UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2002
Commission File Number: 0-17007
Republic First Bancorp, Inc.
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(Exact name of business issuer as specified in its charter)
Pennsylvania 23-2486815
- ------------------------------- ---------------------------
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip code)
215-735-4422
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
6,358,126 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of April 30, 2002
Page 1 of 32
Exhibit index appears on page 31
TABLE OF CONTENTS
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Page
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Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3: Quantitative and Qualitative Information about Market Risk 21
Part II: Other Information
Item 1: Legal Proceedings 30
Item 2: Changes in Securities and Use of Proceeds 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 5: Other Information 30
Item 6: Exhibits and Reports on Form 8-K 31
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1: Financial Statements
--------------------
Page Number
-----------
(1) Consolidated Balance Sheets as of March 31, 2002, (unaudited) and December 31, 2001.......... 4
(2) Consolidated Statements of Income for the three months ended
(unaudited) March 31, 2002, and 2001......................................................... 5
(3) Consolidated Statements of Cash Flows for the three months ended
(unaudited) March 31, 2002, and 2001......................................................... 6
(4) Notes to Consolidated Financial Statements................................................... 7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
dollars in thousands, except share data
ASSETS: March 31, 2002 December 31,
(unaudited) 2001
------------------- -------------------
Cash and due from banks $24,241 $19,647
Federal funds sold and interest-bearing deposits with banks 61,844 21,773
------------------- -------------------
Total cash and cash equivalents 86,085 41,420
Other interest-earning restricted cash 3,929 4,913
Securities available for sale, at fair value 103,440 113,868
Securities held to maturity at amortized cost
(Fair value of $9,566 and $11,601, respectively) 9,531 11,574
Loans receivable (net of allowance for loan losses of
$6,149 and $5,431, respectively) 459,567 463,888
Premises and equipment, net 5,037 5,211
Other real estate owned 1,858 1,858
Accrued income and other assets 11,400 9,597
------------------- -------------------
Total Assets $680,847 $652,329
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $58,463 $62,384
Demand - interest-bearing 44,602 39,789
Money market and savings 113,574 94,774
Time under $100,000 165,557 152,583
Time $100,000 or more 105,680 97,687
------------------- -------------------
Total Deposits 487,876 447,217
Other borrowings 130,000 142,500
Accrued expenses and other liabilities 9,752 9,769
Corporation-obligated-mandatorily redeemable capital
securities of subsidiary trusting holding solely junior
obligations of the corporation 6,000 6,000
------------------- -------------------
Total Liabilities 633,628 605,486
------------------- -------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares
authorized; shares issued 6,358,126 as of March 31, 2002
and December 31, 2001 63 63
Additional paid in capital 32,117 32,117
Retained earnings 17,448 16,560
Treasury Stock at cost (175,172 shares) (1,541) (1,541)
Accumulated other comprehensive loss (868) (356)
------------------- -------------------
Total Shareholders' Equity 47,219 46,843
------------------- -------------------
Total Liabilities and Shareholders' Equity $680,847 $652,329
=================== ===================
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Three Months Ended March 31,
dollars in thousands, except per share data
(unaudited)
2002 2001
---- ----
Interest income:
Loans, including fees $9,533 $9,151
Federal funds sold and
other interest-earning assets 169 652
Investment securities 1,746 2,599
---------------- --------------
Total interest income 11,448 12,402
---------------- --------------
Interest expense:
Demand interest-bearing 121 150
Money market and savings 346 905
Time less than $100,000 1,745 2,836
Time $100,000 or more 1,017 1,596
Other borrowings 2,220 2,541
---------------- --------------
Total interest expense 5,449 8,028
---------------- --------------
Net interest income 5,999 4,374
----------------
--------------
Provision for loan losses 1,280 157
---------------- --------------
Net interest income after provision
for loan losses 4,719 4,217
---------------- --------------
Non-interest income:
Loan advisory and servicing fees 245 282
Service fees on deposit accounts 284 258
Gain on securities sold - 13
Tax refund products 384 186
Other income 21 19
---------------- --------------
934 758
Non-interest expenses:
Salaries and benefits 2,240 2,016
Occupancy 347 349
Equipment 244 217
Legal 344 74
Advertising 161 148
Other operating expenses 921 1,035
---------------- --------------
4,257 3,839
---------------- --------------
Income before income taxes 1,396 1,136
Provision for income taxes 508 375
---------------- --------------
---------------- --------------
Net income $888 $761
================ ==============
Net income per share:
---------------- --------------
Basic $0.14 $0.12
================ ==============
---------------- --------------
Diluted $0.14 $0.12
================ ==============
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
Dollars in thousands
(unaudited)
2002 2001
-------------- --------------
Cash flows from operating activities:
Net income $888 $761
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 1,280 157
Depreciation 244 219
Amortization of securities 200 95
Gain on sales of securities 13
Decrease (increase) in accrued income
and other assets (1,540) 1,338
Decrease in accrued expenses
and other liabilities (17) (927)
Net decrease in deferred fees (33) (47)
-------------- --------------
Net cash provided by operating activities 1,022 1,609
-------------- --------------
Cash flows from investing activities:
Purchase of securities:
Held to maturity (956) (2,420)
Available for sale (900)
Proceeds from Sale of securities:
Available for sale - 7,842
Proceeds from principal receipts, calls and
maturities of securities:
Held to maturity 2,999 6,395
Available for sale 10,353 7,022
Net decrease (increase) in loans 3,074 (5,273)
Decrease (increase) in other interest-earning restricted cash 984 (4,105)
Premises and equipment expenditures (70) (177)
-------------- --------------
Net cash provided by investing activities 15,484 9,284
-------------- --------------
Cash flows from financing activities:
Net increase in demand, money
market and savings deposits 19,692 24,177
Net decrease in borrowed funds less than 90 days - (16,442)
Repayment of borrowed funds greater than 90 days (12,500) (12,500)
Net increase in time deposits 20,967 4,102
-------------- --------------
Net cash provided by (used in) financing activities 28,159 (663)
-------------- --------------
Increase in cash and cash equivalents 44,665 10,230
Cash and cash equivalents, beginning of period 41,420 50,657
-------------- --------------
Cash and cash equivalents, end of period $86,085 $60,887
============== ==============
Supplemental disclosure:
Interest paid $5,542 $8,258
============== ==============
Taxes paid $1,950 $1,350
============== ==============
(See notes to consolidated financial statements)
6
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Republic First Bancorp, Inc. (the "Company"), is a two-bank holding
company organized and incorporated under the laws of the Commonwealth of
Pennsylvania. Its wholly-owned subsidiaries, Republic First Bank (the "Bank"),
and First Bank of Delaware (the "Delaware Bank"), (together the "Banks") offer a
variety of banking services primarily to individuals and businesses throughout
the Greater Philadelphia, Delaware and South Jersey area through offices and
branches in Philadelphia and Montgomery Counties in Pennsylvania and in New
Castle County, Delaware.
