UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2002
Commission File Number: 0-17007
Republic First Bancorp, Inc.
----------------------------
(Exact name of business issuer as specified in its charter)
Pennsylvania 23-2486815
------------ ----------
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
---------------------------------------------------------
(Address of principal executive offices) (Zip code)
215-735-4422
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(Registrant's telephone number, including area code)
N/A
------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to filing requirements
for the past 90 days.
YES X NO
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
Issuer's classes of common stock, as of the latest practicable date.
6,391,008 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of October 31, 2002
Page 1 of 39
Exhibit index appears on page 36
1
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 12
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 34
Item 4: Controls and Procedures 34
Part II: Other Information
Item 1: Legal Proceedings 35
Item 2: Changes in Securities and Use of Proceeds 35
Item 3: Defaults Upon Senior Securities 35
Item 4: Submission of Matters to a Vote of Security Holders 35
Item 5: Other Information 35
Item 6: Exhibits, Reports on Form 8-K and Certifications 36
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1: Financial Statements
--------------------
Page Number
(1) Consolidated Balance Sheets as of September 30, 2002,
(unaudited) and December 31, 2001.........................................4
(2) Consolidated Statements of Income for the three and nine
months ended September 30, 2002, and 2001(unaudited)......................5
(3) Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002, and 2001(unaudited)...................................6
(4) Notes to Consolidated Financial Statements................................7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of September 30, 2002 and December 31, 2001
dollars in thousands, except share data
ASSETS: September 30, 2002 December 31, 2001
------------------ -----------------
(unaudited)
Cash and due from banks $ 8,505 $ 19,647
Federal funds sold and interest-bearing deposits with banks 53,554 21,773
--------- ---------
Total cash and cash equivalents 62,059 41,420
Other interest-earning restricted cash 4,278 4,913
Securities available for sale, at fair value 100,787 113,868
Securities held to maturity at amortized cost
(Fair value of $9,237 and $11,601, respectively) 9,198 11,574
Loans receivable (net of allowance for loan losses of
$7,533 and $5,431, respectively) 462,508 463,888
Premises and equipment, net 4,928 5,211
Other real estate owned 500 1,858
Other assets 10,811 9,597
--------- ---------
Total Assets $ 655,069 $ 652,329
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 72,109 $ 62,384
Demand - interest-bearing 44,839 39,789
Money market and savings 127,971 94,774
Time under $100,000 148,881 152,583
Time $100,000 or more 70,773 97,687
--------- ---------
Total Deposits 464,573 447,217
Other borrowings 125,000 142,500
Accrued expenses and other liabilities 8,477 9,769
Corporation-obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior obligations of
the corporation 6,000 6,000
--------- ---------
Total Liabilities 604,050 605,486
--------- ---------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares
authorized; shares issued and outstanding, 6,391,008 as of
September 30, 2002 and 6,358,126 as of December 31, 2001 64 63
Additional paid in capital 32,235 32,117
Retained earnings 18,435 16,560
Treasury stock at cost (175,172 shares) (1,541) (1,541)
Accumulated other comprehensive income (loss) 1,826 (356)
--------- ---------
Total Shareholders' Equity 51,019 46,843
--------- ---------
Total Liabilities and Shareholders' Equity $ 655,069 $ 652,329
========= =========
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30,
dollars in thousands, except per share data
(unaudited)
Quarter to Date Year to Date
September 30 September 30
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Interest and fees on loans $ 9,204 $ 9,671 $28,124 $28,294
Interest and dividend income on federal
funds sold and other interest-earning balances 192 134 584 1,190
Interest on investments 1,538 2,190 4,910 7,119
------- ------- ------- -------
Total interest income 10,934 11,995 33,618 36,603
------- ------- ------- -------
Interest expense:
Demand interest-bearing 123 199 363 494
Money market and savings 582 728 1,378 2,442
Time under $100,000 1,396 2,517 4,650 8,071
Time $100,000 or more 749 1,241 2,684 4,374
Other borrowed funds 2,076 2,265 6,393 7,047
------- ------- ------- -------
Total interest expense 4,926 6,950 15,468 22,428
------- ------- ------- -------
Net interest income 6,008 5,045 18,150 14,175
------- ------- ------- -------
Provision for loan losses 965 570 3,493 1,347
------- ------- ------- -------
Net interest income after provision
for loan losses 5,043 4,475 14,657 12,828
------- ------- ------- -------
Non-interest income:
Loan advisory and servicing fees 357 241 989 747
Service fees on deposit accounts 322 321 920 861
Gains on securities sold - - - 13
Tax refund products 26 - 760 253
Other income 19 32 59 78
------- ------- ------- -------
724 594 2,728 1,952
Non-interest expenses:
Salaries and benefits 2,170 2,081 6,652 6,120
Occupancy 363 338 1,074 1,021
Equipment 278 248 757 696
Legal 454 310 1,181 429
Advertising 100 141 359 445
Other real estate owned 1,391 - 1,407 -
Other expenses 903 975 2,983 3,004
------- ------- ------- -------
5,659 4,093 14,413 11,715
------- ------- ------- -------
Income before income taxes 108 976 2,972 3,065
------- ------- ------- -------
Provision for income taxes 42 322 1,097 1,011
------- ------- ------- -------
Net income $ 66 $ 654 $ 1,875 $ 2,054
======= ======= ======= =======
Net income per share:
------- ------- ------- -------
Basic $ 0.01 $ 0.11 $ 0.30 $ 0.33
======= ======= ======= =======
------- ------- ------- -------
Diluted $ 0.01 $ 0.10 $ 0.29 $ 0.32
======= ======= ======= =======
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
Dollars in thousands
(unaudited)
2002 2001
-------- --------
Cash flows from operating activities:
Net income $ 1,875 $ 2,054
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 3,493 1,347
Write down of other real estate owned 1,358 -
Depreciation 757 696
Amortization of securities 337 253
Gain on sales of securities - 13
Increase in other assets (2,289) (21)
Increase (decrease) in accrued expenses
and other liabilities (1,292) 1,877
Net decrease in deferred fees (366) 54
-------- --------
Net cash provided by operating activities 3,873 6,273
-------- --------
Cash flows from investing activities:
Purchase of securities:
Held to maturity (966) (3,529)
Available for sale (10,356) -
Proceeds from Sale of securities:
Available for sale - 7,842
Proceeds from principal receipts, calls and maturities of securities:
Held to maturity 3,342 5,831
Available for sale 26,405 24,732
Net increase in loans (1,747) (43,917)
Decrease (increase) in other interest-earning restricted cash 635 (4,323)
Premises and equipment expenditures (474) (913)
-------- --------
Net cash provided by (used in) investing activities 16,839 (14,277)
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options 71 -
Net increase in demand, money market and savings deposits 47,972 78,757
Net decrease in short-term borrowings - (16,442)
Repayment of long-term borrowings (17,500) (17,500)
Net decrease in time deposits (30,616) (28,410)
-------- --------
Net cash provided by (used in) financing activities (73) 16,405
-------- --------
Increase in cash and cash equivalents 20,639 8,401
Cash and cash equivalents, beginning of period 41,420 50,657
-------- --------
Cash and cash equivalents, end of period $ 62,059 $ 59,058
======== ========
Supplemental disclosure:
Interest paid $ 15,969 $ 23,969
======== ========
Taxes paid $ 3,650 $ 1,750
======== ========
(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. The Delaware Bank also makes a number of short-term
consumer loans nationally, which outstandings amount to less than 5% of total
consolidated assets.
