which reflected increases of $114,000 in training and development
expenses, $94,000 in expenses for the two additional branch locations and
$56,000 in loan production expense.
Provision for Income
Taxes
The
provision for income taxes for continuing operations increased $721,000, to $5.2
million for 2006, from $4.5 million for 2005. That increase was primarily the
result of the increase in pre-tax income. The effective tax rates in those
periods were comparable at 34.0% and 33.5% respectively.
Financial
Condition
December 31, 2007 Compared to
December 31, 2006
Total
assets increased $7.5 million to $1.016 billion at December 31, 2007, compared
to $1.009 billion at December 31, 2006. This net increase reflected a higher
balance in loans offset by lower balances in cash and cash equivalents and
investment securities.
Loans:
The loan
portfolio, which represents the Company’s largest asset, is its most significant
source of interest income. The Company’s lending strategy is to focus on small
and medium sized businesses and professionals that seek highly personalized
banking services. Total loans increased $29.5 million, or 3.7%, to $821.5
million at December 31, 2007, versus $792.1 million at December 31, 2006. The
increase reflected $26.4 million, or 3.4%, of growth in commercial and
construction loans. The loan portfolio consists of secured and unsecured
commercial loans including commercial real estate, construction loans,
residential mortgages, automobile loans, home improvement loans, home equity
loans and lines of credit, overdraft lines of credit and others. Republic’s
commercial loans typically range between $250,000 and $5,000,000 but customers
may borrow significantly larger amounts up to Republic’s legal lending limit of
approximately $15.0 million at December 31, 2007. Individual customers may have
several loans that are secured by different collateral which are in total
subject to that lending limit. The aggregate amount of those relationships that
exceeded $8.8 million at December 31, 2007, was $372.9 million. The $8.8 million
threshold approximates 10% of total capital and reflects an additional internal
monitoring guideline.
Investment
Securities:
Investment
securities available-for-sale are investments which may be sold in response to
changing market and interest rate conditions and for liquidity and other
purposes. The Company’s investment securities available-for-sale consist
primarily of U.S Government debt securities, U.S. Government agency issued
mortgage backed securities, municipal securities and debt securities, which
include corporate bonds and trust preferred securities. Available-for-sale
securities totaled $83.7 million at December 31, 2007, a decrease of $18.4
million, or 18.0%, from year-end 2006. This decrease reflected $28.2 million in
proceeds from maturities and calls on securities partially offset by $9.6
million in purchases of primarily mortgage backed and municipal
securities. The purchases were made to decrease exposure to lower
interest rate environments, and enhance net interest income. At
December 31, 2007 and December 31, 2006, the portfolio had net unrealized gains
of $409,000 and $427,000, respectively.
Investment
securities held-to-maturity are investments for which there is the intent and
ability to hold the investment to maturity. These investments are carried at
amortized cost. The held-to-maturity portfolio consists primarily of debt
securities and stocks. At December 31, 2007, securities held to maturity totaled
$282,000, a decrease of $51,000 or 15.3%, from $333,000 at year-end 2006. The
decline reflected a reduction in the amount of debt securities. At both dates,
respective carrying values approximated market values.
Restricted
Stock:
Republic is required to maintain FHLB
stock in proportion to its outstanding debt to FHLB. When the debt is
repaid, the purchase price of the stock is refunded. At December 31,
2007, FHLB stock totaled $6.2 million, a decrease of $446,000, or 6.7%, from
$6.7 million at December 31, 2006.
Republic
is also required to maintain ACBB stock as a condition of a contingency line of
credit. At December 31, 2007 and 2006, ACBB stock totaled
$143,000.
Cash
and Cash Equivalents:
Cash and
due from banks, interest bearing deposits and federal funds sold comprise this
category which consists of the Company’s most liquid assets. The aggregate
amount in these three categories decreased by $9.9 million, to $73.2 million at
December 31, 2007, from $83.1 million at December 31, 2006, primarily due
to an $8.5 million decrease in cash and due from banks.
Fixed
Assets:
Bank
premises and equipment, net of accumulated depreciation totaled $11.3 million at
December 31, 2007 an increase of $5.6 million, or 99.9% from $5.6 million at
December 31, 2006, reflecting main office expenditures and branch
expansion.
Other
Real Estate Owned:
At
December 31, 2007, the Company had assets classified as other real estate owned
with a value of $3.7 million comprised of a tract development project for single
family homes with a value of $3.5 million, a commercial building with a value of
$109,000 and a parcel of land with a value of $42,000. At December
31, 2006, the Company had parcels of land classified as other real estate owned
with a value of $572,000, of which assets valued at $530,000 were sold in
2007.
Bank
Owned Life Insurance:
At
December 31, 2007, the value of the insurance was $11.7 million, an increase of
$424,000, or 3.8%, from $11.3 million at December 31, 2006. The
increase reflected income earned on the insurance policies.
Other
Assets:
Other
assets decreased by $1.6 million to $8.0 million at December 31, 2007, from $9.6
million at December 31, 2006, primarily due to the effect of a $2.5 million
adjustment to the deferred tax asset (offset in other liabilities) partially
offset by an increase of $649,000 in assets related to a deferred compensation
plan.
Deposits:
Deposits,
which include non-interest and interest-bearing demand deposits, money market,
savings and time deposits including some brokered deposits, are Republic’s major
source of funding. Deposits are generally solicited from the Company’s market
area through the offering of a variety of products to attract and retain
customers, with a primary focus on multi-product relationships.
Total
deposits increased by $26.1 million to $780.9 million at December 31, 2007, from
$754.8 million at December 31, 2006. Average transaction accounts
increased 2.3% or $8.7 million from the prior year end to $384.2 million in
2007. Time deposits increased $54.1 million, or 14.7%, to $422.9
million at December 31, 2007, versus $368.8 million at the prior
year-end.
FHLB
Borrowings and Overnight Advances:
FHLB
borrowings and overnight advances are used to supplement deposit generation.
Republic had no term borrowings at December 31, 2007 and December 31, 2006,
respectively. Republic had short-term borrowings (overnight) of $133.4 million
at December 31, 2007 versus $159.7 million at the prior year-end.
Subordinated
Debt:
Subordinated
debt amounted to $11.3 million at December 31, 2007, compared to $6.2 million at
December 31, 2006, as a result of a $5.2 million issuance of trust preferred
securities in June 2007 at a rate of LIBOR plus 1.55%.
Shareholders’
Equity:
Total
shareholders’ equity increased $5.7 million to $80.5 million at December 31,
2007, versus $74.7 million at December 31, 2006. This increase was
primarily the result of 2007 net income of $6.9 million, partially offset by
$1.3 million for the purchase of treasury shares.
Commitments,
Contingencies and Concentrations
The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
Credit
risk is defined as the possibility of sustaining a loss due to the failure of
the other parties to a financial instrument to perform in accordance with the
terms of the contract. The maximum exposure to credit loss under commitments to
extend credit and standby letters of credit is represented by the contractual
amount of these instruments. The Company uses the same underwriting standards
and policies in making credit commitments as it does for on-balance-sheet
instruments.
Financial
instruments whose contract amounts represent potential credit risk are
commitments to extend credit of approximately $160.2 million and $163.2 million
and standby letters of credit of approximately $4.6 million and $7.3 million at
December 31, 2007 and 2006, respectively. Commitments often
expire without being drawn upon. The $160.2 million of commitments to extend
credit at December 31, 2007, were substantially all variable rate
commitments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and many require the
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained upon extension of
credit is based on management’s credit evaluation of the customer. Collateral
held varies but may include real estate, marketable securities, pledged
deposits, equipment and accounts receivable.
Standby
letters of credit are conditional commitments issued that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management’s credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
Contingencies
also include a standby letter of credit issued by an unrelated bank in the
amount of $170,000 which was required by a lessor.