These interim financial statements have been prepared in accordance with
the instructions to Form 10-Q. Accordingly, these financial statements do not
include information or footnotes necessary for a complete presentation of
financial statements in accordance with accounting principles generally accepted
in the United States of America. In the opinion of the Company, the accompanying
unaudited financial statements contain all adjustments (including normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 2002, the results of operations for the three months ended March 31,
2002, and 2001, and the cash flows for the three months ended March 31, 2002,
and 2001. The interim results of operations may not be indicative of the results
of operations for the full year. The accompanying unaudited financial statements
should be read in conjunction with the Company's audited financial statements,
and the notes thereto, included in the Company's 2001 Form 10-K filed with the
Securities and Exchange Commission.
Note 2: Summary of Significant Accounting Policies:
Principles of Consolidation:
The consolidated financial statements of the Company include the accounts
of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, Republic
First Bank and First Bank of Delaware, (the "Banks"). Such statements have been
presented in accordance with accounting principles generally accepted in the
United States of America or applicable to the banking industry. All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The
Banks' earnings are dependent primarily upon the level of net interest income,
which is the difference between interest earned on its interest-earning assets,
such as loans and investments, and the interest paid on its interest-bearing
liabilities, such as deposits and borrowings. Accordingly, the operations of the
Banks are subject to risks and uncertainties surrounding their exposure to
change in the interest rate environment.
The Company began to offer short-term consumer loans through the Delaware
Bank in 2001. At March 31, 2002, the Company had approximately $9.0 million of
net short-term consumer loans outstanding, which were originated in Indiana and
North Carolina through a small number of marketers. These loans generally have
principal amounts of $600 or less and terms of approximately two weeks.
Legislation eliminating, or limiting interest rates upon short-term consumer
loans has from time to time been proposed, primarily as a result of fee levels
which approximate 17% per $100 borrowed, for two week terms. If such proposals
cease, a larger number of competitors may begin offering the product, and
increased competition could result in lower fees. Further, the Company uses a
small number of marketers under contracts which can be terminated upon short
notice, under various circumstances. In the second quarter of 2002, as a result
of legislation in Indiana, the Company ceased
7
making these loans in that state, which accounts for approximately 65% of the
revenue for the program. Although, the Company is in negotiations to expand the
program to other states, there can be no assurance that the Company will
generate revenues comparable to the Indiana loans.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make significant estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results can and should be expected to differ materially from those estimates.
Significant estimates are made by management in determining, among other
things, the allowance for loan losses, carrying values of other real estate
owned, and income tax liability. Consideration is given to a variety of factors
in establishing these and other estimates. In estimating the allowance for loan
losses, management considers estimated loss percentages, impaired loans,
classified loans, current economic conditions, diversification of the loan
portfolio, delinquency statistics, results of internal loan reviews, borrowers'
perceived financial and managerial strengths, the adequacy of underlying
collateral, if loans are collateral dependent, or present value of future cash
flows and other relevant factors. Since the allowance for loan losses and
estimated carrying value of real estate owned are dependent, to a great extent,
on the general economy and other conditions that may be beyond the Banks'
control, it is reasonably possible that the estimates of the allowance for loan
losses and the carrying values of the real estate owned could differ materially
in the near or long-term. There can be no assurance that if collateral is
liquidated, recoveries will not be significantly below appraised amounts,
thereby resulting in losses.
The Company and its subsidiaries are subject to federal and state
regulations governing virtually all aspects of their activities, including but
not limited to, lines of business, liquidity, investments, the payment of
dividends, and other matters. Such regulations and the cost of adherence to such
regulations can have a significant impact on the Company's and the Banks
earnings and financial condition.
Note 3: Legal Proceedings
The Company and the Banks are from time to time parties (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 liabilities
of the Company and the Banks, if any, resulting from such actions will not have
a material effect on the financial condition or results of operations of the
Company and the Banks.
The Delaware Bank was sued alleging violations of the Truth In Lending
Act, Federal Reserve Board Regulation Z and Indiana state law governing maximum
interest rates relating to short-term consumer loans. Because Delaware state law
permits rates to be determined by the open market and has been previously upheld
to preempt laws of states which regulate interest rates, legal counsel has
opined that the Delaware Bank is acting in accordance with applicable law. The
Delaware Bank's marketer, also named in the suit, is required to pay and has
been paying, all legal costs of defense, and indemnify the Delaware Bank against
any resulting legal liability.
8
Note 4: Segment Reporting
The Company's reportable segments represent strategic businesses that offer
different products and services. The segments are managed separately because
each segment has unique operating characteristics, management requirements and
marketing strategies.
Republic First Bancorp has four reportable segments: two community banking
segments, tax refund products and short-term consumer loans. The community
banking segments are primarily comprised of the results of operations and
financial condition of the Banks. Tax refund products are comprised of
accelerated check refunds ("ACRs") and refund anticipation loans ("RALs")
offered on a national basis to customers of Liberty Tax Services, an
unaffiliated national tax preparation firm. Short-term consumer loans are loans
made to customers offered through First Bank of Delaware, with principal amounts
of $600 or less and terms of approximately two weeks. These loans typically are
made in states outside of the Company's normal market area through a small
number of marketers and involve rates and fees significantly different than
other loan products offered by either of the Banks.
The Company evaluates the performance of the community banking segments based
upon income before the provision for income taxes, return on equity and return
on average assets. Tax refund products and short-term consumer loans are
evaluated based upon income before provision for income taxes. Tax refund
products and short-term consumer loans are provided to satisfy consumer demands
while diversifying the Company's earnings stream.