These interim financial statements have been prepared in accordance with
the instructions to Form 10-Q. Accordingly, these financial statements do not
include information or footnotes necessary for a complete presentation of
financial statements in accordance with accounting principles generally accepted
in the United States of America. In the opinion of the Company, the accompanying
unaudited financial statements contain all adjustments (including normal
recurring accruals) necessary to present fairly the financial position as of
September 30, 2002, the results of operations for the three and nine months
ended September 30, 2002, and 2001, and the cash flows for the nine months ended
September 30, 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:
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 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
changes in the interest rate environment.
The Delaware Bank began to offer short-term consumer loans in 2001. At
September 30, 2002, the Company had approximately $3.6 million of net short-term
consumer loans outstanding, which were originated in Georgia, Texas and North
Carolina through two marketers. These loans generally have principal amounts of
$1,000 or less and terms of approximately two weeks. Federal and state
legislation or regulatory action eliminating, or limiting interest rates
chargeable on 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. Additionally, other banks have begun offering courtesy overdraft programs
to their customers. While such programs may charge higher fees than are charged
for short-term loans, such greater convenience may result in a loss in market
share for the short-term loan product. The Delaware Bank uses two marketers
under contracts that can be terminated on short notice under various
circumstances. In the second quarter of 2002, as a result of legislation in
Indiana, the Delaware Bank ceased making these loans in that state, which
accounted for approximately 65% of the revenue for the program. Although the
Delaware Bank is in
7
negotiations to offer the product in other states, there can be no assurance
that the Delaware Bank will generate revenues comparable to the Indiana loans.
Note 3: Legal Proceedings
The Company and the Banks are from time to time parties (plaintiff or
defendant) to lawsuits in the normal course of business. While any litigation
involves an element of uncertainty, management, after reviewing pending actions
with 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 for alleged 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 had
opined that the Delaware Bank was acting in accordance with applicable law. The
Delaware Bank's marketer, also named in the suit, is required to pay and has
been paying the defense costs, and to indemnify the Delaware Bank against any
resulting legal liability. This lawsuit was dismissed in the third quarter of
2002.
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 the Delaware Bank, with principal amounts of
$1,000 or less and terms of approximately two weeks. These loans typically are
made in states that are outside of the Company's normal market area through a
small number of marketers and involve rates and fees significantly different
from other loan products offered by either of the Banks.
The Company evaluates the performance of the community banking segments based
upon net income, return on equity and return on average assets. Tax refund
products and short-term consumer loans are evaluated based upon net income. 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 nine and three months ended September 30, 2002 and
2001, is as follows:
8
As of and for the nine months ended
September 30, 2002
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- --------- -------- --------
Net interest income $ 13,730 $ 936 $ (21) $ 3,505 $ 18,150
Provision for loan losses 2,300 10 - 1,183 3,493
Non-interest income 1,575 393 760 - 2,728
Non-interest expenses 12,186 1,122 376 729 14,413
Net income (loss) $ 548 $ 132 $ 219 $ 976 $ 1,875
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets 611,778 39,090 - 4,201 655,069
Total loans, net 432,508 26,424 - 3,576 462,508
Total deposits 433,180 31,393 - - 464,573
September 30, 2001
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- --------- -------- --------
Net interest income $ 12,141 $ 699 $ - $ 1,335 $ 14,175
Provision for loan losses 725 87 - 535 1,347
Non-interest income 1,317 382 253 - 1,952
Non-interest expenses 9,553 1,461 174 527 11,715
Net income (loss) $ 2,131 $ (313) $ 53 $ 183 $ 2,054
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets $628,207 $ 41,541 $ - $ 9,080 $678,828
Total loans, net 431,676 23,528 - 5,625 460,829
Total deposits 448,031 27,867 - - 475,898
9
As of and for the three months ended
September 30, 2002
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- --------- --------- --------- ---------
Net interest income $ 4,797 $ 323 $ - $ 888 $ 6,008
Provision for loan losses 700 - - 265 965
Non-interest income 544 154 26 - 724
Non-interest expenses 4,924 347 119 269 5,659
Net income (loss) $ (190) $ 79 $ (57) $ 234 $ 66
========= ========= ========= ========= =========
Selected Balance Sheet Accounts:
Total assets 611,778 39,090 - 4,201 655,069
Total loans, net 432,508 26,424 - 3,576 462,508
Total deposits 433,180 31,393 - - 464,573
September 30, 2001
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- --------- --------- --------- ---------
Net interest income 3,788 $ 253 $ - $ 1,004 $ 5,045
Provision for loan losses 170 35 - 365 570
Non-interest income 489 105 - - 594
Non-interest expenses 3,331 391 84 287 4,093
Net income (loss) $ 592 $ (118) $ (56) $ 236 $ 654
========= ========= ========= ========= =========
Selected Balance Sheet Accounts:
Total assets $ 628,207 $ 41,541 $ - $ 9,080 $ 678,828
Total loans, net 431,676 23,528 - 5,625 460,829
Total deposits 448,031 27,867 - - 475,898
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 September 30, 2002,
and 2001, respectively, there were 211,507 and 104,940 of stock options, 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 and nine
months ended September 30, 2002, and 2001.
