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: June 30, 2003
Commission File Number: 000-17007
Republic First Bancorp, Inc.
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(Exact name of business issuer as specified in its charter)
Pennsylvania 23-2486815
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(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
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(Address of principal executive offices) (Zip code)
215-735-4422
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES NO __X__
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.
6,667,481 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of July 31, 2003
Page 1 of 39
Exhibit index appears on page 38
TABLE OF CONTENTS
-----------------
Page
Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 37
Item 4: Controls and Procedures 37
Part II: Other Information
Item 1: Legal Proceedings 38
Item 2: Changes in Securities and Use of Proceeds 38
Item 3: Defaults Upon Senior Securities 38
Item 4: Submission of Matters to a Vote of Security Holders 38
Item 5: Other Information 38
Item 6: Exhibits, Reports on Form 8-K and Certifications 38
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1: Financial Statements
--------------------
Page Number
-----------
(1) Consolidated Balance Sheets as of June 30, 2003, (unaudited) and December 31, 2002........................... 4
(2) Consolidated Statements of Income for the three and six months ended
June 30, 2003, and 2002(unaudited)........................................................................... 5
(3) Consolidated Statements of Cash Flows for the six months ended
June 30, 2003, and 2002(unaudited)........................................................................... 6
(4) Notes to Consolidated Financial Statements................................................................... 7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of June 30, 2003 and December 31, 2002
dollars in thousands, except share data
ASSETS: June 30, 2003 December 31, 2002
------------- -----------------
(unaudited)
Cash and due from banks $ 32,210 $ 18,114
Interest bearing deposits with banks 3,631 3,570
Federal funds sold and interest-bearing deposits with banks 64,831 51,126
--------- ---------
Total cash and cash equivalents 100,672 72,810
Other interest-earning restricted cash 4,552 4,228
Investment securities available for sale, at fair value 53,725 87,291
Investment securities held to maturity at amortized cost
(Fair value of $8,889 and $9,297, respectively) 8,864 9,270
Loans receivable (net of allowance for loan losses of
$7,876 and $6,642, respectively) 458,320 457,047
Premises and equipment, net 4,816 5,000
Other real estate owned 1,015 1,015
Accrued interest receivable 3,481 3,777
Business owned life insurance 11,580 -
Other assets 11,861 7,254
--------- ---------
Total Assets $ 658,886 $ 647,692
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 70,315 $ 59,194
Demand - interest-bearing 59,813 54,653
Money market and savings 146,426 119,213
Time under $100,000 123,611 139,356
Time $100,000 or more 62,752 83,886
--------- ---------
Total Deposits 462,917 456,302
FHLB Advances 125,000 125,000
Accrued interest payable 3,128 3,596
Other liabilities 7,880 5,518
Corporation-obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior obligations
of the corporation 6,000 6,000
--------- ---------
Total Liabilities 604,925 596,416
--------- ---------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares
authorized; shares issued 6,667,481 as of
June 30, 2003 and 6,405,592 as of December 31, 2002 67 64
Additional paid in capital 33,226 32,305
Retained earnings 21,204 18,760
Treasury stock at cost (175,172 shares) (1,541) (1,541)
Accumulated other comprehensive income 1,005 1,688
--------- ---------
Total Shareholders' Equity 53,961 51,276
--------- ---------
Total Liabilities and Shareholders' Equity $ 658,886 $ 647,692
========= =========
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Six Months Ended June 30,
dollars in thousands, except per share data
(unaudited)
Quarter to Date Year to Date
June 30 June 30
------- -------
2003 2002 2003 2002
------- ------ ------- -------
Interest income:
Interest and fees on loans $11,543 $9,387 $23,876 $18,920
Interest and dividend income on federal
funds sold and other interest-earning balances 264 224 492 393
Interest and dividends on investment securities 746 1,625 1,745 3,371
------- ------ ------- -------
Total interest income 12,553 11,236 26,113 22,684
------- ------ ------- -------
Interest expense:
Demand interest-bearing 128 120 247 241
Money market and savings 481 450 913 795
Time under $100,000 1,071 1,509 2,287 3,254
Time $100,000 or more 532 918 1,184 1,935
Other borrowed funds 2,048 2,097 4,089 4,317
------- ------ ------- -------
Total interest expense 4,260 5,094 8,720 10,542
------- ------ ------- -------
Net interest income 8,293 6,142 17,393 12,142
Provision for loan losses 2,286 1,248 5,698 2,529
------- ------ ------- -------
Net interest income after provision
for loan losses 6,007 4,894 11,695 9,613
------- ------ ------- -------
Non-interest income:
Loan advisory and servicing fees 109 386 295 632
Service fees on deposit accounts 332 314 652 598
Tax refund products 1 350 373 734
Other income 55 19 72 40
------- ------ ------- -------
497 1,069 1,392 2,004
------- ------ ------- -------
Non-interest expenses:
Salaries and benefits 2,414 2,242 4,891 4,482
Occupancy 374 363 759 711
Depreciation 302 235 597 479
Legal 271 382 511 727
Advertising 46 98 118 259
Other expenses 1,363 1,237 2,500 2,204
------- ------ ------- -------
4,770 4,557 9,376 8,862
------- ------ ------- -------
Income before income taxes 1,734 1,406 3,711 2,755
Provision for income taxes 583 485 1,267 946
------- ------ ------- -------
Net income $1,151 $921 $2,444 $1,809
======= ====== ======= =======
Net income per share:
Basic $0.18 $0.15 $0.38 $0.29
======= ====== ======= =======
Diluted $0.17 $0.14 $0.37 $0.28
======= ====== ======= =======
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30,
Dollars in thousands
(unaudited)
2003 2002
Cash flows from operating activities:
Net income $ 2,444 $ 1,809
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 5,698 2,529
Depreciation 597 479
Amortization of discounts on investment securities 253 212
Increase in value of business owned life insurance (80) -
Increase in other assets and accrued interest
receivable (3,959) (2,696)
Increase (decrease) in accrued expenses
and other liabilities 1,893 (343)
-------- --------
Net cash provided by operating activities 6,846 1,990
-------- --------
Cash flows from investing activities:
Purchase of securities:
Held to maturity (2,254) (956)
Available for sale (1,520) (6,956)
Proceeds from principal receipts, calls and maturities of securities:
Held to maturity 2,660 3,100
Available for sale 33,799 17,693
Net increase in loans (6,971) (8,085)
(Increase) decrease in other interest-earning restricted cash (324) 5
Purchase of business owned life insurance (11,500) -
Premises and equipment expenditures (413) (146)
-------- --------
Net cash provided by investing activities 13,477 4,655
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options 924 71
Net increase in demand, money market and savings deposits 43,494 26,176
Repayment of long-term borrowings - (17,500)
Net decrease in time deposits (36,879) (7,470)
-------- --------
Net cash provided by financing activities 7,539 1,277
-------- --------
Increase in cash and cash equivalents 27,862 7,922
Cash and cash equivalents, beginning of period 72,810 41,420
-------- --------
Cash and cash equivalents, end of period $100,672 $ 49,342
======== ========
Supplemental disclosure:
Interest paid $ 9,128 $ 10,846
======== ========
Taxes paid $ 1,950 $ 2,950
======== ========
(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.
It includes two wholly owned subsidiaries, Republic First Bank ("PA Bank"), a
Pennsylvania state chartered bank and First Bank of Delaware ("DE Bank), a
Delaware state chartered Bank, (together "the Banks"). The PA Bank offers a
variety of banking services to individuals and businesses throughout the Greater
Philadelphia and South Jersey area through its offices and branches in
Philadelphia and Montgomery Counties.
On June 1, the Company opened the DE Bank located at Brandywine Commons II,
Concord Pike and Rocky Run Parkway in Brandywine, New Castle County Delaware.
The DE Bank offers substantially the same services and financial products as the
PA Bank, but additionally offers short-term consumer loans and other loan
products not offered by the PA Bank.
The Banks encounter vigorous competition for market share in the geographic
areas they serve from bank holding companies, other community banks, thrift
institutions and other non-bank financial organizations, such as mutual fund
companies, insurance companies and brokerage companies.
The Banks are subject to regulation by certain state and federal agencies.
These regulatory agencies periodically examine the Company and its subsidiaries
for adherence to laws and regulations. As a consequence, the cost of doing
business may be affected.