C
ontractual obligations and other
commitments
The following table sets forth
contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2007:
(Dollars
in thousands)
|
Total
|
|
Less
than
One Year
|
|
One
to
Three
Years
|
|
Three
to
Five
Years
|
|
After
Five
Years
|
Minimum
annual rentals or noncancellable
operating
leases
|
$ 44,926
|
|
$ 1,394
|
|
$ 3,426
|
|
$ 3,947
|
|
$
36,159
|
Remaining
contractual maturities of time
deposits
|
422,935
|
|
406,945
|
|
15,199
|
|
736
|
|
55
|
Subordinated
debt
|
11,341
|
|
-
|
|
-
|
|
-
|
|
11,341
|
Employment
agreements
|
1,736
|
|
828
|
|
908
|
|
-
|
|
-
|
Former
CEO SERP
|
143
|
|
95
|
|
48
|
|
-
|
|
-
|
Director
and Officer retirement plan
obligations
|
1,467
|
|
117
|
|
177
|
|
252
|
|
921
|
Loan
commitments
|
160,245
|
|
113,718
|
|
21,189
|
|
2,624
|
|
22,714
|
Standby
letters of credit
|
4,613
|
|
4,451
|
|
54
|
|
108
|
|
-
|
Total
|
$
647,406
|
|
$
527,548
|
|
$
41,001
|
|
$ 7,667
|
|
$
71,190
|
As
of December 31, 2007, the Company had entered into non-cancelable lease
agreements for its main office and operations center, ten current Republic
retail branch facilities, and a new branch facility scheduled to open in 2008,
expiring through August 31, 2037, including renewal options. The leases are
accounted for as operating leases. The minimum annual rental payments required
under these leases are $44.9 million through the year 2037. The
Company has entered into employment agreements with the CEO of the Company and
the President of Republic. The aggregate commitment for future salaries and
benefits under these employment agreements at December 31, 2007 is approximately
$1.7 million. The Company has retirement plan agreements with certain
Directors and Officers. The accrued benefits under the plan at
December 31, 2007 was approximately $1.5 million, with a minimum age of 65
established to qualify for the payments.
The
Company and Republic 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
Republic, if any, resulting from such actions will not have a material effect on
the financial condition or results of operations of the Company and
Republic.
At
December 31, 2007, the Company had no foreign loans and no loan concentrations
exceeding 10% of total loans except for credits extended to real estate
operators and lessors in the aggregate amount of $261.9 million, which
represented 31.9% of gross loans receivable at December 31, 2007. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and
others. In addition, credits extended for single family construction
amounted to $101.6 million, which represented 12.4% of gross loans receivable at
December 31, 2007. Loan concentrations are considered to exist when there is
amounts loaned to a multiple number of borrowers engaged in similar activities
that management believes would cause them to be similarly impacted by economic
or other conditions.
Interest
Rate Risk Management
Interest
rate risk management involves managing the extent to which interest-sensitive
assets and interest-sensitive liabilities are matched. The Company attempts to
optimize net interest income while managing period-to-period fluctuations
therein. The Company typically defines interest-sensitive assets and
interest-sensitive liabilities as those that reprice within one year or
less.
The
difference between interest-sensitive assets and interest-sensitive liabilities
is known as the “interest-sensitivity gap” (“GAP”). A positive GAP occurs when
interest-sensitive assets exceed interest-sensitive liabilities repricing in the
same time periods, and a negative GAP occurs when interest-sensitive liabilities
exceed interest-sensitive assets repricing in the same time periods.
A negative GAP ratio suggests that a financial institution may be better
positioned to take advantage of declining interest rates rather than increasing
interest rates, and a positive GAP ratio suggests the
converse. Static GAP analysis describes interest rate sensitivity at
a point in time. However, it alone does not accurately measure the magnitude of
changes in net interest income since changes in interest rates do not impact all
categories of assets and liabilities equally or
simultaneously. Interest rate sensitivity analysis also requires
assumptions about repricing certain categories of assets and
liabilities. 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, including prepayments based on
historical data and current market trends. Savings, money market and
interest-bearing demand accounts do not have a stated maturity or repricing term
and can be withdrawn or repriced at any time. Management estimates the repricing
characteristics of these accounts based on historical performance and other
deposit behavior assumptions. These deposits are not considered to reprice
simultaneously and, accordingly, a portion of the deposits are moved into time
brackets exceeding one year. However, management may choose not to reprice
liabilities proportionally to changes in market interest rates, for competitive
or other reasons.
Shortcomings,
inherent in a simplified and static GAP analysis, 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, prepayments and
other cash flows could also deviate significantly from those assumed in
calculating GAP in the manner presented in the table below.
The
Company attempts to manage its assets and liabilities in a manner that optimizes
net interest income in a range of interest rate environments. Management uses
GAP analysis and simulation models to monitor behavior of its interest sensitive
assets and liabilities. Adjustments to the mix of assets and liabilities are
made periodically in an effort to provide steady growth in net interest
income.
Management
presently believes that the effect on Republic of any future fall in interest
rates, reflected in lower yielding assets, could be detrimental since Republic
may not have the immediate ability to commensurately decrease rates on its
interest bearing liabilities, primarily time deposits, other borrowings and
certain transaction accounts. An increase in interest rates could have a
negative effect on Republic, due to a possible lag in the repricing of core
deposits not assumed in the model.
The
following tables present a summary of the Company’s interest rate sensitivity
GAP at December 31, 2007. Amounts shown in the table include both
estimated maturities and instruments scheduled to reprice, including prime based
loans. For purposes of these tables, the Company has used assumptions
based on industry data and historical experience to calculate the expected
maturity of loans because, statistically, certain categories of loans are
prepaid before their maturity date, even without regard to interest rate
fluctuations. Additionally, certain prepayment assumptions were made with regard
to investment securities based upon the expected prepayment of the underlying
collateral of the mortgage-backed securities. The interest rate on the trust
preferred securities is variable and adjusts semi-annually.
Interest
Sensitivity Gap
At
December 31, 2007
(Dollars
in thousands)
|
|
0–90
Days
|
|
|
91–180
Days
|
|
|
181–365
Days
|
|
|
1–2
Years
|
|
|
2–3
Years
|
|
|
3–4
Years
|
|
|
4–5
Years
|
|
|
More
than
5
Years
|
|
|
Financial
Statement
Total
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Sensitive Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
securities and other interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balances
|
|
$
|
82,186
|
|
|
$
|
298
|
|
|
$
|
11,041
|
|
|
$
|
9,966
|
|
|
$
|
8,184
|
|
|
$
|
6,714
|
|
|
$
|
5,512
|
|
|
$
|
28,627
|
|
|
$
|
152,528
|
|
|
$
|
152,531
|
|
Average
interest rate
|
|
|
4.59
|
%
|
|
|
6.10
|
%
|
|
|
5.97
|
%
|
|
|
5.98
|
%
|
|
|
5.98
|
%
|
|
|
5.98
|
%
|
|
|
5.98
|
%
|
|
|
5.99
|
%
|
|
|
|
|
|
|
|
|
Loans
receivable
|
|
|
384,017
|
|
|
|
20,252
|
|
|
|
107,350
|
|
|
|
83,649
|
|
|
|
73,975
|
|
|
|
57,305
|
|
|
|
48,307
|
|
|
|
46,694
|
|
|
|
821,549
|
|
|
|
822,545
|
|
Average
interest rate
|
|
|
7.55
|
%
|
|
|
6.81
|
%
|
|
|
6.86
|
%
|
|
|
6.77
|
%
|
|
|
6.77
|
%
|
|
|
6.77
|
%
|
|
|
6.77
|
%
|
|
|
6.69
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
|
466,203
|
|
|
|
20,550
|
|
|
|
118,391
|
|
|
|
93,615
|
|
|
|
82,159
|
|
|
|
64,019
|
|
|
|
53,819
|
|
|
|
75,321
|
|
|
|
974,077
|
|
|
|
975,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Totals
|
|
$
|
466,203
|
|
|
$
|
486,753
|
|
|
$
|
605,144
|
|
|
$
|
698,759
|
|
|
$
|
780,918
|
|
|
$
|
844,937
|
|
|
$
|
898,756
|
|
|
$
|
974,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Sensitive Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
Interest Bearing(1)
|
|
$
|
17,618
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,617
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
35,235
|
|
|
$
|
35,235
|
|
Average
interest rate
|
|
|
1.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
1.00
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Savings
Accounts (1)
|
|
|
9,146
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,145
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,291
|
|
|
|
18,291
|
|
Average
interest rate
|
|
|
4.15
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
4.15
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Money
Market Accounts(1)
|
|
|
102,677
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,677
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
205,354
|
|
|
|
205,354
|
|
Average
interest rate
|
|
|
4.50
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
4.50
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Time
Deposits
|
|
|
243,363
|
|
|
|
90,651
|
|
|
|
72,932
|
|
|
|
12,768
|
|
|
|
2,430
|
|
|
|
288
|
|
|
|
448
|
|
|
|
55
|
|
|
|
422,935
|
|
|
|
422,704
|
|
Average
interest rate
|
|
|
4.75
|
%
|
|
|
4.95
|
%
|
|
|
4.83
|
%
|
|
|
4.28
|
%
|
|
|
4.08
|
%
|
|
|
3.97
|
%
|
|
|
4.17
|
%
|
|
|
5.02
|
%
|
|
|
|
|
|
|
|
|
FHLB
and Short Term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
|
|
|
133,433
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
133,433
|
|
|
|
133,433
|
|
Average
interest rate
|
|
|
4.50
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Subordinated
Debt
|
|
|
11,341
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,341
|
|
|
|
11,341
|
|
Average
interest rate
|
|
|
6.77
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
517,578
|
|
|
|
90,651
|
|
|
|
72,932
|
|
|
|
142,207
|
|
|
|
2,430
|
|
|
|
288
|
|
|
|
448
|
|
|
|
55
|
|
|
|
826,589
|
|
|
|
826,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Totals
|
|
$
|
517,578
|
|
|
$
|
608,229
|
|
|
$
|
681,161
|
|
|
$
|
823,368
|
|
|
$
|
825,798
|
|
|
$
|
826,086
|
|
|
$
|
826,534
|
|
|
$
|
826,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensitivity
GAP
|
|
$
|
(51,375
|
)
|
|
$
|
(70,101
|
)
|
|
$
|
45,459
|
|
|
$
|
(48,592
|
)
|
|
$
|
79,729
|
|
|
$
|
63,731
|
|
|
$
|
53,371
|
|
|
$
|
75,266
|
|
|
|
|
|
|
|
|
|
Cumulative
GAP
|
|
$
|
(51,375
|
)
|
|
$
|
(121,476
|
)
|
|
$
|
(76,017
|
)
|
|
$
|
(124,609
|
)
|
|
$
|
(44,880
|
)
|
|
$
|
18,851
|
|
|
$
|
72,222
|
|
|
$
|
147,488
|
|
|
|
|
|
|
|
|
|
Interest
Sensitive Assets/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Sensitive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
90.07
|
%
|
|
|
80.03
|
%
|
|
|
88.84
|
%
|
|
|
84.87
|
%
|
|
|
94.57
|
%
|
|
|
102.28
|
%
|
|
|
108.74
|
%
|
|
|
117.84
|
%
|
|
|
|
|
|
|
|
|
Cumulative
GAP/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Earning Assets
|
|
|
-5
|
%
|
|
|
-12
|
%
|
|
|
-8
|
%
|
|
|
-13
|
%
|
|
|
-5
|
%
|
|
|
2
|
%
|
|
|
7
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
(1)
|
Demand,
savings and money market accounts are shown to reprice based upon
management’s estimate of when rates would have to be increased to retain
balances in response to competition. Such estimates are necessarily
arbitrary and wholly judgmental.