Quarter to Date | Year to Date
2002 2001 | 2002 2001
|
Net Income $66,000 $654,000 | $1,875,000 $2,054,000
Per Per | Per Per
Shares Share Shares Share | Shares Share Shares Share
------ ----- ------ ----- | ------ ----- ------ -----
Weighted average shares |
For period 6,215,836 6,182,954 | 6,199,395 6,182,954
Basic EPS $0.01 $0.11 | $0.30 $0.33
Add common stock equivalents 216,187 188,372 | 248,435 174,997
------- ------- | ------- -------
representing dilutive stock options |
Effect on basic EPS of dilutive CSEs - $(0.01) | $(0.01) $(0.01)
----- ------ | ------ ------
Equals total weighted average |
shares and CSEs (diluted) 6,432,023 6,371,326 | 6,447,830 6,357.951
--------- --------- | --------- ---------
Diluted EPS $0.01 $0.10 | $0.29 $0.32
----- ------ | ------ ------
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 Nine months ended
September 30, September 30,
--------------------------------- ----------------------------------
2002 2001 2002 2001
------------ ------------ ------------- -------------
Net income $ 66 $ 654 $ 1,875 $ 2,054
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains during the period 894 2,280 2,182 2,864
Less: Reclassification adjustment for gains
included in net income - - - (9)
------------ ------------ ------------- -------------
Comprehensive income $ 960 $ 2,934 $ 4,057 $ 4,909
============ ============ ============= =============
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 2002 and 2001, and any Current Reports on Form 8-K filed
by the Company, as well as other filings.
Financial Condition:
September 30, 2002, Compared to December 31, 2001
Total assets increased $2.7 million to $655.1 million September 30,
2002, versus $652.3 million at December 31, 2001. This increase reflected
increased federal funds sold.
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 $722,000 to $470.0
million at September 30, 2002, versus $469.3 million at December 31, 2001, due
to an increase in commercial loans which offset declines in residential
mortgages and short-term consumer loans. 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, home equity
loans and lines of credit, and others. Commercial loans typically range between
$250,000 and $3,000,000 but customers may borrow significantly larger amounts up
to the Banks' combined legal lending limit of $8.5 million at September 30,
2002. Individual customers may have several loans that are often secured by
different collateral. The aggregate amount of loans in excess of $5.5 million at
September 30, 2002, was $17.6 million. In the first nine months of 2002, the
Company allowed the residential mortgage portfolio to decline through
prepayments by $8.4 million to $59.5 million as these loans yield less than the
growing commercial loan portfolio. At September 30, 2002, the Company had $3.6
million in net short-term consumer loans, which were first offered in the second
quarter of 2001, versus $6.8 million of such loans at
12
December 31, 2001. These loans have principal amounts of less than $1,000, terms
of approximately two weeks and were originated in North Carolina, Texas and
Georgia through two unaffiliated marketers. The decline in loans outstanding
reflected the second quarter termination of business in Indiana.
Securities:
Securities available for sale are investments that 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 ("CMO's") consist primarily of securities issued by the Federal Home
Loan Mortgage Corporation. Securities available for sale totaled $100.8 million
at September 30, 2002, a decrease of $13.1 million or 11.5%, 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 $3.1 million gain in the market value of available for sale
securities that is reflected on the balance sheet. At September 30, 2002, the
total portfolio had net unrealized gains of $2.8 million, compared to unrealized
losses of $540,000 at December 31, 2001.
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 U.S. Government agency securities, other debt securities and a
small amount of CMO securities. At September 30, 2002, securities held to
maturity totaled $9.2 million, a decrease of $2.4 million from $11.6 million at
year-end 2001. This decline was due primarily to maturities of U.S. government
agency securities. The market value of the held to maturity portfolio was $9.2
million at September 30, 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 $20.6 million, to $62.1 million at September 30, 2002, from $41.4
million at December 31, 2001, reflecting increased deposits which were
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. These balances
declined by $635,000 to $4.3 million at September 30, 2002, versus $4.9 million
at December 31, 2001.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$283,000 to $4.9 million at September 30, 2002, from $5.2 million at December
31, 2001, due to depreciation.
Other Real Estate Owned:
The $500,000 balance of other real estate owned represents a hotel
property acquired in the fourth quarter of 2001. The Company wrote down the
value of this property by $1.4 million in the third quarter of 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 a variety of products to attract and retain customers, with a
primary focus on multi-product relationships.
Total deposits increased by $17.4 million, or 3.9% to $464.6 million at
September 30, 2002, from $447.2 million at December 31, 2001. Core deposits,
which include non-public demand, money market and savings accounts, increased by
$33.0 million, or 16.7% to $229.9 million at September 30, 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 decreased $30.6 million, or
12.2% to $219.7 million at September 30, 2002, versus $250.3 million at the
prior year-end. The decrease reflected the Company's strategy of reducing higher
costing time deposits.
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 $17.5 million to $125.0 million at
September 30, 2002, from $142.5 million at December 31, 2001, due to the
maturity of two FHLB advances.
Shareholders' Equity:
Total shareholders' equity increased $4.2 million to $51.0 million at
September 30, 2002, versus $46.8 million at December 31, 2001. This increase was
the result of year-to-date 2002 net income of $1.9 million and the net of tax
increase in the market value of available for sale securities of $2.2 million.
14
Three Months Ended September 30, 2002 Compared to September 30, 2001
- --------------------------------------------------------------------
Results of Operations:
Overview
The Company's net income decreased $588,000, or 92% to $66,000, or
$0.01 per diluted share for the three months ended September 30, 2002, compared
to $654,000, or $0.10 per diluted share for the prior year comparable period.