Segment information for the three months ended March 31, 2002 and 2001, is as
follows:
9
March 31, 2002
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income $ 4,449 $ 274 $ (38) $ 1,314 $ 5,999
Provision for loan losses 750 10 -- 520 1,280
Non-interest income 429 121 384 -- 934
Non-interest expenses 3,491 382 154 230 4,257
-------- -------- -------- -------- --------
Net income $ 428 $ 12 $ 115 $ 333 $ 888
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets 608,414 52,320 8,671 11,442 680,847
Total loans, net 424,436 22,442 3,671 9,018 459,567
Total deposits 434,247 33,937 8,250 11,442 487,876
March 31, 2001
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income $ 4,143 $ 231 $ -- $ -- $ 4,374
Provision for loan losses 115 42 -- -- 157
Non-interest income 429 143 186 -- 758
Non-interest expenses 2,809 812 -- 218 3,839
-------- -------- -------- -------- --------
Net income $ 1,104 $ (322) $ 125 $ (146) $ 761
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets 624,007 31,433 731 100 656,271
Total loans, net 402,139 20,506 731 100 423,476
Total deposits 426,517 27,312 -- -- 453,829
10
Note 5: Earnings Per Share:
Earnings per share ("EPS") consists of two separate components, basic EPS
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents ("CSEs"). CSEs
consist of dilutive stock options granted pursuant to the Company's stock option
plan. The following table is a reconciliation of the numerator and denominator
used in calculating basic and diluted EPS. CSEs that are not dilutive are not
included in the following calculation. At March 31, 2002, and 2001, there were
76,340 and 101,940 of stock options, respectively, that were not included in the
calculation of EPS because the exercise price was higher than the average market
price for the period. These CSEs, however, may become dilutive in the future.
The following table is a comparison of EPS for the three months ended
March 31, 2002, and 2001.
2002 2001
Net Income $888,000 $761,000
Shares Per Share Shares Per Share
------ --------- ------ ---------
Weighted average shares
for period 6,182,954 6,182,954
Basic EPS $ 0.14 $ 0.12
Add common stock equivalents 241,969 154,475
--------- ---------
representing dilutive stock options
Effect on basic EPS of dilutive CSE -- --
--------- ---------
Equals total weighted average
shares and CSE (diluted) 6,424,923 6,337,429
========= =========
Diluted EPS $ 0.14 $ 0.12
--------- ---------
Note 6: Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. For the Company,
the only components of other comprehensive income are those related to the
unrealized gains (losses) on available for sale investment securities.
(dollar amounts in thousands) Three months ended
March 31,
--------------------------
2002 2001
-------- --------
Net income $ 888 $ 761
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) during
the period (512) 1,473
Less: Reclassification adjustment for gains
Included in net income -- (9)
-------- --------
Comprehensive income $ 376 $ 2,225
======== ========
11
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the Company's results of operations, financial condition,
and capital resources presented in the accompanying consolidated financial
statements of Republic First Bancorp, Inc. This discussion should be read in
conjunction with the accompanying notes to the consolidated financial
statements.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may", "believes", "expect", "estimate", "project", anticipate", "should",
"intend", "probability", "risk", "target", "objective" and similar expressions
or variations on such expressions. The forward-looking statements contained
herein are subject to certain risks and uncertainties that could cause actual
results to differ materially from those projected in the forward-looking
statements. For example, risks and uncertainties can arise with changes in:
general economic conditions, including their impact on capital expenditures; new
service and product offerings by competitors and price pressures; and similar
items. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, Quarterly Reports on Form 10-Q,
filed by the Company in 2001, and any Current Reports on Form 8-K filed by the
Company, as well as other filings.
Financial Condition:
March 31, 2002, Compared to December 31, 2001
Total assets increased $28.5 million to $680.8 million March 31, 2002,
versus $652.3 million at December 31, 2001. This increase reflects increases in
various deposit categories, that have been temporarily invested as federal
funds.
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 decreased $3.6 million, to
$465.7 million at March 31, 2002, versus $469.3 million at December 31, 2001, as
repayments exceeded originations. The loan portfolio consists of secured and
unsecured commercial loans including commercial real estate, construction loans,
residential mortgages, automobile loans, home improvement loans, short-term
consumer loans beginning in the second quarter of 2001 and home equity loans and
lines of credit and others. Commercial loans typically range between $250,000
and $2,000,000 but customers may borrow significantly larger amounts up to the
Banks combined legal lending limit of $8.5 million at March 31, 2002. Individual
customers may have several loans that are often secured by different collateral.
Such relationships in excess of $5,000,000 at March 31, 2002, amounted to $50.6
million. At March 31, 2002, the Company had $9.0 million in short-term consumer
loans, which were first offered in the second quarter of 2001. These loans have
principal amounts of less than $600, terms of approximately two weeks and were
originated in North Carolina and Indiana through a small number of marketers.
12
Securities:
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 securities available-for-sale consist primarily of
U.S Government debt securities, U.S. Government agency issued mortgage-backed
securities and collateralized mortgage obligations. Collateralized mortgage
obligations consist of securities issued by the Federal Home Loan Mortgage
Corporation. Available-for-sale securities totaled $103.4 million at March 31,
2002, a decrease of $10.4 million or 9.2%, from year-end 2001. This decrease
primarily reflected principal repayments on mortgage-backed securities which
were used to reduce borrowings. Additionally, the Company experienced a $775,000
decline in the market value of available-for-sale securities which is reflected
on the balance sheet. At March 31, 2002, the portfolio had net unrealized losses
of $1.3 million, compared to unrealized losses of $540,000 at the end of the
prior year.
Securities held-to-maturity are investments for which there is the
positive intent and ability to hold the investment to maturity. These
investments are carried at amortized cost. The held-to-maturity portfolio
consists primarily of Federal Home Loan Bank ("FHLB") securities. In addition,
the Bank holds agency securities, other debt securities and a small amount of
CMO securities. At March 31, 2002, securities held to maturity totaled $9.5
million, a decrease of $2.1 million from $11.6 million at year-end 2001. This
decline was due primarily to maturities of government agency securities. The
market value of the held-to-maturity portfolio was $9.6 million at March 31,
2002, versus $11.6 million at December 31, 2001.
Cash and due from Banks:
Cash and due from banks, interest bearing deposits and federal funds
sold are all liquid funds. The aggregate amount in these three categories
increased by $44.7 million, to $86.1 million at March 31, 2002, from $41.4
million at December 31, 2001, reflecting increased deposits and was temporarily
invested in federal funds.