|
In
addition to the GAP analysis, the Company utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate sensitivity.
Income simulation considers not only the impact of changing market interest
rates on forecasted net interest income, but also other factors such a yield
curve relationships, the volume and mix of assets and liabilities and general
market conditions.
Net Portfolio Value and Net Interest
Income Analysis.
Our interest rate
sensitivity also is monitored by management through the use of models which
generate estimates of the change in its net portfolio value (“NPV”) and net
interest income (“NII”) over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. The following table sets forth our NPV
as of December 31, 2007 and reflects the changes to NPV as a result of immediate
and sustained changes in interest rates as indicated.
Change
in
Interest
Rates
|
|
NPV
as % of Portfolio
|
In
Basis Points
|
|
|
|
|
|
|
(Dollars
in Thousands)
|
200bp
|
$119,982
|
$(11,534)
|
(8.77)%
|
12.06%
|
(98)bp
|
100
|
126,123
|
(5,393)
|
(4.10)
|
12.58
|
(46)
|
Static
|
131,516
|
--
|
--
|
13.04
|
--
|
(100)
|
132,168
|
652
|
0.50
|
13.08
|
4
|
(200)
|
131,426
|
(90)
|
(0.07)
|
13.00
|
(4)
|
In
addition to modeling changes in NPV, we also analyze potential changes to NII
for a twelve-month period under rising and falling interest rate
scenarios. The following table shows our NII model as of December 31,
2007.
Change
in Interest Rates in Basis Points (Rate Shock)
|
|
|
|
(Dollars
in Thousands)
|
200bp
|
$28,862
|
$(1,361)
|
(4.50)%
|
100
|
29,628
|
(595)
|
(1.97)
|
Static
|
30,223
|
--
|
--
|
(100)
|
30,644
|
421
|
1.39
|
(200)
|
31,330
|
1,107
|
3.67
|
The above
table indicates that as of December 31, 2007, in the event of an immediate and
sustained 200 basis point increase in interest rates, the Company’s net interest
income for the 12 months ending December 31, 2007, subject to the significant
limitations specified in the following paragraph, might decrease by $1.4 million
over the static scenario.
As is the
case with the GAP Table, certain shortcomings are inherent in the methodology
used in the above interest rate risk measurements. Modeling changes
in NPV and NII require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the models presented assume that the
composition of our interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and also
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements
and net interest income models provide an indication of interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect
of
changes in market interest rates on net interest income and will differ from
actual results. It is unlikely that the increases in net interest
income shown in the table would occur, if deposit rates continue to lag prime
rate reductions.
The
Company’s management believes that the assumptions utilized in evaluating the
Company’s estimated net interest income are reasonable; however, the interest
rate sensitivity of the Company’s assets, liabilities and off-balance sheet
financial instruments as well as the estimated effect of changes in interest
rates on estimated net interest income could vary substantially if different
assumptions are used or actual experience differs from the experience on which
the assumptions were based. Periodically, the Company may and does make
significant changes to underlying assumptions, which are wholly
judgmental. Prepayments on residential mortgage loans and mortgage
backed securities have increased over historical levels due to the lower
interest rate environment, and may result in reductions in margins.
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 11.01% and 10.30% at December 31,
2007 and 2006, respectively, and as required by the guidelines, at least
one-half of the qualifying total capital consisted of Tier l capital elements.
Tier l risk-based capital ratios on December 31, 2007 and 2006 were 10.07% and
9.46%, respectively. At December 31, 2007 and 2006, the Company exceeded the
requirements for risk-based capital adequacy under both federal and Pennsylvania
state guidelines.
Under FRB
and FDIC regulations, a bank and a holding company are deemed to be “well
capitalized” when it has a “leverage ratio” (“Tier l capital to total assets”)
of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%,
and a total capital to weighted-risk assets ratio of at least 10%. At December
31, 2007 and 2006, the Company’s leverage ratio was 9.44% and 8.75%,
respectively. Accordingly, at December 31, 2007 and 2006, the Company was
considered “well capitalized” under FRB and FDIC regulations.
On
November 28, 2001, Republic First Bancorp, Inc., through a pooled offering with
Sandler O'Neill & Partners, issued $6.2 million of corporation-obligated
mandatorily redeemable capital securities of the subsidiary trust holding solely
junior subordinated debentures of the corporation more commonly known as trust
preferred securities. The purpose of the issuance was to increase capital as a
result of the Company's continued loan and core deposit growth. The
trust preferred securities qualify as Tier 1 capital for regulatory purposes in
amounts up to 25% of total Tier 1 capital. The Company had the ability to call
the securities on any interest payment date after five years, without a
prepayment penalty, notwithstanding their final 30 year maturity. The interest
rate was variable and adjustable semi-annually at 3.75% over the 6 month London
Interbank Offered Rate (“Libor”). The Company did call the securities
in December 2006 and then issued $6.2 million in Trust Preferred Securities at a
variable interest rate, adjustable quarterly, at 1.73% over the 3 month
Libor. The Company may call the securities on any interest payment
date after five years.
On June
28, 2007, the Company, through a pooled offering, issued an additional $5.2
million of corporation-obligated mandatorily redeemable capital securities of
the subsidiary trust holding solely junior subordinated debentures of the
corporation more commonly known as Trust Preferred Securities for the same
purpose as the 2001 issuance. The Company has the ability to call the
securities or any interest payment date after five years, without a prepayment
penalty, notwithstanding their final 30 year maturity. The interest
rate is variable, adjustable quarterly, at 1.55% over the 3 month
Libor.
The
shareholders’ equity of the Company as of December 31, 2007, totaled
approximately $80.5 million compared to approximately $74.7 million as of
December 31, 2006. This increase of $5.7 million reflected 2007 net income of
$6.9 million, less $1.3 million for the purchase of treasury shares. That net
income increased the book value per share of the Company’s common stock from
$7.16 as of December 31, 2006, based upon 10,445,332 shares outstanding
(restated for a 10% stock dividend), to $7.80 as of December 31, 2007, based
upon 10,320,908 shares outstanding at December 31, 2007, as adjusted for
treasury stock.