The decline in earnings reflected a write down of other real estate owned of
$1.4 million pre-tax, or $909,000, and $0.14 per diluted share on an after-tax
basis. Net interest income increased $963,000 or 20% compared to the prior year
period. The increased margin reflected success in repricing deposits, as well as
continuation of multi-year trends of double digit core deposit growth. Average
core non-public deposits increased 11% in the third quarter of 2002 compared to
the prior year comparable period. In those periods, average commercial and
construction loans grew 7.2%, which also increased margins. The provision for
loan losses increased $395,000 between those periods. In those periods,
operating expenses, excluding the other real estate owned write down, increased
5.0%. The decreased net income resulted in a return on average assets and
average equity of .04% and 0.53% respectively, compared to .40% and 5.63%
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
For the three months ended For the three months ended
September 30, 2002 September 30, 2001
-------------------------------------------- --------------------------------------------------
Interest-earning assets:
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
------------- ------------- ------------- ------------------- ------------ -------------
Federal funds sold
and other interest-
earning assets 41,640 192 1.83% 15,192 134 3.48%
Securities 110,216 1,538 5.58% 142,272 2,190 6.16%
Loans receivable 469,726 9,204 7.79% 451,214 9,671 8.52%
------------- ------------- ------------- ------------------- ------------ -------------
Total interest-earning assets 621,582 10,934 7.00% 608,678 11,995 7.84%
Other assets 26,634 24,148
------------- -------------------
Total assets $ 648,216 $ 632,826
============= ===================
Interest-bearing liabilities:
Demand-non interest
bearing $ 57,777 $ 48,398
Demand interest-bearing 45,163 123 1.08% 40,919 199 1.93%
Money market & savings 119,065 582 1.94% 96,857 728 2.98%
Time deposits 235,760 2,145 3.61% 243,203 3,758 6.13%
------------- ------------- ------------- ------------------- ------------ -------------
Total deposits 457,765 2,850 2.47% 429,377 4,685 4.33%
Total interest-bearing
deposits 399,988 2,850 2.83% 380,979 4,685 4.88%
------------- ------------- ------------- ------------------- ------------ -------------
Other borrowings 131,000 2,076 6.29% 146,991 2,265 6.11%
------------- ------------- ------------- ------------------- ------------ -------------
Total interest-bearing
liabilities $ 530,988 $ 4,926 3.68% 527,970 6,950 5.22%
============= ============= ============= =================== ------------ -------------
Total deposits and
other borrowings 588,765 4,926 3.32% 576,368 6,950 4.78%
------------- ------------- ------------- ------------------- ------------ -------------
Noninterest-bearing
liabilites 8,481 10,603
Shareholders' equity 50,970 45,855
------------- -------------------
Total liabilities and
shareholders' equity $ 648,216 $ 632,826
============= ===================
Net interest income $ 6,008 $ 5,045
============= ============
Net interest spread 3.68% 3.05%
============= =============
Net interest margin 3.85% 3.31%
============= =============
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 September 30,
2002 versus 2001
(dollars in thousands)
Due to change in:
Volume Rate Total
-------- --------- ---------
Interest earned on:
Federal funds sold $ 121 $ (63) $ 58
Securities (443) (209) (652)
Loans 360 (827) (467)
- ------------------------------------------------------------------------------------------------
Total interest-earning assets 38 (1,099) (1,061)
Interest Expense of
Deposits
Interest-bearing demand deposits (12) 88 76
Money market and savings (108) 254 146
Time deposits 68 1,545 1,613
- ------------------------------------------------------------------------------------------------
Total deposit interest expense (52) 1,887 1,835
Other borrowings 253 (64) 189
- ------------------------------------------------------------------------------------------------
Total interest expense 201 1,823 2,024
- ------------------------------------------------------------------------------------------------
Net interest income $ 239 $ 724 $ 963
- ------------------------------------------------------------------------------------------------
The Company's net interest margin increased 54 basis points to 3.85% for
the three months ended September 30, 2002, versus the prior year comparable
period. The improvement reflected the average growth of 7.2% in commercial and
construction loans, the 11% increase in average lower costing core non-public
deposits (demand, money market and savings accounts), and the repricing of
certificates of deposit and other deposits in the lower interest rate
environment. The average yield on interest-earning assets declined 84 basis
points to 7.00% for the three months ended September 30, 2002, from 7.84% for
the prior year comparable period due principally to the decline in the prime
rate of interest. Overall, the average rate paid on interest-bearing liabilities
decreased 154 basis points to 3.68% for the three months ended September 30,
2002, from 5.22% in the prior year comparable period, reflecting the impact of
the lower interest rate environment as the Company repriced its deposits lower.
The Company's net interest income increased $963,000, or 20.3%, to $6.0
million for the three months ended September 30, 2002, from $5.0 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 $239,000 with a $724,000 increase in net interest income
reflecting deposits repricing to lower rates. The positive impact of volume
changes reflected increases in average commercial and construction loans, and
increased lower cost core deposits. Average interest-earning assets increased
$12.9 million, to $621.6 million for the three months ended September 30, 2002,
from $608.7 million for the prior year comparable period.
17
The Company's total interest income decreased $1.1 million, or 8.8%, to
$10.9 million for the three months ended September 30, 2002, from $12.0 million
for the prior year comparable period, reflecting the lower interest rate
environment, particularly on loans tied to the prime rate of interest. Interest
and fees on loans decreased $467,000, to $9.2 million for the three months ended
September 30, 2002, from $9.7 million for the prior year comparable period. The
decline reflected a lower interest rate earned on average loans resulting from
the lower rate environment. The impact of the lower prime rate was the principal
factor reducing the yield on loans 73 basis points to 7.79%. Interest and
dividend income on securities decreased $652,000 to $1.5 million for the three
months ended September 30, 2002, from $2.2 million for the prior year comparable
period. This decline was due principally to the $32.1 million, or 22.5%,
decrease in average securities outstanding to $110.2 million at September 30,
2001 from $142.3 million for the prior year period. In addition, the average
rate earned on securities declined 58 basis points to 5.58% 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 or were
invested as federal funds sold. Interest income on federal funds sold and other
interest-earning assets increased $58,000 as average fed funds sold outstanding
increased $26.4 million to $41.6 million. This increase in average offset the
lower yields earned on these balances due to the lower interest rate
environment.
The Company's total interest expense decreased $2.0 million, or 29.1%, to
$4.9 million for the three months ended September 30, 2002, from $6.9 million
for the prior year comparable period, due to the lower rate environment and an
increase in lower cost core deposits. Interest-bearing liabilities averaged
$531.0 million for the three months ended September 30, 2002, versus $528.0
million for the prior year comparable period, however, the mix was more
favorable in the third quarter of 2002. Average interest-bearing lower cost
non-public core deposits increased $20.7 million, while higher cost time
deposits and other borrowings declined $7.4 million and $16.0 million,
respectively. Both factors contributed to the reduction in interest expense. The
average rate paid on interest-bearing liabilities decreased 154 basis points to
3.68% for the three months ended September 30, 2002, due to the decrease in
average rates paid on deposit products resulting from the lower interest rate
environment.