Other interest-earning restricted cash:
Other interest-earning restricted cash represents funds provided to
fund an offsite ATM network for which the Company is compensated. At March 31,
2002, the balance was $3.9 million versus $4.9 million at December 31, 2001.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$174,000 to $5.0 million at March 31, 2002, from $5.2 million at December 31,
2001 due to depreciation.
Other Real Estate Owned:
The $1.9 million balance of other real estate owned represents a hotel
property acquired in the fourth quarter of 2001. The appraisal for the property
(commercial real estate), indicates a market value that exceeds its carrying
value at March 31, 2002.
13
Deposits:
Deposits, which include non-interest and interest-bearing demand
deposits, money market, savings and time deposits, are the Banks' primary source
of funding. Deposits are generally solicited from the Company's primary 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 $40.7 million, or 9.1% to $487.9 million at
March 31, 2002, from $447.2 million at December 31, 2001. Core deposits, which
include demand, money market and savings accounts, increased by $19.7 million,
or 10.0% to $216.6 million at March 31, 2002, versus $196.9 million at the prior
year-end. Deposit growth has benefited from the Company's business development
efforts and bank consolidations in the Philadelphia market that left some
customers underserved. Time deposits increased $21.0 million, or 8.4% to $271.2
million at March 31, 2002, versus $250.3 million at the prior year-end. The
increase reflected the Company's strategy to modestly increase the certificates
of deposits with one year maturities at current relatively low rates, in
anticipation of rate increases later in the year.
Other Borrowings:
Other borrowings are comprised primarily of FHLB borrowings. These
borrowings are used primarily to fund asset growth not supported by deposit
generation. Other borrowings declined by $12.5 million to $130.0 million at
March 31, 2002, from $142.5 million at December 31, 2001, due to the maturity of
an FHLB advance.
Corporation Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Obligations of the Corporation:
On November 28, 2001, Republic First Bancorp, Inc., through a pooled
offering, issued $6.0 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 may call the securities on any interest
payment date after five years, without a prepayment penalty, notwithstanding
their final 30 year maturity. The interest rate varies and is adjustable semi
- -annually at 3.75% over the 6 month London Interbank Offered Rate ("Libor") with
a current rate of 6.007%. The interest rate cap of 11% is effective through the
initial 5-year call date. Under certain circumstances, the Company can be
required to redeem the trust preferred securities.
Shareholders' Equity:
Total shareholders' equity increased $376,000 to $47.2 million at March
31, 2002, versus $46.8 million at December 31, 2001. This increase was the
result of first quarter 2002 net income of $888,000, but was partially offset by
a decline in the market value of available for sale securities of $512,000.
14
Three Months Ended March 31, 2002 Compared to March 31, 2001
- ------------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased $127,000, or 17% to $888,000, or
$0.14 per diluted share for the three months ended March 31, 2002, compared to
$761,000, or $0.12 per diluted share for the prior year comparable period. The
increase reflected improvements in both net interest and non-interest income.
Between those periods, the Company increased its average commercial and
construction loans 10.5% and increased its average lower cost core deposits
26.3%. The Company also added the short-term consumer loan product in the second
quarter of 2001. These items had a favorable impact on net interest income.
However, the increase in net interest income implied by loan and core deposit
growth was significantly offset by the effect of the interest rate reductions of
475 basis points in 2001, which continues to impact the current year. Partially
offsetting the impact of these increases, was a larger provision for loan
losses, higher operating expenses and the continued effect of the lower interest
rate environment. However, the ongoing repricing of certificates of deposit in a
lower rate environment continues to contribute positively to the margin. The
increased net income resulted in a return on average assets and average equity
of .54% and 7.57% respectively, compared to .47% and 6.86% respectively for the
same period in 2001.
Analysis of Net Interest Income
Historically, the Company's earnings have depended significantly upon
the Banks' net interest income, which is the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income is impacted by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
15
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
---------- --------- -------- --------- --------- --------
For the three months ended For the three months ended
Interest-earning assets: March 31, 2002 March 31, 2001
------------------------------------------- ------------------------------------------
Federal funds sold
and other interest-
earning assets 38,757 169 1.77% 46,474 652 5.69%
Securities 120,356 1,746 5.80% 163,143 2,599 6.37%
Loans receivable 466,892 9,533 8.27% 429,967 9,151 8.63%
-------- -------- ---- -------- -------- ----
Total interest-earning assets 626,005 11,448 7.39% 639,584 12,402 7.83%
Other assets 35,815 21,219
-------- --------
Total assets $661,820 $660,803
======== ========
Interest-bearing liabilities:
Demand-non interest
bearing 61,124 45,554
Demand interest-bearing 47,774 121 1.03% 32,808 150 1.85%
Money market & savings 95,938 346 1.46% 83,878 905 4.38%
Time deposits 252,926 2,762 4.43% 275,844 4,432 6.52%
-------- -------- ---- -------- -------- ----
Total deposits 457,762 3,229 2.86% 438,084 5,487 5.08%
Total interest-bearing
deposits 396,638 3,229 3.30% 392,530 5,487 5.67%
-------- -------- ---- -------- -------- ----
Other borrowings 146,326 2,220 6.15% 169,088 2,541 6.09%
-------- -------- ---- -------- -------- ----
Total interest-bearing
liabilities $542,964 $ 5,449 4.07% 561,618 8,028 5.80%
======== ======== ==== -------- -------- ----
Total deposits and
other borrowings 604,088 5,449 3.66% 607,172 8,028 5.36%
-------- -------- ---- -------- -------- ----
Noninterest-bearing
liabilites 10,295 9,902
Shareholders' equity 47,437 43,729
-------- --------
Total liabilities and
shareholders' equity $661,820 $660,803
======== ========
Net interest income $ 5,999 $ 4,374
======== ========
Net interest spread 3.73% 2.47%
===== ====
Net interest margin 3.86% 2.74%
===== ====
16
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the period. Changes due to rate and volume variances have been allocated to
rate.
Rate/Volume Table
Three months ended March 31,
2002 versus 2001
(dollars in thousands)
Due to change in:
Volume Rate Total
---------------- -------------- ------------
Interest earned on:
Federal funds sold $ (33) $ (450) $ (483)
Securities (621) (232) (853)
Loans 1,931 (1,549) 382
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,277 (2,231) (954)
Interest Expense of
Deposits
Interest-bearing demand deposits (38) 67 29
Money market and savings (48) 607 559
Time deposits 250 1,420 1,670
- -------------------------------------------------------------------------------------------------------------------------
Total deposit interest expense 164 2,094 2,258
Other borrowed funds 345 (24) 321
- -------------------------------------------------------------------------------------------------------------------------
Total interest expense 509 2,070 2,579
- -------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,786 $ (161) $ 1,625
- -------------------------------------------------------------------------------------------------------------------------
The Company's net interest margin increased 112 basis points to 3.86% for
the three months ended March 31, 2002, versus the prior year comparable period.