Note 2: Current Developments:
An 8-K was filed by the Company on June 27, 2003 which disclosed an
exit from the short-term consumer loan line of business. The Board of Directors
of the DE Bank, determined that the DE Bank would cease selling participations
in short-term loans to the PA Bank, effective June 23, 2003 and would cease
making short-term loans effective October 31, 2003. The Board of the DE Bank
made its determination based on substantially increased Federal Reserve Bank
regulatory requirements for participation in that line of business that the DE
Bank did not believe it can satisfy. The DE Bank believes that these changes
permit termination of contracts between the DE Bank and the companies which
assist it in making such loans. The DE Bank is continuing to review its options
regarding the short-term consumer loan program. The Company believes that the DE
Bank's discontinuation of the short-term lending program will have a material
adverse affect on the Company's earnings but because of the phase out of the
lending program, a calculation of the earnings loss cannot be reasonably
determined at this time. The Company is currently evaluating the provisions of
FAS No. 144 and has determined that the "held for sale" criteria has not been
met at June 30, 2003. See also Risk and Uncertainties and Certain Significant
Estimates on Page 8.
Note 3: Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements include the accounts of Republic
First Bancorp, Inc. and its wholly-owned subsidiaries, the PA Bank and the DE
Bank. Such statements have been presented in accordance with accounting
principles generally accepted in the United States of America or applicable to
the banking industry.
7
All significant inter-company accounts and transactions have been eliminated in
the consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the results of operations of the Banks
are subject to risks and uncertainties surrounding their exposure to change in
the interest rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans
and mortgage-backed securities vary significantly and may cause significant
fluctuations in interest margins.
Short-term consumer loans were first offered through the DE Bank in
2001. At June 30, 2003, there were approximately $773,000 of short-term consumer
loans outstanding, which were originated in Texas, California, Georgia, Arizona,
Ohio and North Carolina through a small number of marketers. The Company
currently sells a majority of these loans to independent third parties and
retains a portion of the interest income. DE Bank had outstanding loans of $23.1
million as of June 30, 2003 and has sold $22.4 million of these loans to the
previously mentioned third parties resulting in loans still held on the books of
$773,000. The Company evaluated these sales and determined that these
transactions qualify as sales under FAS 140. These loans generally have
principal amounts of $1,000 or less and terms of approximately two weeks.
Effective June 23, 2003, the DE Bank ceased selling participations in these
short-term consumer loans to the PA Bank. The DE Bank will cease making these
loans effective October 31, 2003. The DE Bank also believes that the change in
regulatory requirements permit it to terminate contracts related to these loans
with unaffiliated firms. The Company believes that the De Bank's decision
relating to these loans will have a materially adverse affect on the Company's
earnings; however, because of the phase-out of the lending programs, the precise
effect on the Company's earnings cannot be predicted with certainty. The Company
is currently evaluating the provisions of FAS No. 144 and has determined that
the "held for sale" criteria has not been met at June 30, 2003. See also NOTE 2
CURRENT DEVELOPMENTS, NOTE 6 SEGMENT REPORTING, and ITEM 2; MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for
information about the contribution of the short-term consumer loan program to
the Company's net income.
In 2001, the DE Bank began offering two tax refund products to customers of
Liberty Tax Service. Liberty Tax Service is a nationwide tax service provider
which prepares and electronically files federal and state income tax returns and
the DE Bank offers certain Liberty Tax Service customers accelerated refunds
("Tax Refund Products"). Tax Refund Products consist of accelerated check
refunds ("ACRs"), and refund anticipation loans ("RALs"). There can be no
assurance that revenues from these products will continue to grow or be
maintained at current levels in future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make significant estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions,
8
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers' perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. Since the allowance for loan
losses and carrying value of other real estate owned are dependent, to a great
extent, on the general economy and other conditions that may be beyond the
Banks' control, it is at least reasonably possible that the estimates of the
allowance for loan losses and the carrying values of other real estate owned
could differ materially in the near term.
Stock Based Compensation:
The Company accounts for stock options under the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which
contains a fair valued-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees. Entities that continue to account for stock options
using APB Opinion 25 are required to make pro forma disclosures of net income
and earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied.
At June 30, 2003, the Company had a stock-based employee compensation plan,
The Company accounts for that plan under the recognition and measurement
principles of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Stock-based employee compensation costs are not reflected in
net income, as all options granted under the plan had an exercise price equal to
the market vale of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per share if
the company had applied the fair value recognition provisions of SFAS No. 123,
to stock-based employee compensation ( in thousands, except per share amounts).