Regulatory
Capital Requirements
Federal
banking agencies impose three minimum capital requirements on the Company’s
risk-based capital ratios based on total capital, Tier 1 capital, and a leverage
capital ratio. The risk-based capital ratios measure the adequacy of a bank’s
capital against the riskiness of its assets and off-balance sheet activities.
Failure to maintain adequate capital is a basis for “prompt corrective action”
or other regulatory enforcement action. In assessing a bank’s capital adequacy,
regulators also consider other factors such as interest rate risk exposure;
liquidity, funding and market risks; quality and level or earnings;
concentrations of credit, quality of loans and investments; risks of any
nontraditional activities; effectiveness of bank policies; and management’s
overall ability to monitor and control risks.
The
following table presents the Company’s regulatory capital ratios at December 31,
2007 and 2006:
|
|
Actual
|
|
For
Capital
Adequacy
Purposes
|
|
To
be well
capitalized
under
regulatory
capital guidelines
|
|
(Dollars
in thousands)
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$99,634
|
|
11.02%
|
|
$72,534
|
|
8.00%
|
|
$90,667
|
|
10.00%
|
|
Company
|
|
99,704
|
|
11.01%
|
|
72,638
|
|
8.00%
|
|
-
|
|
-
|
|
Tier
one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
91,126
|
|
10.08%
|
|
36,267
|
|
4.00%
|
|
54,400
|
|
6.00%
|
|
Company
|
|
91,196
|
|
10.07%
|
|
36,319
|
|
4.00%
|
|
-
|
|
-
|
|
Tier
one leverage capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
91,126
|
|
9.45%
|
|
48,225
|
|
5.00%
|
|
48,225
|
|
5.00%
|
|
Company.
|
|
91,196
|
|
9.44%
|
|
48,294
|
|
5.00%
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
$88,256
|
|
10.28%
|
|
$61,009
|
|
8.00%
|
|
$76,261
|
|
10.00%
|
|
Company
|
|
88,510
|
|
10.30%
|
|
61,098
|
|
8.00%
|
|
-
|
|
-
|
|
Tier
one risk based capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
80,198
|
|
9.34%
|
|
30,505
|
|
4.00%
|
|
45,757
|
|
6.00%
|
|
Company
|
|
80,452
|
|
9.46%
|
|
30,549
|
|
4.00%
|
|
-
|
|
-
|
|
Tier
one leverage capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic
|
|
80,198
|
|
8.72%
|
|
45,989
|
|
5.00%
|
|
45,989
|
|
5.00%
|
|
Company
|
|
80,452
|
|
8.75%
|
|
45,990
|
|
5.00%
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
believes that the Company and Republic met, as of December 31, 2007 and 2006,
all capital adequacy requirements to which they are subject. As of December 31,
2007, the FDIC categorized Republic as well capitalized under the regulatory
framework for prompt corrective action provisions of the Federal Deposit
Insurance Act. There are no calculations or events since that notification,
which management believes would have changed Republic’s category.
The
Company and Republic’s ability to maintain the required levels of capital is
substantially dependent upon the success of their capital and business plans,
the impact of future economic events on Republic’s loan customers and Republic’s
ability to manage its interest rate risk, 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. Republic currently exceeds 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 criteria
could result in a downgrading in such classifications.
The
Company’s equity to assets ratio increased to 7.92% as of December 31, 2007,
from 7.41% as of December 31, 2006. The increase at year-end 2007 was the
result of 2007 net income of $6.9 million. The Company’s average equity to
assets ratio for 2007, 2006 and 2005 was 8.01%, 8.17% and 7.99%, respectively.
The Company’s average return on equity for 2007, 2006 and 2005 was 8.86%, 14.59%
and 15.22%, respectively; and its average return on assets for 2007, 2006 and
2005, was 0.71%, 1.19% and 1.22%, respectively.
Liquidity
Financial
institutions must maintain liquidity to meet day-to-day requirements of
depositors and borrowers, time investment purchases to market conditions and
provide a cushion against unforeseen needs. Liquidity needs can be met by either
reducing assets or increasing liabilities. The most liquid assets consist of
cash, amounts due from banks and federal funds sold.
Regulatory
authorities require the Company to maintain certain liquidity ratios such that
Republic maintains available funds, or can obtain available funds at reasonable
rates, in order to satisfy commitments to borrowers and the demands of
depositors. In response to these requirements, the Company has formed
an Asset/Liability Committee (ALCO), comprised of certain members of Republic’s
board of directors and senior management, which monitors such
ratios. The purpose of the committee is, in part, to monitor
Republic’s liquidity and adherence to the ratios in addition to managing
relative interest rate risk. The ALCO meets at least
quarterly.
The
Company’s most liquid assets, comprised of cash and cash equivalents on the
balance sheet, totaled $73.2 million at December 31, 2007, compared to $83.1
million at December 31, 2006. Loan maturities and repayments are another
source of asset liquidity. At December 31, 2007, Republic estimated that in
excess of $50.0 million of loans would mature or repay in the six-month period
ended June 30, 2008. Additionally, the majority of its securities are available
to satisfy liquidity requirements through pledges to the FHLB to access
Republic’s line of credit.
Funding
requirements have historically been satisfied by generating core deposits and
certificates of deposit with competitive rates, buying federal funds or
utilizing the facilities of the Federal Home Loan Bank System (“FHLB”). At
December 31, 2007, Republic had $113.1 million in unused lines of credit
available under arrangements with the FHLB and with correspondent banks,
compared to $82.7 million at December 31, 2006. The increase in available
lines resulted from Republic’s decreased level of overnight borrowings against
these lines. Management believes it satisfactorily exceeds regulatory
liquidity guidelines. These lines of credit enable Republic to purchase funds
for short to long-term needs at rates often lower than other sources and require
pledging of securities or loan collateral.
At
December 31, 2007, the Company had outstanding commitments (including unused
lines of credit and letters of credit) of $164.9 million. Certificates of
deposit scheduled to mature in one year totaled $406.9 million at December 31,
2007. The Company anticipates that it will have sufficient funds available to
meet its current commitments. In addition, the Company can use term borrowings
to replace these borrowed funds.
Republic’s
target and actual liquidity levels are determined by comparisons of the
estimated repayment and marketability of Republic’s interest-earning assets with
projected future outflows of deposits and other liabilities. Republic has
established a contingency line of credit with a correspondent bank to assist in
managing Republic’s liquidity position. That line of credit totaled
$15.0 million at December 31, 2007. Republic had drawn down $0 on
this line at December 31, 2007. Republic has also established a line of credit
with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity
of approximately $211.5 million. That $211.5 million capacity is
reduced by advances outstanding to arrive at the unused line of credit
available. As of December 31, 2007 and 2006, Republic had borrowed
$113.4 million and $139.7 million, respectively from the FHLB. Investment
securities represent a primary source of liquidity for Republic. Accordingly,
investment decisions generally reflect liquidity over other
considerations. Additionally, Republic has uncollateralized overnight
advances with PNC. As of December 31, 2007 and 2006, there were $20.0
million and $20.0 million of such overnight advances outstanding.
Operating
cash flows are primarily derived from cash provided from net income during the
year and are another source of liquidity.
The
Company’s primary short-term funding sources are certificates of deposit and its
securities portfolio. The circumstances that are reasonably likely to affect
those sources are as follows. Republic has historically been able to generate
certificates of deposit by matching Philadelphia market rates or paying a
premium rate of 25 to 50 basis points over those market rates. It is anticipated
that this source of liquidity will continue to be available; however, the
incremental cost may vary
depending
on market conditions. The Company’s securities portfolio is also available for
liquidity, most likely as collateral for FHLB advances. Because of the FHLB’s
AAA rating, it is unlikely those advances would not be available. But even if
they are not, numerous investment companies would likely provide repurchase
agreements up to the amount of the market value of the securities.
The ALCO
committee is responsible for managing the liquidity position and interest
sensitivity of Republic. That committee’s primary objective is to maximize net
interest income while configuring Republic’s interest-sensitive assets and
liabilities to manage interest rate risk and provide adequate liquidity for
projected needs.
Investment
Securities Portfolio
Republic’s
investment securities portfolio is intended to provide liquidity and contribute
to earnings while diversifying credit risk. The Company attempts to maximize
earnings while minimizing its exposure to interest rate risk. The securities
portfolio consists primarily of U.S. Government agency securities, mortgage
backed securities, municipal securities, corporate bonds and trust preferred
securities. The Company’s ALCO monitors and approves all security
purchases. The increase in securities in 2006 was a result of the
Company’s desire to reduce its exposure to lower rate environments, by
purchasing long term bonds. The decline in securities in 2007
primarily reflected the maturity of an eighteen month security.