Interest expense on time deposits (certificates of deposit) decreased
$1.6 million, or 42.9%, to $2.1 million at September 30, 2002, from $3.8 million
for the prior year comparable period. This increase reflected the lower interest
rate environment as the average rate declined 252 basis points to 3.61%. In
addition, average certificates of deposit outstanding decreased $7.4 million, or
3.1%, to $235.8 million, for the third quarter ended September 30, 2002, from
$243.2 million in the third quarter of 2001, as higher cost time deposits
matured and were not replaced.
Interest expense on other borrowings, which consist of FHLB advances
and the trust preferred securities, decreased $189,000 or 8.3% to $2.1 million
for the for the three months ended September 30, 2002, compared to $2.3 million
for the prior year comparable period. This decrease resulted from a $16.0
million, or 10.9% decline in average other borrowings to $131.0 million at
September 30, 2002, versus $147.0 million for the prior year comparable period.
The decline in average other borrowings reflected increased deposit generation
and securities maturities and prepayments which were used to pay down term
borrowings. The Company issued $6.0 million of trust preferred securities in
November 2001, the expense for which is included in other borrowings expense.
Such expenses were $99,000 for the three months ended September 30, 2002.
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 $395,000 to $965,000 for the three months ended September 30,
2002, from $570,000 for the prior year comparable period. This increase
reflected additional provisions based on regulatory
18
classifications as detailed in the Company's Annual Report on Form 10K for 2001.
Finally, loan loss provisions reflected loan growth and other elements of the
Company's loan loss methodology.
Non-Interest Income
Total non-interest income increased $130,000, or 21.9% to $724,000 for
the three months ended September 30, 2002, versus $594,000 for the prior year
comparable period due primarily to increased loan fees.
Non-Interest Expenses
Total non-interest expenses increased $1.6 million, or 38.3% to $5.7
million for the three months ended September 30, 2002, from $4.1 million for the
prior year comparable period. This included a $1.4 million provision for the
write down of one other real estate owned property. Without this write down,
total expenses increased $208,000 or 5.0% to $4.3 million. Salaries and employee
benefits increased $89,000 or 4.3%, to $2.2 million for the three months ended
September 30, 2002, from $2.1 million for the prior year comparable period. The
increase reflected operational support for the tax refund and short-term
consumer loan products, business development efforts and normal merit increases.
Occupancy expense increased $25,000 to $363,000 for the three months ended
September 30, 2002, versus $338,000 for the prior year comparable period due
primarily to increased deprecation expense.
Legal fees increased $144,000 to $454,000 for the three months ended
September 30, 2002, from $310,000 for the prior year comparable period. This
increase reflected legal expenses related to loan collections and start-up legal
expenses associated with the short-term loan program.
Advertising expense declined $41,000 to $100,000 as the Company reduced
the number of advertisements during the year.
Other operating expenses decreased $72,000, or 7.3% to $903,000 for the
for the three months ended September 30, 2002, from $975,000 for the prior year
comparable period. The decline reflected lower FDIC insurance and postage
expenses. The third quarter of 2001 also included $90,000 in start-up expenses
related to the pilot program for the consumer short-term loan product.
Provision for Income Taxes
The provision for income taxes decreased $280,000, or 87.0%, to $42,000
for the three months ended September 30, 2002, from $322,000 for the prior year
comparable period. This decrease was primarily the result of the decrease in
pre-tax income. The effective tax rate was 38.9% for the three months ended
September 30, 2002, versus 33.0% for the prior year comparable period. The
effective tax rate increased in 2002, to reflect the impact of state taxes on
the Delaware Bank.
19
Nine Months Ended September 30, 2002 Compared to September 30, 2001
- -------------------------------------------------------------------
Results of Operations:
Overview
The Company's net income decreased $179,000, or 8.7% to $1.9 million,
or $0.29 per diluted share for the nine months ended September 30, 2002,
compared to $2.1 million, or $0.32 per diluted share for the prior year
comparable period. The decline in net income was primarily caused by the
provison to write down an other real estate owned property. This provision was
$1.4 million pre-tax or $909,000, and $0.14 per diluted share after tax. Net
interest income increased $4.0 million, or 28.0%, for the nine months ended
September 30, 2002 versus the prior year comparable period. This improvement
reflected lower deposit costs as the Company reduced the rate paid on average
core non-public deposits which grew 20.1%. The Company also increased its
average commercial and construction loans outstanding by 9.4% which benefited
the margin. The Company also benefited from the full period effect of the
short-term consumer loan product, first offered in the second quarter of 2001.
Non-interest income was favorably impacted by the growth of the tax refund
products. Partially offsetting the impact of these increases were a larger
provision for loan losses and higher legal and operating expenses. The decreased
net income resulted in a return on average assets and average equity of .38% and
5.18% respectively for the nine months ended September 30, 2002, compared to
..43% and 6.25% 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.
20
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
--------------- ------------- ------------- -------------- ------------ -------------
For the nine months ended For the nine months ended
Interest-earning assets: September 30, 2002 September 30, 2001
---------------------------------------------- ----------------------------------------------
Federal funds sold
and other interest-
earning assets 42,439 584 1.84% 32,285 1,190 4.93%
Securities 113,909 4,910 5.75% 153,004 7,119 6.20%
Loans receivable 468,146 28,124 8.03% 438,464 28,294 8.62%
--------------- ------------- ------------- --------------- ------------ -------------
Total interest-earning assets 624,494 33,618 7.19% 623,753 36,603 7.84%
Other assets 29,098 23,086
--------------- ---------------
Total assets $ 653,592 $ 646,839
=============== ===============
Interest-bearing liabilities:
Demand-non interest
bearing 57,964 48,904
Demand interest-bearing 45,697 363 1.06% 35,155 494 1.88%
Money market & savings 107,023 1,378 1.72% 91,308 2,442 3.58%
Time deposits 248,105 7,334 3.95% 263,351 12,445 6.32%
--------------- ------------- ------------- --------------- ------------ -------------
Total deposits 458,789 9,075 2.64% 438,718 15,381 4.69%
Total interest-bearing
deposits 400,825 9,075 3.03% 389,814 15,381 5.28%
--------------- ------------- ------------- --------------- ------------ -------------
Other borrowings 137,023 6,393 6.24% 153,768 7,047 6.13%
--------------- ------------- ------------- --------------- ------------ -------------
Total interest-bearing
liabilities $ 537,848 $ 15,468 3.85% 543,582 22,428 5.52%
=============== ============= ============= =============== ============ =============
Total deposits and
other borrowings 595,812 15,468 3.47% 592,486 22,428 5.06%
--------------- ------------- ------------- --------------- ------------ -------------
Noninterest-bearing
liabilites 9,037 9,759
Shareholders' equity 48,743 44,594
--------------- ---------------
Total liabilities and
shareholders' equity $ 653,592 $ 646,839
=============== ===============
Net interest income $ 18,150 $ 14,175
============= ============
Net interest spread 3.72% 2.78%
============= =============
Net interest margin 3.88% 3.03%
============= =============
21
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the period. Changes due to rate and volume variances have been allocated to
rate.