The improvement reflected the 10.5% average growth in commercial and
construction loans, the 26.3% increase in average lower costing core deposits
(demand, money market and savings accounts) and the addition of the short-term
consumer loan program fees. Fees on short-term consumer loans, first offered in
the second quarter of 2001, contributed $1.3 million to net interest income and
contributed 91 basis points to the margin. The Company was negatively impacted
by the 475 basis point decline in prime interest rate during the year 2001 which
immediately impacted the yield on interest-earning assets, especially loans tied
to the prime rate of interest. The repricing of loans generally took effect in
advance of the Banks repricing of certificates of deposit. The average yield on
interest-earning assets declined 44 basis points to 7.39% for the three months
ended March 31, 2002, from 7.83% for the prior year comparable period due
principally to the decline in prime rate partially offset by the higher yielding
short-term consumer loans. The average rate paid on interest-bearing liabilities
decreased 173 basis points to 4.07% for the for the three months ended March 31,
2002, from 5.80% in the prior year comparable period reflecting the lower
interest rate environment.
The Company's net interest income increased $1.6 million, or 37.2%, to
$6.0 million for the for the three months ended March 31, 2002, from $4.4
million for the prior year comparable period. As shown in the Rate Volume table
above, the increase in net interest income was due to the positive effect of
volume changes of approximately $1.8 million, partially offset by the effect of
lower interest rates, which caused a $161,000
17
reduction in net interest income. The positive impact of volume changes
reflected the increases in average commercial and construction loans and the
short-term consumer loans discussed previously. Average interest-earning assets
declined $13.6 million, to $626.0 million for the for the three months ended
March 31, 2002, from $639.6 million for the prior year comparable period as the
Company used cash from the maturities and prepayments of securities to reduce
other borrowings.
The Company's total interest income decreased $954,000, or 7.7%, to $11.4
million for the for the three months ended March 31, 2002, from $12.4 million
for the prior year comparable period, reflecting the lower interest rate
environment, especially the lower prime rate of interest. This resulted in a
$2.2 million decline in interest income. Partially offsetting that decline was
the positive effect of volume changes in commercial and consumer loans which
resulted in a $1.3 million increase in interest income. Interest and fees on
loans increased $382,000, or 4.2%, to $9.5 million for the for the three months
ended March 31, 2002, from $9.2 million for the prior year comparable period.
This increase reflected an increase in average loans, primarily in commercial
and construction, of $36.9 million, or 8.6% to $466.9 million and the addition
of the short-term consumer loan product, which contributed $1.4 million in
interest income versus $0 in the first quarter of 2001. These increases were
partially offset by the impact of the lower prime rate of interest. The impact
of the lower prime rate was the principal factor reducing the yield on loans 35
basis points to 8.27%. Interest and dividend income on securities decreased
$853,000 to $1.7 million for the for the three months ended March 31, 2002, from
$2.6 million for the prior year comparable period. This decline was due
principally to the $42.8 million, or 26.2% decrease in average securities
outstanding to $120.4 million at March 31, 2001 from $163.1 million for the
prior year period. In addition, the average rate earned on securities declined
57 basis points to 5.80% as higher coupon investments prepaid more rapidly than
lower coupons and the rates earned on variable rate securities declined due to
the lower interest rate environment. Proceeds from these securities were
utilized to reduce FHLB borrowings. Interest income on federal funds sold and
other interest-earning assets decreased $483,000, reflecting the lower interest
rate environment.
The Company's total interest expense decreased $2.6 million, or 32.1%, to
$5.4 million for the three months ended March 31, 2002, from $8.0 million for
the prior year comparable period, due principally to the lower rate environment.
Interest-bearing liabilities averaged $543.0 million for the for the three
months ended March 31, 2002, a decrease of $18.7 million, or 3.3%, from $561.6
million for the prior year comparable period. The decline resulted from lower
average borrowings and certificates of deposit. The average rate paid on
interest-bearing liabilities decreased 173 basis points to 4.07% for the three
months ended March 31, 2002, due to the decrease in average rates paid on all
deposit products as a result of the lower interest rate environment. This
interest rate decline was reflected in a $2.1 million reduction in interest
expense.
Interest expense on time deposits (certificates of deposit) decreased
$1.7 million, or 37.7%, to $2.8 million at March 31, 2002, from $4.4 million for
the prior year comparable period. This increase reflected the lower interest
rate environment as the average rate declined 209 basis points to 4.43%. In
addition, average certificates of deposit outstanding decreased $22.9 million,
or 8.3%, to $252.9 million, for the three months ended March 31, 2002, from
$275.8 million for the prior year comparable period as the company was able to
obtain lower cost core deposits.
Interest expense on other borrowings, which consist of FHLB advances
and the trust preferred securities, decreased $321,000 or 12.6% to $2.2 million
for the for the three months ended March 31, 2002, compared to $2.5 million for
the prior year comparable period. This decrease resulted from a $22.8 million,
or 13.5% decline in average other borrowings to $146.3 million at March 31,
2002, versus $169.1 million for the prior year comparable. This decline in
average borrowings resulted in a $345,000 decline in interest expense. The
decline in average other borrowings reflected increased deposit generation and
securities maturities and prepayments. The Company issued $6.0 million of trust
preferred securities in November 2001, the expense for which is included in
other borrowings expense. (See "Capital Resources"). These expenses were $95,000
for the three months ended March 31, 2002.
18
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 increased $1.1 million to $1.3 million for the for the three months ended
March 31, 2002, from $157,000 for the prior year comparable period. This
increase reflected additional provisions based on regulatory classifications as
detailed in the Company's Annual Report on Form 10K for 2001. In addition, the
short-term consumer loan program, first offered in the second quarter of 2001,
resulted in provisions of $520,000 versus $0 in 2001. Additionally, provisions
reflected loan growth and other elements of the Company's loan loss methodology.