A summary
of investment securities available-for-sale and investment securities
held-to-maturity at December 31, 2007, 2006 and 2005 follows.
|
|
Investment
Securities Available for Sale at December 31,
|
|
|
|
(Dollars
in thousands)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
U.S.
Government Agencies
|
|
$
|
-
|
|
|
$
|
18,570
|
|
|
$
|
18,717
|
|
Mortgage
backed Securities/CMOs (1)
|
|
|
55,579
|
|
|
|
58,642
|
|
|
|
8,691
|
|
Other
securities (2)
|
|
|
27,671
|
|
|
|
24,400
|
|
|
|
9,752
|
|
Total
amortized cost of securities
|
|
$
|
83,250
|
|
|
$
|
101,612
|
|
|
$
|
37,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fair value of investment securities
|
|
$
|
83,659
|
|
|
$
|
102,039
|
|
|
$
|
37,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
Securities Held to Maturity at December 31,
|
|
|
|
(Dollars
in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
U.S.
Government Agencies
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Mortgage
backed Securities/CMOs (1)
|
|
|
15
|
|
|
|
58
|
|
|
|
59
|
|
Other
securities
|
|
|
264
|
|
|
|
272
|
|
|
|
354
|
|
Total
amortized cost of investment securities
|
|
$
|
282
|
|
|
$
|
333
|
|
|
$
|
416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
fair value of investment securities
|
|
$
|
285
|
|
|
$
|
338
|
|
|
$
|
427
|
|
(1)
Substantially all of these obligations consist of U.S. Government Agency issued
securities.
(2)
Comprised
primarily of municipal securities, corporate bonds and trust preferred
securities.
The
following table presents the contractual maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 2007.
Mortgage backed securities are presented without consideration of amortization
or prepayments.
|
|
Investment
Securities Available for Sale at December 31, 2007
|
|
|
|
Within
One Year
|
|
|
One
to Five Years
|
|
|
Five
to Ten Years
|
|
|
Past
10 Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Fair
value
|
|
|
Cost
|
|
|
Yield
|
|
|
|
(Dollars
in thousands)
|
|
U.S.
Government Agencies
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Mortgage
backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
253
|
|
|
|
6.21
|
%
|
|
|
56,206
|
|
|
|
6.04
|
%
|
|
|
56,459
|
|
|
|
55,579
|
|
|
|
6.04
|
%
|
Other securities
|
|
|
-
|
|
|
|
-
|
|
|
|
148
|
|
|
|
4.40
|
%
|
|
|
2,104
|
|
|
|
6.02
|
%
|
|
|
24,948
|
|
|
|
5.56
|
%
|
|
|
27,200
|
|
|
|
27,671
|
|
|
|
5.59
|
%
|
Total
AFS
securities
|
|
$
|
-
|
|
|
|
-
|
|
|
|
148
|
|
|
|
4.40
|
%
|
|
$
|
2,357
|
|
|
|
6.04
|
%
|
|
$
|
81,154
|
|
|
|
5.89
|
%
|
|
$
|
83,659
|
|
|
$
|
83,250
|
|
|
|
5.89
|
%
|
|
|
Investment
Securities Held to Maturity at December 31, 2007
|
|
|
|
Within
One Year
|
|
|
One
to Five Years
|
|
|
Five
to Ten Years
|
|
|
Past
10 Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(Dollars
in thousands)
|
|
U.S.
Government Agencies
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3
|
|
|
|
6.04
|
%
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
3
|
|
|
|
6.04
|
%
|
Mortgage
backed securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
7.48
|
%
|
|
|
15
|
|
|
|
7.48
|
%
|
Other
securities
|
|
|
80
|
|
|
|
6.10
|
%
|
|
|
75
|
|
|
|
6.45
|
%
|
|
|
34
|
|
|
|
6.01
|
%
|
|
|
75
|
|
|
|
3.50
|
%
|
|
|
264
|
|
|
|
5.45
|
%
|
Total
HTM securities
|
|
$
|
80
|
|
|
|
6.10
|
%
|
|
$
|
75
|
|
|
|
6.45
|
%
|
|
$
|
37
|
|
|
|
6.01
|
%
|
|
$
|
90
|
|
|
|
4.16
|
%
|
|
$
|
282
|
|
|
|
5.56
|
%
|
Loan
Portfolio
The
Company’s loan portfolio consists of secured and unsecured commercial loans
including commercial real estate loans, loans secured by one-to-four family
residential property, commercial construction and residential construction loans
as well as residential mortgages, home equity loans and other consumer loans.
Commercial loans are primarily secured term loans made to small to medium-sized
businesses and professionals for working capital, asset acquisition and other
purposes. Commercial loans are originated as either fixed or variable rate loans
with typical terms of 1 to 5 years. Republic’s commercial loans typically range
between $250,000 and $5.0 million but customers may borrow significantly larger
amounts up to Republic’s legal lending limit of approximately $15.0 million at
December 31, 2007. Individual customers may have several loans often secured by
different collateral. Such relationships in excess of $8.8 million (an internal
monitoring guideline which approximates 10% of capital and reserves) at December
31, 2007, amounted to $372.9 million. There were no loans in excess of the legal
lending limit at December 31, 2007.
The
Company’s total loans increased $29.5 million, or 3.7%, to $821.5 million at
December 31, 2007, from $792.1 million at December 31, 2006. That increase
reflected a $11.0 million, or 2.4%, increase in real estate secured loans, which
represents the Company’s largest loan portfolio. The increase also
reflected a $9.9 million, or 4.5%, increase in construction loans.
The
following table sets forth the Company’s gross loans by major categories for the
periods indicated:
|
|
At
December 31,
|
|
|
|
(Dollars
in thousands)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
secured
|
|
$
|
477,678
|
|
|
$
|
466,636
|
|
|
$
|
447,673
|
|
|
$
|
351,314
|
|
|
$
|
281,253
|
|
Construction and land
development
|
|
|
228,616
|
|
|
|
218,671
|
|
|
|
141,461
|
|
|
|
107,462
|
|
|
|
86,547
|
|
Non real estate
secured
|
|
|
77,347
|
|
|
|
71,816
|
|
|
|
49,515
|
|
|
|
57,361
|
|
|
|
49,850
|
|
Non real estate
unsecured
|
|
|
8,451
|
|
|
|
8,598
|
|
|
|
10,620
|
|
|
|
8,917
|
|
|
|
13,398
|
|
Total
commercial
|
|
|
792,092
|
|
|
|
765,721
|
|
|
|
649,269
|
|
|
|
525,054
|
|
|
|
431,048
|
|
Residential
real estate
(1)
|
|
|
5,960
|
|
|
|
6,517
|
|
|
|
7,057
|
|
|
|
8,219
|
|
|
|
14,875
|
|
Consumer
and
other
|
|
|
24,302
|
|
|
|
20,952
|
|
|
|
23,050
|
|
|
|
17,048
|
|
|
|
14,636
|
|
Total
loans
|
|
|
822,354
|
|
|
|
793,190
|
|
|
|
679,376
|
|
|
|
550,321
|
|
|
|
460,559
|
|
Deferred
loan
fees
|
|
|
805
|
|
|
|
1,130
|
|
|
|
1,290
|
|
|
|
632
|
|
|
|
735
|
|
Total loans, net of deferred
loan fees
|
|
$
|
821,549
|
|
|
$
|
792,060
|
|
|
$
|
678,086
|
|
|
$
|
549,689
|
|
|
$
|
459,824
|
|
__________
(1) Residential
real estate secured is comprised of jumbo residential first mortgage loans for
all years presented.