Rate/Volume Table
Nine months ended September 30,
2002 versus 2001
(dollars in thousands)
Due to change in:
Volume Rate Total
---------------- -------------- --------------
Interest earned on:
Federal funds sold $ 139 $ (745) $ (606)
Securities (1,679) (530) (2,209)
Loans 1,784 (1,954) (170)
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 244 (3,229) (2,985)
Interest Expense of
Deposits
Interest-bearing demand deposits (83) 214 131
Money market and savings (202) 1,266 1,064
Time deposits 451 4,660 5,111
- -------------------------------------------------------------------------------------------------------------------
Total deposit interest expense 166 6,140 6,306
Other borrowed funds 780 (126) 654
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 946 6,014 6,960
- -------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,190 $ 2,785 $ 3,975
- -------------------------------------------------------------------------------------------------------------------
The Company's net interest margin increased 85 basis points to 3.88% for
the nine months ended September 30, 2002, versus the prior year comparable
period. The improvement reflected the average growth in commercial and
construction loans of 9.4%, a 20.1% increase in average lower cost core deposits
(demand, money market and savings accounts), the repricing of certificates of
deposit to the lower rate environment and the full year impact of the short-term
consumer loan fees. Fees on short-term consumer loans, first offered in the
second quarter of 2001, contributed $3.7 million to interest income and 79 basis
points to the margin in 2002 versus $1.6 million and 34 basis points to the
margin in 2001. The Company was able to lower deposit costs, particularly
certificates of deposit in response to the lower rate environment. The average
yield on interest-earning assets declined 65 basis points to 7.19% for the nine
months ended September 30, 2002, from 7.84% for the prior year comparable period
due principally to the decline in the prime rate which was partially offset by
the higher yielding short-term consumer loans. The average rate paid on
interest-bearing liabilities decreased 167 basis points to 3.85% for the nine
months ended September 30, 2002, from 5.52% in the prior year comparable period
and reflected the repricing of certificates of deposit to the lower rate
environment.
The Company's net interest income increased $4.0 million, or 28.0%, to
$18.2 million for the nine months ended September 30, 2002, from $14.2 million
for the prior year comparable period. As shown in the Rate Volume table above,
the increase in net interest income was due primarily to the positive effect of
volume changes of approximately $1.2 million, and the benefit of lower deposit
rates which, after offsetting lower asset
22
yields, still contributed $2.8 million to 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 increased $741,000, to $624.5 million for the
for the nine months ended September 30, 2002, from $623.8 million for the prior
year comparable period.
The Company's total interest income decreased $3.0 million, or 8.2%, to
$33.6 million for the nine months ended September 30, 2002, from $36.6 million
for the prior year comparable period, reflecting the lower interest rate
environment. That decrease reflected a $3.2 million decline in interest income
due to lower interest rates which was partially offset by the positive effect of
increased volume of commercial and consumer loans of $244,000. Interest and fees
on loans decreased $170,000, to $28.1 million for the for the nine months ended
September 30, 2002, from $28.3 million for the prior year comparable period. The
decline reflected the lower interest rate environment and average prime rate
during 2002. This was partially offset by volume increases as average loans,
particularly commercial and construction loans which increased by $29.7 million
or 6.8% to $468.1 million at September 30, 2002. The full year impact of the
short term loan program also contributed to the positive volume variance. The
impact of the lower prime rate was the principal factor reducing the yield on
loans 59 basis points to 8.03%. Interest and dividend income on securities
decreased $2.2 million, or 31.0% to $4.9 million for the nine months ended
September 30, 2002, from $7.1 million for the prior year comparable period. This
decline was due principally to the $39.1 million, or 25.6%, decrease in average
securities outstanding to $113.9 million at September 30, 2002 from $153.0
million for the prior year period. In addition, the average rate earned on
securities declined 45 basis points to 5.75% as higher coupon investments
prepaid more rapidly than lower coupon investments 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
$606,000, reflecting the lower interest rate environment.
The Company's total interest expense decreased $7.0 million, or 31.0%, to
$15.5 million for the nine months ended September 30, 2002, from $22.4 million
for the prior year comparable period, due principally to the lower rate
environment as the Company was able to reprice deposits, particularly
certificates of deposit. Interest-bearing liabilities averaged $537.8 million
for the nine months ended September 30, 2002, a decrease of $5.7 million, or
1.0%, from $543.6 million for the prior year comparable period. Higher cost
certificates of deposit and borrowings decreased $15.2 million and $16.7 million
respectively, on average, while average lower cost core deposits increased $35.3
million or 20.1%. The average rate paid on interest-bearing liabilities
decreased 167 basis points to 3.85% for the nine months ended September 30,
2002, due to the decrease in average rates paid on deposit products as a result
of the lower interest rate environment.
Interest expense on time deposits (certificates of deposit) decreased
$5.1 million, or 41.1%, to $7.3 million at September 30, 2002, from $12.4
million for the prior year comparable period. This decrease reflected the lower
interest rate environment and the ability of the Bank to reprice certificates as
the average rate paid on these deposits declined 237 basis points to 3.95%. In
addition, average certificates of deposit outstanding decreased $15.2 million,
or 5.8%, to $248.1 million, for the nine months ended September 30, 2002, from
$263.4 million for the prior year comparable period as the Company was able to
increase its lower cost core deposits.