Stock Based Compensation
(dollar amounts in thousands) Three months ended Six months ended
June 30, June 30,
-------------------------- -----------------------------
2003 2002 2003 2002
--------- ------- --------- ---------
Net income as reported $ 1,151 $ 921 $ 2,444 $ 1,809
Less: Stock based compensation costs determined
under fair value method for all awards - (51) (102) (332)
--------- ------- --------- ---------
Net income, proforma $ 1,151 $ 870 $ 2,342 $ 1,477
========= ======= ========= =========
Earnings per common share-basic: As reported $ 0.18 $ 0.15 $ 0.38 $ 0.29
--------- ------- --------- ---------
Pro-forma $ 0.18 $ 0.14 $ 0.37 $ 0.24
--------- ------- --------- ---------
Earnings per common share-diluted: As reported $ 0.17 $ 0.14 $ 0.37 $ 0.28
--------- ------- --------- ---------
Pro-forma $ 0.17 $ 0.13 $ 0.35 $ 0.23
--------- ------- --------- ---------
The Company granted 56,667 and 128,167 options during the six months
ended June 30, 2003 and 2002, respectively. The proforma compensation expense is
based upon the fair value of the option at grant date. The fair value of each
option is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in 2003
and 2002, respectively: dividend yields of 0% for both periods; expected
volatility of 31% for 2003 and 35% for 2002; risk-free interest rates of 4.0%
and 4.7%, respectively and an expected life of 5.0 years for both periods.
9
Note 4: Significant Accounting Pronouncements
The Company adopted FIN 45 Guarantor's Accounting and Disclosure Requirements
for Guarantees, including Indirect Guarantees of Indebtedness of Others on
January 1, 2003. FIN 45 requires a guarantor entity, at the inception of a
guarantee covered by the measurement provisions of the interpretation, to record
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company has financial and performance letters of credit.
Financial letters of credit require the Company to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Company to make payments if the
customer fails to perform certain non-financial contractual obligation. The
Company previously did not record a liability, except for the initial fees
received, when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002.
The maximum potential undiscounted amount of future payments of these letters of
credit as of June 30, 2003 are $7.1 million and they expire through 2006.
Amounts due under these letters of credit would be reduced by any proceeds that
the Company would be able to obtain in liquidating the collateral for the loans,
which varies depending on the customer.
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46), Consolidation
of Variable Interest Entities. FIN 46 clarifies the application of Accounting
Research Bulletin 51, Consolidated Financial Statements, for certain entities
that do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties
or in which equity investors do not have the characteristics of a controlling
financial interest ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both. FIN 46 applies immediately
to variable interest entities created after January 31, 2003, and to variable
interest entities in which an enterprise obtains an interest after that date.
In November 2001, the Company, through Sandler O'Neill and Partners, issued
trust preferred securities. Management has determined that the Trusts qualify as
variable interest entities under FIN 46. The Trusts issued mandatory redeemable
preferred stock to investors and loaned the proceeds to the Company. The Trusts
hold, as their sole assets, subordinated debentures issued by the Company in
November 2001. The timing and amount of payments on the subordinated debentures
are the same as the timing and amount of payments by The Trusts on the
mandatorily redeemable preferred stock. The Trusts are currently included in the
Company's consolidated financial statements. Management believes that the Trusts
should continue to be included in the Company's consolidated financial
statements after the effective date of FIN 46. However, as additional
interpretations related to entities similar to the Trusts become available,
management will reevaluate its conclusion that the Trusts should be included in
the consolidated financial statements and its potential impact to its Tier I
capital calculation under such interpretations.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS No.
149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations.
10
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150
changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. The Company
currently classifies its Corporation -obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior obligations of the
corporation as a liability. As a result, management does not anticipate the
adoption of SFAS No. 150 to have a material impact on the Company's financial
position or results of operations.
Note 5: 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.