Loan
Maturity and Interest Rate Sensitivity
The
amount of loans outstanding by category as of the dates indicated, which are due
in (i) one year or less, (ii) more than one year through five years
and (iii) over five years, is shown in the following table. Loan balances
are also categorized according to their sensitivity to changes in interest
rates:
|
|
At
December 31, 2007
|
|
|
|
(Dollars
in thousands)
|
|
|
|
Commercial
and Commercial Real Estate
|
|
|
Construction
and Land Development
|
|
|
Residential
Real Estate
|
|
|
Consumer
and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
year or less
|
|
$
|
77,004
|
|
|
$
|
9,254
|
|
|
$
|
-
|
|
|
$
|
381
|
|
|
$
|
86,639
|
|
1-5
years
|
|
|
255,289
|
|
|
|
6,840
|
|
|
|
-
|
|
|
|
1,143
|
|
|
|
263,272
|
|
After
5 years
|
|
|
90,371
|
|
|
|
17,224
|
|
|
|
5,960
|
|
|
|
5,054
|
|
|
|
118,609
|
|
Total fixed
rate
|
|
|
422,664
|
|
|
|
33,318
|
|
|
|
5,960
|
|
|
|
6,578
|
|
|
|
468,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
year or less
|
|
|
63,787
|
|
|
|
152,270
|
|
|
|
-
|
|
|
|
986
|
|
|
|
217,043
|
|
1-5
years
|
|
|
22,900
|
|
|
|
18,983
|
|
|
|
-
|
|
|
|
187
|
|
|
|
42,070
|
|
After
5 years
|
|
|
53,320
|
|
|
|
24,045
|
|
|
|
-
|
|
|
|
16,551
|
|
|
|
93,916
|
|
Total
adjustable rate
|
|
|
140,007
|
|
|
|
195,298
|
|
|
|
-
|
|
|
|
17,724
|
|
|
|
353,029
|
|
Total
|
|
$
|
562,671
|
|
|
$
|
228,616
|
|
|
$
|
5,960
|
|
|
$
|
24,302
|
|
|
$
|
821,549
|
|
In the
ordinary course of business, loans maturing within one year may be renewed, in
whole or in part, as to principal amount, at interest rates prevailing at the
date of renewal.
At
December 31, 2007, 57.0% of total loans were fixed rate compared to 51.3% at
December 31, 2006.
Credit
Quality
Republic’s
written lending policies require specified underwriting, loan documentation and
credit analysis standards to be met prior to funding, with independent credit
department approval for the majority of new loan balances. A committee of the
Board of Directors oversees the loan approval process to monitor that proper
standards are maintained, while approving the majority of commercial
loans.
Loans,
including impaired loans, are generally classified as non-accrual if they are
past due as to maturity or payment of interest or principal for a period of more
than 90 days, unless such loans are well-secured and in the process of
collection. Loans that are on a current payment status or past due less than 90
days may also be classified as non-accrual if repayment in full of principal
and/or interest is in doubt.
Loans may
be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance 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. For non-accrual loans which
have been partially charged off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan balance at
the contractual interest rate. Cash interest receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
The
following summary shows information concerning loan delinquency and
non-performing assets at the dates indicated.
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars
in thousands)
|
|
Loans
accruing, but past due 90 days or more
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,928
|
|
Restructured
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-accrual
loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
14,757
|
|
|
|
6,448
|
|
|
|
2,725
|
|
|
|
3,914
|
|
|
|
3,269
|
|
Construction
|
|
|
6,747
|
|
|
|
173
|
|
|
|
492
|
|
|
|
656
|
|
|
|
1,795
|
|
Residential
real estate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
and other
|
|
|
776
|
|
|
|
295
|
|
|
|
206
|
|
|
|
284
|
|
|
|
74
|
|
Total
non-accrual loans
|
|
|
22,280
|
|
|
|
6,916
|
|
|
|
3,423
|
|
|
|
4,854
|
|
|
|
5,138
|
|
Total
non-performing loans (1)
|
|
|
22,280
|
|
|
|
6,916
|
|
|
|
3,423
|
|
|
|
4,854
|
|
|
|
8,066
|
|
Other
real estate owned
|
|
|
3,681
|
|
|
|
572
|
|
|
|
137
|
|
|
|
137
|
|
|
|
207
|
|
Total
non-performing assets (1)
|
|
$
|
25,961
|
|
|
$
|
7,488
|
|
|
$
|
3,560
|
|
|
$
|
4,991
|
|
|
$
|
8,273
|
|
Non-performing
loans as a percentage of total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans, net of unearned income
(1) (2)
|
|
|
2.71
|
%
|
|
|
0.87
|
%
|
|
|
0.50
|
%
|
|
|
0.88
|
%
|
|
|
1.75
|
%
|
Non-performing
assets as a percentage of total assets
|
|
|
2.55
|
%
|
|
|
0.74
|
%
|
|
|
0.42
|
%
|
|
|
0.75
|
%
|
|
|
1.33
|
%
|
(1)
|
Non-performing
loans are comprised of (i) loans that are on a non-accrual basis,
(ii) accruing loans that are 90 days or more past due and
(iii) restructured loans. Non-performing assets are composed of
non-performing loans and other real estate
owned.
|
(2)
|
Includes
loans held for sale.
|
Total
non-performing loans increased $15.4 million to $22.3 million at December 31,
2007, from $6.9 million at the prior year-end. The $15.4 million
increase in 2007 non-performing loans compared to 2006 reflected the transfer of
loans to two borrowers totaling $20.0 million to non-accrual status, partially
offset by the payoff of one loan totaling $1.9 million, the charge off and
paydown of loans to one borrower totaling $1.0 million, and the paydown and
transfer to substandard of one loan totaling $2.0 million. Problem
loans consist of loans that are included in performing loans, but for which
potential credit problems of the borrowers have caused management to have
serious doubts as to the ability of such borrowers to continue to comply with
present repayment terms. At December 31, 2007, all identified problem loans are
included in the preceding table, or are classified as substandard or doubtful,
with a reserve allocation in the allowance for loan losses (see “Allowance For
Loan Losses”).
The
following summary shows the impact on interest income of non-accrual loans for
the periods indicated:
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Interest
income that would have been recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
had
the loans been in accordance with their
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
original
terms
|
|
$
|
1,447,000
|
|
|
$
|
479,000
|
|
|
$
|
165,000
|
|
|
$
|
391,000
|
|
|
$
|
253,000
|
|
Interest
income included in net income
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
170,000
|
|
|
$
|
-
|
|
At
December 31, 2007, the Company had no foreign loans and no loan concentrations
exceeding 10% of total loans except for credits extended to non-residential
building operators and real estate agents and managers in the aggregate amount
of $261.9 million, which represented 31.9% of gross loans receivable at December
31, 2007. Various types of real estate are included in this category, including
industrial, retail shopping centers, office space, residential multi-family and
others. In addition, credits were extended for single family
construction in the amount of $101.6 million, which represented 12.4% of gross
loans receivable at December 31, 2007. Loan concentrations are considered to
exist when multiple number of borrowers are engaged in similar activities that
management believes would cause them to be similarly impacted by economic or
other conditions. Republic had no credit exposure to “highly leveraged
transactions” at December 31, 2007 as defined by the FRB.
Allowance
for Loan Losses
A
detailed analysis of the Company’s allowance for loan losses for the years ended
December 31, 2007, 2006, 2005, 2004 and 2003 is as follows: (Dollars in
thousands)
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Balance
at beginning of period
|
|
$
|
8,058
|
|
|
$
|
7,617
|
|
|
$
|
6,684
|
|
|
$
|
7,333
|
|
|
$
|
6,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,503
|
|
|
|
601
|
|
|
|
29
|
|
|
|
1,036
|
|
|
|
365
|
|
Tax
refund loans
|
|
|
-
|
|
|
|
1,286
|
|
|
|
1,113
|
|
|
|
700
|
|
|
|
1,393
|
|
Consumer
|
|
|
3
|
|
|
|
-
|
|
|
|
21
|
|
|
|
186
|
|
|
|
53
|
|
Short-term
loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,159
|
|
Total
charge-offs
|
|
|
1,506
|
|
|
|
1,887
|
|
|
|
1,163
|
|
|
|
1,922
|
|
|
|
5,970
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
81
|
|
|
|
37
|
|
|
|
287
|
|
|
|
1,383
|
|
|
|
1,066
|
|
Tax
refund loans
|
|
|
283
|
|
|
|
927
|
|
|
|
617
|
|
|
|
200
|
|
|
|
334
|
|
Consumer
|
|
|
2
|
|
|
|
-
|
|
|
|
6
|
|
|
|
4
|
|
|
|
-
|
|
Total
recoveries
|
|
|
366
|
|
|
|
964
|
|
|
|
910
|
|
|
|
1,587
|
|
|
|
1,400
|
|
Net
charge-offs
|
|
|
1,140
|
|
|
|
923
|
|
|
|
253
|
|
|
|
335
|
|
|
|
4,570
|
|
Provision
for loan losses
|
|
|
1,590
|
|
|
|
1,364
|
|
|
|
1,186
|
|
|
|
(314
|
)
|
|
|
5,827
|
|
Balance
at end of period
|
|
$
|
8,508
|
|
|
$
|
8,058
|
|
|
$
|
7,617
|
|
|
$
|
6,684
|
|
|
$
|
7,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
loans outstanding (1)
|
|
$
|
820,380
|
|
|
$
|
728,754
|
|
|
$
|
602,031
|
|
|
$
|
493,635
|
|
|
$
|
439,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
a percent of average loans (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs (2)
|
|
|
0.14
|
%
|
|
|
0.13
|
%
|
|
|
0.04
|
%
|
|
|
0.07
|
%
|
|
|
1.04
|
%
|
Provision
for loan losses
|
|
|
0.19
|
%
|
|
|
0.19
|
%
|
|
|
0.20
|
%
|
|
|
(0.06
|
)%
|
|
|
1.33
|
%
|
Allowance
for loan losses
|
|
|
1.04
|
%
|
|
|
1.11
|
%
|
|
|
1.27
|
%
|
|
|
1.35
|
%
|
|
|
1.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loans, net of unearned income
|
|
|
1.04
|
%
|
|
|
1.02
|
%
|
|
|
1.12
|
%
|
|
|
1.22
|
%
|
|
|
1.59
|
%
|
Total
non-performing loans
|
|
|
38.19
|
%
|
|
|
116.51
|
%
|
|
|
222.52
|
%
|
|
|
137.70
|
%
|
|
|
90.91
|
%
|
__________
(1) Includes
non-accruing loans.