(See "Allowance for Loan Losses")
Non-Interest Income
Total non-interest income increased $176,000, or 23.2% to $934,000 for
the three months ended March 31, 2002, versus $758,000 for the prior year
comparable period due primarily to increased revenue resulting from a greater
volume of tax refund products.
Non-Interest Expenses
Total non-interest expenses increased $418,000 million, or 10.9% to $4.3
million for the for the three months ended March 31, 2002, from $3.8 million for
the prior year comparable period. Salaries and employee benefits increased
$224,000 or 11.1%, to $2.2 million for the for the three months ended March 31,
2002, from $2.0 million for the prior year comparable period. The increase
reflected an increase in staff associated with the commercial loan department,
operational support for the tax refund and short-term consumer loan products,
business development efforts and normal merit increases.
Equipment expenses increased $27,000 or 12.4% to $244,000 for the three
months ended March 31, 2002 versus $217,000 for the prior year comparable period
due to increased depreciation expense.
Legal fees increased $270,000 to $344,000 for the for the three months
ended March 31, 2002, from $74,000 for the prior year comparable period. This
increase reflected legal expenses related to loan collections.
Other operating expenses decreased $114,000, or 11.0% to $921,000 for the
for the three months ended March 31, 2002, from $1.0 million for the prior year
comparable period. This decline reflected prior year start up expenses
associated with the short-term consumer loan program.
Provision for Income Taxes
The provision for income taxes increased $133,000, or 35.5%, to $508,000
for the for the three months ended March 31, 2002, from $375,000 for the prior
year comparable period. This increase was primarily the result of the increase
in pre-tax income. The effective tax rate was 36.4% for the three months ended
March 31, 2002, versus 33.0% for the prior year comparable period due to an
increase in state income tax expense.
19
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 $69.5 million and $57.7
million and standby letters of credit of approximately $5.2 million and $5.3
million at March 31, 2002, and December 31, 2001, respectively.
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 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.
At March 31, 2002, 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 $136.1 million, which
represented 29.2% of gross loans receivable at March 31, 2002. Various types of
real estate are included in this category, including industrial, retail shopping
centers, office space, residential multi-family and others. 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.
20
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest Rate Risk Management
There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation in the 2001 Annual Report on
Form 10-K filed with the SEC.
Regulatory Matters
Dividend payments by the Banks to the Company are subject to the
Pennsylvania Banking Code of 1965 ("the Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act ("FDIA"). Under the Banking Code, no
dividends may be paid except from the "accumulated net earnings" (generally,
undivided profits). Under the Federal Reserve Boards ("FRB") regulations, the
Banks cannot pay dividends that exceed their net income for the current and the
preceding two years. Under the FDIA, an insured bank may pay no dividends if the
bank is in arrears in the payment of insurance due to the FDIC.
Federal banking agencies impose three minimum capital requirements on
the Company's risk-based capital ratios based on total capital, Tier 1 capital,
and a leverage capital ratio. The risk-based capital ratios measure the adequacy
of a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level of
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks. The Banks and the Company are
subject to periodic examinations by regulatory agencies.
Under FRB and FDIC regulations, a bank is deemed to be "well
capitalized" when it has a "leverage ratio" ("Tier l capital to total assets")
of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%,
and a total capital to weighted-risk assets ratio of at least 10%. At March 31,
2002, and December 31, 2001, Republic First Bank, First Bank of Delaware and
Republic First Bancorp, Inc. exceeded all requirements to be considered well
capitalized.
21
The following table presents the Company's capital regulatory ratios at
March 31, 2002, and December 31, 2001:
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ------------ --------- --------- ----------
Dollars in thousands
At March 31, 2002
Total risk based capital
Republic First Bank $51,555 12.97% $31,805 8.00% $39,757 10.00%
First Bank of Delaware 5,702 20.80% 2,193 8.00% 2,742 10.00%
Republic First Bancorp, 59,115 14.03% 33,707 8.00% 42,134 N/A
Inc.
Tier one risk based capital
Republic First Bank 46,576 11.72% 15,903 4.00% 23,854 6.00%
First Bank of Delaware 5,359 19.55% 1,097 4.00% 1,645 6.00%
Republic First Bancorp, 53,837 12.78% 16,854 4.00% 25,280 N/A
Inc.
Tier one leveraged capital
Republic First Bank 46,576 7.51% 31,024 5.00% 31,024 5.00%
First Bank of Delaware 5,359 11.21% 2,390 5.00% 2,390 5.00%
Republic First Bancorp, 53,837 8.14% 33,087 5.00% 33,087 N/A
Inc.
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ------------ --------- --------- ----------
At December 31, 2001
Total risk based capital
Republic First Bank $51,000 12.96% $31,493 8.00% $39,366 10.00%
First Bank of Delaware 5,288 23.13% 1,829 8.00% 2,286 10.00%
Republic First Bancorp, Inc. 58,151 13.98% 33,275 8.00% 41,594 N/A
Tier one risk based capital
Republic First Bank 46,078 11.70% 15,747 4.00% 23,620 6.00%
First Bank of Delaware 5,001 21.87% 915 4.00% 1,372 6.00%
Republic First Bancorp, Inc. 52,949 12.73% 16,638 4.00% 24,957 N/A
Tier one leveraged capital
Republic First Bank 46,078 7.46% 30,884 5.00% 30,884 5.00%
First Bank of Delaware 5,001 12.74% 1,963 5.00% 1,963 5.00%
Republic First Bancorp, Inc. 52,949 8.07% 32,793 5.00% 32,793 N/A
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. The Company
does not plan to pay cash dividends to shareholders in the next year and intends
to retain all earnings to fund the growth of the Company and the Banks.
22
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, take advantage of market
opportunities, and provide a cushion against unforeseen needs. Liquidity needs
can be met by either reducing assets or increasing liabilities. The most liquid
assets consist of cash, amounts due from banks and federal funds sold.
Regulatory authorities require the Banks to maintain certain liquidity
ratios such that the Banks maintain 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 Banks have formed
Asset/Liability Committees (ALCO), comprised of certain members of the Banks
board of directors and senior management, which monitors such ratios. The
purpose of the committees are in part, to monitor the Banks liquidity and
adherence to the ratios in addition to managing the relative interest rate risk
to the Bank. The ALCO meets at least quarterly.