Note 6: Segment Reporting
The Company's reportable segments represent strategic businesses that
offer different products and services. The segments are managed separately
because each segment has unique operating characteristics, management
requirements and marketing strategies. The Company 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 and refund anticipation loans offered by
the DE Bank 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 by the DE 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 six months ended June 30, 2003 and 2002, is as
follows:
11
As of and for the six months ended
June 30, 2003
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income $ 7,752 $ 739 $ 1,191 $ 7,711 $ 17,393
Provision for loan losses 60 61 1,042 4,535 5,698
Non-interest income 872 147 373 - 1,392
Non-interest expenses 7,218 766 400 992 9,376
-------- -------- -------- -------- --------
Net income $ 902 $ 39 $ 81 $ 1,422 $ 2,444
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets 594,181 56,907 - 7,798 658,886
Total loans 432,839 32,584 - 773 466,196
Total deposits 423,782 39,135 - - 462,917
June 30, 2002
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income (loss) $ 8,933 $ 613 $ (21) $ 2,617 $ 12,142
Provision for loan losses 1,600 10 - 919 2,529
Non-interest income 1,034 236 734 - 2,004
Non-interest expenses 7,262 782 288 530 8,862
-------- -------- -------- -------- --------
Net income $ 760 $ 49 $ 276 $ 724 $ 1,809
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets $616,598 $ 35,498 $ 572 $ 3,740 $656,408
Total loans 444,626 22,023 - 2,795 469,444
Total deposits 438,462 27,461 - - 465,923
12
As of and for the three months ended
June 30, 2003
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income $ 3,719 $ 375 $ 37 $ 4,162 $ 8,293
Provision for loan losses - 30 24 2,232 2,286
Non-interest income 440 56 1 - 497
Non-interest expenses 3,722 477 141 430 4,770
-------- -------- -------- -------- --------
Net income (loss) $ 302 $ (50) $ (81) $ 980 $ 1,151
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets 594,181 56,907 - 7,798 658,886
Total loans 432,839 32,584 - 773 466,196
Total deposits 423,782 39,135 - - 462,917
June 30, 2002
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income $ 4,483 $ 339 $ 17 $ 1,303 $ 6,142
Provision for loan losses 850 - - 398 1,248
Non-interest income 604 115 350 - 1,069
Non-interest expenses 3,769 398 119 271 4,557
-------- -------- -------- -------- --------
Net income $ 332 $ 37 $ 161 $ 391 $ 921
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets $616,598 $ 35,498 $ 572 $ 3,740 $656,408
Total loans 444,626 22,023 - 2,795 469,444
Total deposits 438,462 27,461 - - 465,923
13
Note 7: 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 through the Company's stock
option plan. The following table is a reconciliation of the numerator and
denominator used in calculating basic and diluted EPS. CSEs which are
anti-dilutive are not included in the following calculation. At June 30, 2003,
and 2002, respectively, there were 35,840 and 106,340 of stock options, that
were not included in the calculation of EPS because the option price is greater
than the average market price for the period. These CSEs, however, may become
dilutive in the future.
The following table is a comparison of EPS for the three months ended
June 30, 2003, and 2002.
Quarter to Date Year to Date
2003 2002 2003 2002
Net Income $1,151,000 $921,000 $2,444,000 $1,809,000
Per Per Per Per
Shares Share Shares Share Shares Share Shares Share
---------------------------------------------------------------------------------------------
Weighted average shares
For period 6,476,159 6,199,395 6,358,245 6,191,175
Basic EPS $0.18 $0.15 $0.38 $0.29
Add common stock equivalents
representing dilutive stock options 294,980 287,149 264,820 264,559
--------- --------- --------- ---------
Effect on basic EPS of dilutive CSE $(0.01) $(0.01)
----- ----- ----- -----
(0.01) $(0.01)
Equals total weighted average
shares and CSE (diluted) 6,771,139 6,486,544 6,623,065 6,455,734
========= ========= ========= =========
Diluted EPS $0.17 $0.14 $0.37 $0.28
----- ----- ----- -----
Note 8: 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 Six months ended
June 30, June 30,
------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $ 1,151 $ 921 $ 2,444 $ 1,809
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses)
during the period (329) 1,800 (683) 1,288
Less: Reclassification adjustment for gains
included in net income - - - -
------- ------- ------- -------
Comprehensive income $ 822 $ 2,721 $ 1,761 $ 3,097
======= ======= ======= =======
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of significant
changes in the Company's results of operations, financial condition and capital
resources presented in the accompanying consolidated financial statements. 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, 2002, Quarterly Reports on Form 10-Q,
filed by the Company in 2003 and 2002, and any Current Reports on Form 8-K filed
by the Company, as well as other filings.