Interest expense on other borrowings, which consist of FHLB advances
and trust preferred securities, decreased $654,000 or 9.3% to $6.4 million for
the nine months ended September 30, 2002, compared to $7.0 million for the prior
year comparable period. This decrease resulted from a $16.7 million, or 10.9%
decline in average other borrowings to $137.0 million at September 30, 2002,
versus $153.8 million for the prior year comparable. 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. Such expenses were $292,000 for the nine months ended
September 30, 2002.
23
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 $2.1 million to $3.5 million for the nine months ended
September 30, 2002, from $1.3 million 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,
had provisions of $1.2 million in the year 2002 versus $535,000 in 2001.
Finally, provisions also reflected loan growth and other elements of the
Company's loan loss methodology.
Non-Interest Income
Total non-interest income increased $788,000, or 40.6% to $2.7 million
for the nine months ended September 30, 2002, versus $1.9 million for the prior
year comparable period reflecting increased revenue resulting from a greater
volume of tax refund products and increased loan fees.
Non-Interest Expenses
Total non-interest expenses increased $2.7 million, or 23.0% to $14.4
million for the for the nine months ended September 30, 2002, from $11.7 million
for the prior year comparable period. The increase in the third quarter includes
a write down of one other real estate owned property for $1.4 million. Not
including this item, non-interest expenses increased $1.3 million or 11.2%.
Salaries and employee benefits increased $532,000 or 8.7% to $6.7 million for
the for the nine months ended September 30, 2002, from $6.1 million for the
prior year comparable period. The increase reflected operational support for the
tax refund and short-term consumer loan products, business development efforts,
increased incentives and normal merit increases.
Occupancy expense increased of $53,000 to $1.1 million due to increased
rent and repairs and maintenance expense.
Equipment expense increased $61,000 or 8.8%, reflecting higher
depreciation on data processing equipment.
Legal fees increased $752,000 to $1.2 million for the nine months ended
September 30, 2002, from $429,000 for the prior year comparable period. This
increase reflected legal expenses related to loan collections and start-up legal
costs related to the short-term loan and tax refund product programs.
Advertising expense declined $86,000, or 19.3% to $359,000 as the Company
reduced the number of advertisements this year.
Other operating expenses decreased $21,000, to $3.0 million for the for
the nine months ended September 30, 2002, from $3.0 million for the prior year
comparable period.
Provision for Income Taxes
The provision for income taxes increased $86,000, or 8.5%, to $1.1 million
for the nine months ended September 30, 2002, from $1.0 million for the prior
year comparable period. This increase was primarily the result of state income
tax expense. The effective tax rate was 36.9% for the nine months ended
September 30, 2002, versus 33.0% for the prior year comparable period due to
state income tax expense.
24
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 totaling $65.7 million at September 30, 2002. 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 $58.5 million and $57.7
million and standby letters of credit of approximately $7.2 million and $5.3
million at September 30, 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 September 30, 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 $138.0 million, which
represented 29.4% of gross loans receivable at September 30, 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.
25
Regulatory Matters
The following table presents the Company's capital regulatory ratios at
September 30, 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 September 30, 2002
Total risk based capital
Republic First Bank $52,081 13.26% $31,415 8.00% $39,269 10.00%
First Bank of Delaware 6,157 25.06% 1,966 8.00% 2,457 10.00%
Republic First Bancorp, 60,182 14.44% 33,345 8.00% 41,681 N/A
Inc.
Tier one risk based capital
Republic First Bank 47,145 12.01% 15,707 4.00% 23,561 6.00%
First Bank of Delaware 5,849 23.80% 983 4.00% 1,474 6.00%
Republic First Bancorp, 54,943 13.18% 16,672 4.00% 25,009 N/A
Inc.
Tier one leveraged capital
Republic First Bank 47,145 7.73% 30,492 5.00% 30,492 5.00%
First Bank of Delaware 5,849 14.70% 1,989 5.00% 1,989 5.00%
Republic First Bancorp, 54,943 8.50% 32,334 5.00% 32,334 N/A
Inc.
Actual For Capital To be well capitalized
Adequacy purposes 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 and does not
currently plan to pay cash dividends to shareholders in the next year.
26
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 each
formed Asset/Liability Committees ("ALCOs"), comprised of selected members of
the Banks' boards of directors and senior management, which monitor 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 Banks'. The ALCOs meet at least quarterly.
The Company's most liquid assets totaled $62.1 million at September 30,
2002, compared to $41.4 million at December 31, 2001, due to an increase in
federal funds sold. Loan maturities and repayments are a primary source of asset
liquidity. At September 30, 2002, the Bank estimated that in excess of $50.0
million of loans would mature or be repaid in the six month period that will end
March 31, 2003. 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 September 30,
2002, the Bank had $109.0 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 or
long-term needs at rates often lower than other sources and require pledging of
securities or loan collateral.
At September 30, 2002, the Company had aggregate outstanding commitments
(including unused lines of credit and letters of credit) of $65.7 million.
Certificates of deposit scheduled to mature in one year totaled $150.9 million
at September 30, 2002, and no borrowings were scheduled to mature within that
period. The Company anticipates that it will have sufficient funds available to
meet its current commitments. The Bank has $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
September 30, 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 $224.0 million. As of September 30, 2002, and December 31, 2001,
the Company had borrowed $125.0 million and $142.5 million, respectively, under
these lines of credit. Securities also represent a primary source of liquidity
for the Banks. 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
27
portfolio is also available for liquidity, usually 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 Banks' ALCOs are responsible for managing the liquidity position and
interest sensitivity of the Banks. Those committees' 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.
Securities Portfolio
At September 30, 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 $98.0 million and $100.8 million as of
September 30, 2002, respectively. The net unrealized gain on securities
available for sale as of that date was $2.8 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 $3,000,000, but customers may borrow significantly larger
amounts up to the Banks combined legal lending limit of $8.5 million at
September 30, 2002. Individual customers may have several loans often secured by
different collateral. The aggregate amount of loans that exceeded $5.5 million
at September 30, 2002, was $17.6 million.