The Company's most liquid assets totaled $86.1 million at March 31, 2002,
compared to $41.4 million at December 31, 2001, due to an increase in federal
funds sold. Loan maturities and repayments are another source of asset
liquidity. At March 31, 2002, the Bank estimated that in excess of $60.0 million
of loans would mature or repay in the six month period that will end September
30, 2002. Additionally, the majority of its securities are available to satisfy
liquidity requirements through pledges to the FHLB to access the Banks' line of
credit.
Funding requirements have historically been satisfied primarily by
generating core deposits and certificates of deposit with competitive rates and
utilizing the facilities of the Federal Home Loan Bank System. At March 31,
2002, the Bank had $156.0 million in unused lines of credit available under
arrangements with correspondent banks compared to $162.5 million at December 31,
2001. These lines of credit enable the Bank 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 March 31, 2002, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $74.6 million. Certificates of
deposit scheduled to mature in one year totaled $210.1 million at March 31,
2002, and borrowings scheduled to mature within that period amounted to $5.0
million. The Company anticipates that it will have sufficient funds available to
meet its current commitments. The Bank has an additional $125.0 million in other
borrowings that are callable by the FHLB, whereupon they would likely be
replaced by borrowings at then current rates. In addition, the Company can use
overnight borrowings or other term borrowings to replace these borrowed funds.
The Banks target and actual liquidity levels are determined by comparisons
of the estimated repayment and marketability of the Banks interest-earning
assets with projected future outflows of deposits and other liabilities. The
Bank has established a line of credit from a correspondent to assist in managing
the Banks' liquidity position. That line of credit totaled $10.0 million at
March 31, 2002. Additionally, the Bank has established a line of credit with the
Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of
approximately $276.0 million. As of March 31, 2002, and December 31, 2001, the
Company had borrowed $130.0 million and $142.5 million, respectively, under its
lines of credit. Securities represent a primary source of liquidity for the
Bank. Accordingly, investment decisions generally reflect liquidity over other
considerations.
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. The Banks have 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, its 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
23
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 Banks' ALCO is responsible for managing the liquidity position and
interest sensitivity of the Bank. That committee's primary objective is to
maximize net interest income while configuring the Banks' interest-sensitive
assets and liabilities to manage interest rate risk and provide adequate
liquidity for projected needs.
Securities Portfolio
At March 31, 2002, the Company had identified certain investment
securities that are being held for indefinite periods of time, including
securities that will be used as part of the Company's asset/liability management
strategy and that may be sold in response to changes in interest rates,
prepayments and similar factors. These securities are classified as
available-for-sale and are intended to increase the flexibility of the Company's
asset/liability management. Available-for-sale securities consist of US
Government Agency securities and other investments. The book and market values
of securities available-for-sale were $104.8 million and $103.4 million as of
March 31, 2002, respectively. The net unrealized loss on securities
available-for-sale, as of that date, was $1.3 million.
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, consumer
and other loans. Commercial loans are primarily term loans made to small to
medium-sized businesses and professionals for working capital, asset acquisition
and other purposes. The Banks commercial loans typically range between $250,000
and $2,000,000 but customers may borrow significantly larger amounts up to the
Banks combined legal lending limit of $8.5 million at March 31, 2002. Individual
customers may have several loans often secured by different collateral. Such
relationships in excess of $5,000,000 at March 31, 2002, amounted to $50.6
million.
The Company's net loans decreased $4.3 million, to $459.6 million at March
31, 2002 from $463.9 million at December 31, 2001.
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
24
(dollars in thousands) As of March 31, 2002 As of December 31, 2001
---------------------------------------------------------------------------
Balance % of Total Balance % of Total
---------------------------------------------------------------------------
Commercial:
Real estate secured $ 311,987 67.0 $ 321,579 68.5
Non real estate secured 54,112 11.6 53,388 11.4
Unsecured 6,838 1.4 7,229 1.5
-------------------------------------------------------------------------
372,937 80.0 382,196 81.4
Residential real estate 64,965 14.0 67,821 14.5
Consumer, short-term & other 27,814 6.0 19,302 4.1
-------------------------------------------------------------------------
Total loans 465,716 100.0% 469,319 100.0%
Less allowance for loan losses (6,149) (5,431)
------------ ----------------
Net loans $ 459,567 $ 463,888
============ ================
Credit Quality
The Banks' written lending policies require underwriting, loan
documentation and credit analysis standards to be met prior to funding, with a
senior loan officer review of all loan applications. 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. In the case where a
non-accrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
25
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
March 31, December 31,
2002 2001
-----------------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $1,410 $518
Non-accrual loans 3,784 3,830
---------------------------------------------
Total non-performing loans (1) 5,194 4,348
Other real estate owned 1,858 1,858
---------------------------------------------
Total non-performing assets (2) $7,052 $6,206
=============================================
Non-performing loans as a percentage of total
loans net of unearned
Income 1.12% 0.93%
Non-performing assets as a percentage of total
assets 1.04% 0.95%
<FN>
(1) Non-performing loans are comprised of (i) loans that are on a
nonaccrual basis; (ii) accruing loans that are 90 days or more past due
and (iii) restructured loans.
(2) Non-performing assets are composed of non-performing loans and other
real estate owned (assets acquired in foreclosure).
</FN>
Total non-performing loans increased $846,000 at March 31, 2002, when
compared to December 31, 2001, which resulted primarily from an increase in over
90 day past due loans. The increase in loans past due 90 days or more, resulted
from a loan to one borrower for which the appraised value of the collateral
exceeds the carrying amount, and which is in the process of collection.
The recorded investment in impaired loans totaled $5.2 million and
$4.3 million at March 31, 2002, and December 31, 2001, respectively, and the
amount of such valuation allowances were $220,000 and $288,000, respectively.
There were no commitments to extend credit to any borrowers with impaired loans
as of the end of the periods presented herein.
At March 31, 2002, and December 31, 2001, internally classified
substandard loans totaled approximately $8.8 million and $8.7 million
respectively; and for doubtful loans totaled approximately $59,000 and $62,000,
respectively. There were no loans classified as loss at those dates.
The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at
March 31, 2002 and December 31, 2001, in the aggregate principal amount of $2.5
million and $6.1 million respectively; and (ii) 60 to 89 days past due, at
December 31, 2001, and 2000 in the aggregate principal amount of $4.5 million
and $853,000 respectively.