Financial Condition:
June 30, 2003, Compared to December 31, 2002
Total assets increased $11.2 million to $658.9 million at June 30,
2003, versus $647.7 million at December 31, 2002. This net increase reflected
higher federal funds and commercial loans, partially offset by historically high
prepayments in residential mortgages and mortgage-backed securities.
Loans:
The loan portfolio, which represents the Company's largest asset, is its
most significant source of interest income. The Company's lending strategy is to
focus on small and medium sized businesses and professionals that seek highly
personalized banking services. Total loans increased $2.5 million, to $466.2
million at June 30, 2003, versus $463.7 million at December 31, 2002. The slight
increase reflected $34.3 million growth in commercial and construction loans
which partially offset a $27.0 million decline in residential mortgage loans
resulting primarily from historically high prepayments and lower amounts of
short-term consumer loans outstanding. 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, home equity loans and lines of credit, overdraft
lines of credit and others. 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 $9.0 million at June 30, 2003.
Individual customers may have several loans that are secured by different
collateral. The aggregate amount of those relationships that exceeded $5.8
million at June 30, 2003, was $13.5 million. The $5.8 million threshold
15
approximates 10% of total capital and reserves and reflects an additional
internal monitoring guideline. At June 30, 2003, the Company had $773,000 in
short-term consumer loans outstanding versus $5.0 million at December 31, 2002.
The decrease reflected the decision to participate the majority of the loans to
independent third parties to comply with regulatory requests. These loans were
first offered in the second quarter of 2001. These loans have principal amounts
of less than $1,000, and terms of approximately two weeks and were originated in
North Carolina, Georgia, Texas, Arizona, Ohio and California through a small
number of marketers.
Investment Securities:
Investment securities available-for-sale are investments which may be sold
in response to changing market and interest rate conditions and for liquidity
and other purposes. The Company's investment securities available-for-sale
consist primarily of U.S Government debt securities, U.S. Government agency
issued mortgage-backed securities, and debt securities which include corporate
bonds and trust preferred securities. Available-for-sale securities totaled
$53.7 million at June 30, 2003, a decrease of $33.6 million or 38.5%, from
year-end 2002. This decrease resulted primarily from historically high principal
repayments on mortgage-backed securities, which were used to reduce borrowings
and temporarily increase liquidity. At June 30, 2003, and December 31, 2002, the
portfolio had net unrealized gains of $1.5 million and $2.6 million,
respectively.
Investment securities held-to-maturity are investments for which there is
the intent and ability to hold the investment to maturity. These investments are
carried at amortized cost. The held-to-maturity portfolio consists primarily of
Federal Home Loan Bank ("FHLB") securities. At June 30, 2003, securities held to
maturity totaled $8.9 million, a decrease of $406,000, or 4.4% from $9.3 million
at year-end 2002. At both dates, respective carrying values approximated market
values.
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 $27.9 million, to $100.7 million at June 30, 2003, from $72.8 million at
December 31, 2002, as prepayments in the residential mortgage portfolio and
mortgage-backed securities and growth in deposits were temporarily invested in
federal funds. The increase also reflected an increase in cash and due from
banks reflecting the timing of cash letters.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. At June 30, 2003, the
balance was $4.6 million versus $4.2 million at December 31, 2002.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$184,000 to $4.8 million at June 30, 2003, from $5.0 million at December 31,
2002. The decrease reflected depreciation of equipment and software.
Other Real Estate Owned:
The $1.0 million balance of other real estate owned represents two
properties. The first is a hotel property acquired in the fourth quarter of
2001, which was originally recorded at a value of $1.9 million. That property
was written down to $500,000 in the third quarter of 2002. The other property is
a building, which was acquired in the fourth quarter of 2002 and is carried at
an estimated realizable value of $515,000. Appraisals for both properties
support their carrying values at June 30, 2003.
16
Business Owned Life Insurance:
In the second quarter of 2003, the Company purchased $11.5 million of
business owned life insurance to fund employee related liabilities.
Deposits:
Deposits, which include non-interest and interest-bearing demand deposits,
money market, savings and time deposits, are the Banks' major source of funding.
Deposits are generally solicited from the Company's market area through the
offering of a variety of products to attract and retain customers, with a
primary focus on multi-product relationships.