(2)
Excluding
tax refund loan net charge-offs, ratios were 0.17%, 0.08% and (0.04)% in 2007,
2006 and 2005, respectively.
In 2007,
the Company charged-off commercial loans to three borrowers totaling $1.4
million. In 2006, the Company charged-off commercial loans to three
borrowers totaling $523,000. There were no charge-offs on tax refund
loans in 2007 as the Company did not purchase tax refund loans in that
year. Charge-offs on tax refund loans amounted to $1.3 million
in 2006. Recoveries on tax refund loans decreased to $283,000 in 2007, from
$927,000 in 2006 as a result of the discontinuation of the tax refund loan
program in 2007. Management makes at least a quarterly determination
as to an appropriate provision from earnings to maintain an allowance for loan
losses that is management’s best estimate of known and inherent losses. The
Company’s Board of Directors periodically reviews the status of all non-accrual
and impaired loans and loans classified by Republic’s regulators or internal
loan review officer, who reviews both the loan portfolio and overall adequacy of
the allowance for loan losses. The Board of Directors also considers specific
loans, pools of similar loans, historical charge-off activity, economic
conditions and other relevant factors in reviewing the adequacy of the loan loss
reserve. Any additions deemed necessary to the allowance for loan losses are
charged to operating expenses.
The
Company has an existing loan review program, which monitors the loan portfolio
on an ongoing basis. Loan review is conducted by a loan review officer who
reports quarterly, directly to the Board of Directors.
Estimating
the appropriate level of the allowance for loan losses at any given date is
difficult, particularly in a continually changing economy. In Management’s
opinion, the allowance for loan losses was appropriate at December 31, 2007.
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.
Republic’s
management is unable to determine in which loan category future charge-offs and
recoveries may occur. The following schedule sets forth the allocation of the
allowance for loan losses among various categories. The allocation is
accordingly based upon historical experience. The entire allowance for loan
losses is available to absorb loan losses in any loan category:
|
|
At
December 31,
|
|
|
|
(Dollars
in thousands)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Allocation
of the allowance for loan losses (1) (2):
|
|
Amount
|
|
|
%
of
Loans
|
|
|
Amount
|
|
|
%
of
Loans
|
|
|
Amount
|
|
|
%
of
Loans
|
|
|
Amount
|
|
|
%
of
Loans
|
|
|
Amount
|
|
|
%
of
Loans
|
|
Commercial
|
|
$
|
5,303
|
|
|
|
68.5
|
%
|
|
$
|
5,852
|
|
|
|
69.0
|
%
|
|
$
|
5,074
|
|
|
|
74.8
|
%
|
|
$
|
5,016
|
|
|
|
75.9
|
%
|
|
$
|
5,247
|
|
|
|
74.8
|
%
|
Construction
|
|
|
2,739
|
|
|
|
27.8
|
%
|
|
|
1,714
|
|
|
|
27.6
|
%
|
|
|
1,417
|
|
|
|
20.8
|
%
|
|
|
783
|
|
|
|
19.5
|
%
|
|
|
1,058
|
|
|
|
18.8
|
%
|
Residential
real estate
|
|
|
43
|
|
|
|
0.7
|
%
|
|
|
48
|
|
|
|
0.8
|
%
|
|
|
71
|
|
|
|
1.0
|
%
|
|
|
33
|
|
|
|
1.5
|
%
|
|
|
60
|
|
|
|
3.2
|
%
|
Consumer
and other
|
|
|
174
|
|
|
|
3.0
|
%
|
|
|
156
|
|
|
|
2.6
|
%
|
|
|
231
|
|
|
|
3.4
|
%
|
|
|
115
|
|
|
|
3.1
|
%
|
|
|
96
|
|
|
|
3.2
|
%
|
Unallocated
|
|
|
249
|
|
|
|
-
|
|
|
|
288
|
|
|
|
-
|
|
|
|
824
|
|
|
|
-
|
|
|
|
737
|
|
|
|
-
|
|
|
|
872
|
|
|
|
-
|
|
Total
|
|
$
|
8,508
|
|
|
|
100
|
%
|
|
$
|
8,058
|
|
|
|
100
|
%
|
|
$
|
7,617
|
|
|
|
100
|
%
|
|
$
|
6,684
|
|
|
|
100
|
%
|
|
$
|
7,333
|
|
|
|
100
|
%
|
__________
(1) Gross
loans net of unearned income.
(2) Includes
loans held for sale.
The
methodology utilized to estimate the amount of the allowance for loan losses is
as follows: The Company first applies an estimated loss percentage against all
loans which are not specifically reserved. In 2007, excluding tax refund loans,
the Company experienced net charge-offs to average loans of approximately
0.17%. Net recoveries and net charge-offs, respectively, excluding
short-term and tax refund loans, to average loans were 0.08%, (0.04)%, (0.03)%
and (0.15)% in 2006, 2005, 2004 and 2003. In the absence of sustained
charge-off history, management estimates loss percentages based upon the purpose
and/or collateral of various commercial loan categories. While such loss
percentages exceed the percentages suggested by historical experience, the
Company maintained those percentages in 2007. The Company will continue to
evaluate these percentages and may adjust these estimates on the basis of
charge-off history, economic conditions, industry experience or other relevant
factors. The Company also provides specific reserves for impaired
loans to the extent the estimated realizable value of the underlying collateral
is less than the loan balance, when the collateral is the only source of
repayment. Also, the Company estimates and recognizes reserve allocations on
loans classified as “doubtful”, “substandard” or “special mention” based upon
any factor that might impact loss estimates. Those factors include but are not
limited to the impact of economic conditions on the borrower and management’s
potential alternative strategies for loan or collateral
disposition. At December 31, 2005, the unallocated component
increased $87,000 to $824,000 from $737,000 at December 31, 2004. The
unallocated component decreased $536,000 from $824,000 at December 31, 2005 to
$288,000 at December 31, 2006 as the Company integrated the revised Interagency
Policy Statement on the allowance for loan losses issued by the FDIC in December
2006. As of December 31, 2007, the unallocated component decreased
$39,000 to $249,000 from $288,000 at December 31, 2006. Total loans
at December 31, 2007, increased to $821.5 million from $792.1 million at the
prior year-end. The unallocated allowance is established for losses
that have not been identified through the formulaic and other specific
components of the allowance as described above. The unallocated portion is more
subjective and requires a high degree of management judgment and experience.
Management has identified several factors that impact credit losses that are not
considered in either the formula or the specific allowance segments. These
factors consist of macro and micro economic conditions, industry and geographic
loan concentrations, changes in the composition of the loan portfolio, changes
in underwriting processes and trends in problem loan and loss recovery rates.
The impact of the above is considered in light of management’s conclusions as to
the overall adequacy of underlying collateral and other factors.
The
majority of the Company's loan portfolio represents loans made for commercial
purposes, while significant amounts of residential property may serve as
collateral for such loans. The Company attempts to evaluate larger loans
individually, on the basis of its loan review process, which scrutinizes loans
on a selective basis; and other available information. Even if all commercial
purpose
loans
could be reviewed, there is no assurance that information on potential problems
would be available. The Company's portfolios of loans made for purposes of
financing residential mortgages and consumer loans are evaluated in groups. At
December 31, 2007, loans made for commercial and construction, residential
mortgage and consumer purposes, respectively, amounted to $791.3 million, $6.0
million and $24.3 million.