At March 31, 2002, 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 $136.1 million, which
represented 29.2% of gross loans receivable at December 31, 2001. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family
26
and others. 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. Potential problem
loans consist of loans that are included in performing loans, but for which
potential credit problems of the borrowers have caused management to have
serious doubts as to the ability of such borrowers to continue to comply with
present repayment terms. At March 31, 2002, all identified problem loans are
included in the preceding table with the exception of loans classified as
substandard but still accruing which totaled $5.1 million as of March 31, 2002.
Other Real Estate Owned:
Other real estate owned ("OREO")is initially recorded at the lower or
cost or estimated fair value, net of estimated selling costs at the date of
foreclosure. After foreclosure, management periodically performs valuations and
any subsequent deteriations in fair value, and all other revenue and expenses
are charged against operating expenses in the period in which they occur.
Currently, the Company has one OREO property which consists of a hotel property
acquired in the fourth quarter of 2001.
The Company had no credit exposure to "highly leveraged transactions"
at March 31, 2002, as defined by the Federal Reserve Bank.
27
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the three
months ended March 31, 2002, and 2001, and the twelve months ended December 31,
2001 is as follows:
For the three For the twelve months For the three months
months ended ended ended
(dollars in thousands) March 31, 2002 December 31, 2001 March 31, 2001
---------------------- -------------------- -------------------
Balance at beginning of period ................ $ 5,431 $ 4,072 $ 4,072
Charge-offs:
Commercial ................................. -- 2,074 --
Consumer and short-term .................... 568 805 47
-------- -------- --------
Total charge-offs ....................... 568 2,879 47
-------- -------- --------
Recoveries:
Commercial ................................. 6 257 3
Consumer ................................... -- 17 10
-------- -------- --------
Total recoveries ........................ 6 274 13
-------- -------- --------
Net charge-offs ............................... 562 2,605 34
-------- -------- --------
Provision for loan losses ..................... 1,280 3,964 157
-------- -------- --------
Balance at end of period ................... $ 6,149 $ 5,431 $ 4,195
======== ======== ========
Average loans outstanding (1) .............. $466,892 $448,397 $429,967
======== ======== ========
As a percent of average loans (1):
Net charge-offs/Recoveries ................. 0.12% 0.58% -%
Provision for loan losses .................. 0.27% 0.88% 0.04%
Allowance for loan losses .................. 1.32% 1.21% 0.98%
Allowance for loan losses to:
Total loans, net of unearned income at
period end .............................. 1.32% 1.16% 0.98%
Total non-performing loans at period
end ..................................... 118.37% 124.89% 120.54%
<FN>
(1) Includes nonaccruing loans.
</FN>
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 the Banks' 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, historic 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
and is reported quarterly 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
28
March 31, 2002. However, there can be no assurance that, if asset quality
deteriorates in future periods, additions to the allowance for loan losses will
not be required.
The Banks' management is unable to determine in what loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for loan losses among various categories. The
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb loan losses in any loan category:
At March 31, 2002 At December 31, 2001
----------------- --------------------
Percent of Loans Percent of Loans
Amount In Each Category Amount In Each Category
(in 000's) To Loans (in 000's) to Loans
---------- -------- ---------- --------
Allocation of allowance for loan losses:
Commercial $5,293 80.0% $4,814 81.4%
Residential real estate 195 14.0% 203 14.5%
Consumer,short-term and other 230 6.0% 182 4.1%
Unallocated 431 -% 232 -%
-----------------------------------------------------------------------
Total $6,149 100.00% $5,431 100.00%
================== ===============
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 March 31, 2002, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $372.9
million, $65.0 million and $27.8 million.
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.
29
Part II Other Information
Item 1: Legal Proceedings
-----------------
The Company and the Banks are from time to time parties (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
companies and the Banks.
The Delaware Bank was sued alleging violations of the Truth In Lending
Act, Federal Reserve Board Regulation Z and Indiana state law governing maximum
interest rates relating to short-term consumer loans. Because Delaware state law
permits rates to be determined by the open market and has been previously upheld
to preempt laws of states which regulate interest rates, legal counsel has
opined that the Delaware Bank is acting in accordance with applicable law. The
Delaware Bank's marketer, also named in the suit, is required to pay all legal
costs of defense, and indemnify the Bank against resulting legal liability.
Item 2: Changes in Securities and use of proceeds
-----------------------------------------
None
Item 3: Defaults upon Senior Securities
-------------------------------
None
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The annual meeting of shareholders of Republic First Bancorp, Inc., to
take action upon the re-election of certain directors of the Company
was held on the 23rdday of April, 2002 at 4:00 p.m., at the
Warwick-Radisson Hotel, 17th and Locust Streets, Philadelphia, PA.
19103, after written notice of said meeting, according to law, was
mailed to each shareholder of record entitled to receive notice of
said meeting, 32 days prior thereto. As of the record date for said
meeting of shareholders, the number of shares then issued and
outstanding was 6,358,126 shares of common stock, of which 6,358,126
shares were entitled to vote. A total of 5,695,092 shares were voted.
No nominee received less than 91.3% of the voted shares. Therefore,
pursuant to such approval, the following directors were re-elected to
the Company.
Harry D. Madonna
Kenneth J. Adelberg
William W. Batoff
Item 5: Other Information
-----------------
None
Item 6: Exhibits and Reports on Form 8-K
--------------------------------
The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-K for an
annual report on Form 10-K)
30
Exhibit No.
-----------
10 Amended and Restated Material Contracts.- None
21 Subsidiaries of the Company
Republic First Bank (the "Bank"), a wholly-owned
subsidiary, commenced operations on November 3,
1988. The Bank is a commercial bank chartered
pursuant to the laws of the Commonwealth of
Pennsylvania. First Bank of Delaware (the
"Delaware Bank"), which also is a wholly-owned
subsidiary of the Company, commenced operations on
June 1, 1999. The Delaware Bank is a commercial
bank chartered pursuant to the laws of the State
of Delaware. The Bank and the Delaware Bank are
both members of the Federal Reserve System and
their primary federal regulators are the Federal
Reserve Board of Governors.
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
**Incorporated by reference in the Company's Form 10-K, filed February
28, 2002.
Reports on Form 8-K and 8-KA
Regarding change in Accountants Filed April 12, and 25, 2002, respectively.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Republic First Bancorp, Inc.
Harry D. Madonna
----------------
President and Chief Executive Officer
Paul Frenkiel
-------------
Executive Vice President and
Chief Financial Officer
Dated: May 14, 2002
32