The Company's net loans decreased $1.4 million, to $462.5 million at
September 30, 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:
28
(dollars in thousands) As of September 30, 2002 As of December 31, 2001
-------------------------------------------------------------------------------
Balance % of Total Balance % of Total
-------------------------------------------------------------------------------
Commercial:
Real estate secured $ 332,647 70.8 $ 321,579 68.5
Non real estate secured 52,072 11.1 53,388 11.4
Unsecured 6,359 1.3 7,229 1.5
-------------------------------------------------------------------------------
391,078 83.2 382,196 81.4
Residential real estate 59,461 12.7 67,821 14.5
Consumer, short-term & other 19,502 4.1 19,302 4.1
-------------------------------------------------------------------------------
Total loans 470,041 100.0% 469,319 100.0%
Less allowance for loan losses (7,533) (5,431)
---------------- ------------------
Net loans $ 462,508 $ 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.
29
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
September 30, December 31,
2002 2001
-------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $3,469 $518
Non-accrual loans 5,710 3,830
-------------------------------------
Total non-performing loans (1) 9,179 4,348
Other real estate owned 500 1,858
-------------------------------------
Total non-performing assets (2) $9,679 $6,206
=====================================
Non-performing loans as a percentage of total
loans net of unearned
Income 1.95% 0.93%
Non-performing assets as a percentage of total
assets 1.48% 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 $4.8 million to $9.2 million at
September 30, 2002. The increase in loans over 90 days past due reflected loans
to two different borrowers. The increase in non-accrual loans, resulted from a
loan to one borrower classified as non-accrual in the second quarter of 2002.
The recorded investment in impaired loans totaled $5.7 million and
$4.3 million at September 30, 2002, and December 31, 2001, respectively, and the
amount of such valuation allowances were $2.7 million 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 September 30, 2002, and December 31, 2001, internally classified
substandard loans totaled approximately $10.3 million and $8.7 million
respectively; and doubtful loans totaled approximately $2.8 million and $62,000,
respectively. There were no loans classified as loss at those dates. The
increase in doubtful loans represent loans to one borrower which were classified
as doubtful and placed in non-accrual status in the second quarter of 2002. At
September 30, 2002, all identified problem loans are included in the preceding
table with the exception of loans classified as substandard but still accruing
which totaled $3.7 million as of September 30, 2002.
The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at
September 30, 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
September 30, 2002 and December 31, 2001, in the aggregate principal amount of
$1.2 million and $853,000, respectively.
30
At September 30, 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 $138.0 million, which
represented 29.4% 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 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.
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 deteriorations 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. In the third quarter of 2002, the
Company wrote down the value of the property by $1.4 million to $500,000.
At September 30, 2002, the Company had no credit exposure to "highly
leveraged transactions" as defined by the Federal Reserve Bank.
31
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the nine
months ended September 30, 2002, and 2001, and the twelve months ended December
31, 2001 is as follows:
For the nine months For the twelve months For the nine months
ended ended ended
(dollars in thousands) September 30, 2002 December 31, 2001 September 30, 2001
--------------------- ---------------------- --------------------
Balance at beginning of period .......... $5,431 $4,072 $4,072
Charge-offs:
Commercial ........................... 94 2,074 33
Consumer and short-term .............. 1,332 805 435
-------- -------- --------
Total charge-offs ................. 1,462 2,879 468
-------- -------- --------
Recoveries:
Commercial ........................... 35 257 255
Consumer ............................. - 17 17
-------- -------- --------
Total recoveries .................. 35 274 272
--------
-------- --------
Net charge-offs ......................... 1,391 2,605 196
-------- -------- --------
Provision for loan losses ............... 3,493 3,964 1,347
-------- -------- --------
Balance at end of period ............. $7,533 $5,431 $5,223
======== ======== ========
Average loans outstanding (1) ........ $468,146 $448,397 $438,464
======== ======== ========
As a percent of average loans (1):
Net charge-offs ...................... 0.30% 0.58% 0.04%
Provision for loan losses ............ 0.75% 0.88% 0.31%
Allowance for loan losses ............ 1.61% 1.21% 1.19%
Allowance for loan losses to:
Total loans, net of unearned income at
period end ........................ 1.60% 1.16% 1.12%
Total non-performing loans at period
end ............................... 82.07% 124.89% 62.05%
<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.
32
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 September
30, 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.
It is impractical 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 based
upon historical experience. The entire allowance for loan losses is available to
absorb loan losses in any loan category:
At September 30, 2002 At December 31, 2001
--------------------- --------------------
Percent of Percent of
Loans Loans
In Each In Each
Amount Category Amount Category
(in 000's) To Loans (in 000's) to Loans
---------- -------- ---------- --------
Allocation of allowance for loan losses:
Commercial $6,786 83.2% $4,814 81.4%
Residential real estate 183 12.7% 203 14.5%
Consumer, short-term and other 142 4.1% 182 4.1%
Unallocated 422 -% 232 -%
-------------------------------------------------------------------
Total $7,533 100.00% $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 September 30, 2002, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $391.0
million, $59.5 million and $19.5 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.
33
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.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
The management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, have conducted an evaluation of the effectiveness of
the Company's disclosure controls and procedures pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934 as of a date (the "Evaluation Date") within
90 days prior to the filing date of this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
effective in ensuring that all material information relating to the Company,
including our consolidated subsidiaries, required to be filed in this quarterly
report has been made known to them in a timely manner.
(b) Changes in internal controls.
There have been no significant changes made in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the Evaluation Date.
34
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 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 adverse 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 had
opined that the Delaware Bank is acting in accordance with applicable law. The
Delaware Bank's marketer, also a defendant in the suit, is required to pay all
defense costs, and to indemnify the Bank against any resulting legal liability.
This suit was dismissed in the third quarter of 2002.
Item 2: Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3: Defaults upon Senior Securities
-------------------------------
None
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5: Other Information
-----------------
Our chief executive officer and chief financial officer have furnished
to the SEC the certification with respect to this Report that is required by
Section 906 of the Sarbanes-Oxley Act of 2002.
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)
35
Exhibit No.
- -----------
10 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
September 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.
99 Certifications under Section 906 of the Sarbanes-Oxley Act
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
None.
36
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: November 14, 2002
37
Certifications under Section 302 of the Sarbanes-Oxley Act:
I, Harry D. Madonna, President and Chief Executive Officer of the Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: November 14, 2002
/s/ Harry D. Madonna, President and Chief Executive Officer
38
I, Paul Frenkiel, Chief Financial Officer of the Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in the Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to date of their evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
DATE: November 14, 2002
/s/ Paul Frenkiel, Executive Vice President and Chief Financial Officer
39