The
recorded investment in loans that are impaired in accordance with SFAS No. 114
totaled $22.3 million, $6.9 million and $3.4 million at December 31, 2007, 2006
and 2005 respectively. The amounts of related valuation allowances were $1.6
million, $1.8 million and $1.6 respectively at those dates. For the
years ended December 31, 2007, 2006 and 2005 the average
recorded
investment in impaired loans was approximately $16.1 million, $5.3 million, and
$3.5 million, respectively. The Company did not recognize any interest income on
impaired loans during 2007, 2006 or 2005. There were no commitments
to extend credit to any borrowers with impaired loans as of the end of the
periods presented herein.
At
December 31, 2007 and 2006, accruing special mention loans totaled approximately
$10.6 million and $2.9 million, respectively. The amounts of related
valuation allowances were $688,000 and $61,000 respectively at those
dates. At December 31, 2007 and 2006, accruing substandard loans
totaled approximately $702,000 and $162,000 respectively. The amounts
of related valuation were $56,000 and $28,000 respectively at those
dates. There were no accruing doubtful loans at December 31, 2007 and
2006. Republic had delinquent loans as follows: (i) 30 to 59 days
past due, at December 31, 2007 and 2006, in the aggregate principal amount of
$3.6 million and $40,000 respectively; and (ii) 60 to 89 days past due, at
December 31, 2007 and 2006 in the aggregate principal amount of $1.6 million and
$2.5 million respectively.
The
following table is an analysis of the change in Other Real Estate Owned for the
years ended December 31, 2007 and 2006.
Dollars
in thousands
|
|
2007
|
|
|
2006
|
|
Balance
at January
1,
|
|
$
|
572
|
|
|
$
|
137
|
|
Additions,
net
|
|
|
3,639
|
|
|
|
572
|
|
Sales
|
|
|
530
|
|
|
|
137
|
|
Balance
at December
31,
|
|
$
|
3,681
|
|
|
$
|
572
|
|
Deposit
Structure
Of the
total daily average deposits of approximately $745.3 million held by Republic
during the year ended December 31, 2007, approximately $78.6 million, or 10.6%,
represented non-interest bearing demand deposits, compared to approximately
$82.2 million, or 12.1%, of total daily average deposits during 2006. Total
deposits at December 31, 2007, consisted of $99.0 million in
non-interest-bearing demand deposits, $35.2 million in interest-bearing demand
deposits, $223.6 million in savings and money market accounts, $179.0 million in
time deposits under $100,000 and $243.9 million in time deposits greater than
$100,000.
The
following table is a distribution of Republic’s deposits for the periods
indicated:
|
|
At
December 31,
|
|
|
|
(Dollars
in thousands)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Demand
deposits, non-interest bearing
|
|
$
|
99,040
|
|
|
$
|
78,131
|
|
|
$
|
88,862
|
|
|
$
|
97,790
|
|
|
$
|
74,572
|
|
Demand
deposits, interest bearing
|
|
|
35,235
|
|
|
|
47,573
|
|
|
|
69,940
|
|
|
|
54,762
|
|
|
|
70,536
|
|
Money
market & savings deposits
|
|
|
223,645
|
|
|
|
260,246
|
|
|
|
223,129
|
|
|
|
170,980
|
|
|
|
98,196
|
|
Time
deposits
|
|
|
422,935
|
|
|
|
368,823
|
|
|
|
265,912
|
|
|
|
187,152
|
|
|
|
182,193
|
|
Total
deposits
|
|
$
|
780,855
|
|
|
$
|
754,773
|
|
|
$
|
647,843
|
|
|
$
|
510,684
|
|
|
$
|
425,497
|
|
In
general, Republic pays higher interest rates on time deposits compared to other
deposit categories. Republic’s various deposit liabilities may fluctuate from
period-to-period, reflecting customer behavior and strategies to optimize net
interest income.
The
following table is a distribution of the average balances of Republic’s deposits
and the average rates paid thereon, for the years ended December 31, 2007, 2006
and 2005.
|
|
For
the Years Ended December 31,
|
|
|
|
(Dollars
in thousands)
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Average
Balance
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Rate
|
|
|
Average
Balance
|
|
|
Rate
|
|
Demand
deposits, non-interest-bearing
|
|
$
|
78,641
|
|
|
|
-
|
%
|
|
$
|
82,233
|
|
|
|
-
|
%
|
|
$
|
88,702
|
|
|
|
-
|
%
|
Demand
deposits, interest-bearing
|
|
|
38,850
|
|
|
|
1.10
|
%
|
|
|
53,073
|
|
|
|
1.06
|
%
|
|
|
49,118
|
|
|
|
0.68
|
%
|
Money
market & savings deposits
|
|
|
266,706
|
|
|
|
4.48
|
%
|
|
|
240,189
|
|
|
|
3.79
|
%
|
|
|
238,786
|
|
|
|
2.52
|
%
|
Time
deposits
|
|
|
361,120
|
|
|
|
5.21
|
%
|
|
|
304,375
|
|
|
|
4.64
|
%
|
|
|
211,972
|
|
|
|
3.20
|
%
|
Total
deposits
|
|
$
|
745,317
|
|
|
|
4.18
|
%
|
|
$
|
679,870
|
|
|
|
3.50
|
%
|
|
$
|
588,578
|
|
|
|
2.23
|
%
|
The
following is a breakdown by contractual maturity, of the Company’s time
certificates of deposit issued in denominations of $100,000 or more as of
December 31, 2007.
|
Certificates
of Deposit
|
|
(Dollars
in thousands)
|
|
|
|
2007
|
|
Maturing
in:
|
|
|
|
|
Three
months or
less
|
|
$
|
196,422
|
|
Over
three months through six months
|
|
|
30,149
|
|
Over
six months through twelve months
|
|
|
7,748
|
|
Over
twelve
months
|
|
|
9,573
|
|
Total
|
|
$
|
243,892
|
|
The
following is a breakdown, by contractual maturities of the Company’s time
certificates of deposit for the years 2007 through 2012.
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
(Dollars
in thousands)
|
|
|
|
|
|
|
$
|
406,945
|
|
|
$
|
12,769
|
|
|
$
|
2,430
|
|
|
$
|
288
|
|
|
$
|
448
|
|
|
$
|
55
|
|
|
$
|
422,935
|
|
Variable
Interest Entities
In
January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest
Entities
. FIN 46 clarifies the application of Accounting Research
Bulletin 51,
Consolidated
Financial Statements
, to certain entities in which voting rights are not
effective in identifying the investor with the controlling financial interest.
An entity is subject to consolidation under FIN 46 if the investors either do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support, are unable to direct the
entity’s activities, or are not exposed to the entity’s losses or entitled to
its residual returns ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both.
Management
previously determined that Republic First Capital Trust I, utilized for the
Company’s $6,000,000 of pooled trust preferred securities issuance, qualifies as
a variable interest entity under FIN 46. Republic First Capital Trust I (“RFCT”)
originally issued mandatorily redeemable preferred stock to investors and loaned
the proceeds to the Company. The securities were subsequently
reissued via a call during 2006 by Republic First Capital Trust
II. Republic First Capital Trust II holds, as its sole asset,
subordinated debentures issued by the Company in 2006. The
Company issued an additional $5,000,000 of pooled trust preferred securities in
June 2007. Republic First Capital Trust III holds, as its sole asset,
subordinated debentures issued by the Company in 2007.
The
Company does not consolidate RFCT. FIN 46(R) precludes consideration of the call
option embedded in the preferred stock when determining if the Company has the
right to a majority of RFCT’s expected residual returns. The non-consolidation
results
in the investment in the common stock of RFCT to be included in other assets
with a corresponding increase in outstanding debt of $341,000. In addition, the
income received on the Company’s common stock investment is included in other
income. The adoption of FIN 46R did not have a material impact on the financial
position or results of operations. The Federal Reserve has issued final guidance
on the regulatory capital treatment for the trust-preferred securities issued by
RFCT as a result of the adoption of FIN 46(R). The final rule would retain the
current maximum percentage of total capital permitted for trust preferred
securities at 25%, but would enact other changes to the rules governing trust
preferred securities that affect their use as part of the collection of entities
known as “restricted core capital elements”. The rule would take
effect March 31, 2009; however, a five-year transition period starting March 31,
2004 and leading up to that date would allow bank holding companies to continue
to count trust preferred securities as Tier 1 Capital after applying FIN-46(R).
Management has evaluated the effects of the final rule and does not anticipate a
material impact on its capital ratios.
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.