Total deposits increased by $6.6 million, or 1.5% to $462.9 million at June
30, 2003, from $456.3 million at December 31, 2002. Average core non-public
deposits increased 17%, or $33.9 million more than the prior year period to
$238.4 million in the first six months of 2003. Deposit growth benefited from
the Company's business development efforts and bank consolidations in the
Philadelphia market which continue to leave some customers underserved. Time
deposits decreased $36.9 million, or 16.5% to $186.4 million at June 30, 2003,
versus $223.2 million at the prior year-end. The decline reflects the Company
replacing these higher cost deposits with lower cost core deposits.
FHLB Borrowings:
FHLB borrowings are used to supplement deposit generation. FHLB
borrowings totaled $125.0 million at both June 30, 2003 and December 31, 2002.
The Company's borrowings primarily mature in the fourth quarter of 2004 and
first quarter of 2005.
Shareholders' Equity:
Total shareholders' equity increased $2.7 million to $54.0 million at
June 30, 2003, versus $51.3 million at December 31, 2002. This increase was
primarily the result of year-to-date 2003 net income of $2.4 million.
17
Three Months Ended June 30, 2003 Compared to June 30, 2002
- ----------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased $230,000, or 25.0% to $1.2 million
or $0.17 per diluted share for the three months ended June 30, 2003, compared to
$921,000, or $0.14 per diluted share for the prior year comparable period. The
25% improvement in earnings reflected a significant increase in net interest
income. Net interest income increased $2.2 million or 35% compared to the prior
year period. Interest margins were significantly impacted by prepayments of the
residential real estate and mortgage-backed securities portfolios, but the Banks
continued reductions in deposit rates, lower cost core deposit growth and
increases in short-term loan fees more than offset the impact of those
prepayments. Of the approximately $2.9 million increase in net interest income
from the short-term loan product, approximately $1.8 million was offset by
increased loan loss provisions for that product. Average core non-public
deposits increased 19% in the second quarter of 2003 compared to the prior year
comparable period. The increases in net interest income resulted in an 149 basis
point increase in net interest margin to 5.40% at June 30, 2003 versus 3.91% at
June 30, 2002. The provision for loan losses increased $1.0 million between
those periods reflecting higher charge-offs principally related to the
short-term loan program. Increased revenues from this product more than offset
these provisions. The increased net income resulted in a return on average
assets and average equity of .70% and 8.60% respectively, in the second quarter
compared to .56% and 7.65% respectively for the same period in 2002.
Current Developments
The DE Bank will cease making short-term consumer loans as described in Notes 2
and 3. The termination of this business segment will materially impact earnings
and will effect the analysis of the results of operations as described herein.
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.
18
For the three months ended For the three months ended
June 30, 2003 June 30, 2002
-------------------------- ---------------------------
Interest-earning assets:
Interest Interest
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
Federal funds sold
and other interest-
earning assets 84,876 264 1.25% 50,909 224 1.76%
Securities 67,323 746 4.43% 111,265 1,625 5.84%
Loans receivable 463,733 11,543 9.98% 467,343 9,387 8.06%
-------- ------- ---- ------- ----- ----
Total interest-earning assets 615,932 12,553 8.17% 629,517 11,236 7.15%
Other assets 46,782 25,516
-------- --------
Total assets $662,714 $655,033
======== ========
Interest-bearing liabilities:
Demand-non interest
bearing $ 71,936 $ 55,253
Demand interest-bearing 59,924 128 0.86% 44,183 120 1.09%
Money market & savings 137,568 481 1.40% 105,516 450 1.71%
Time deposits 195,706 1,603 3.29% 260,318 2,427 3.74%
-------- ------- ---- ------- ----- ----
Total deposits 465,134 2,212 1.91% 465,270 2,997 2.58%
Total interest-bearing
deposits 393,198 2,212 2.26% 410,017 2,997 2.93%
-------- ------- ---- ------- ----- ----
Other borrowings 131,033 2,048 6.27% 134,212 2,097 6.27%
-------- ------- ---- ------- ----- ----
Total interest-bearing
liabilities $524,231 $ 4,260 3.26% 544,229 5,094 3.75%
======== ======= ==== ======= ----- ----
Total deposits and
other borrowings 596,167 4,260 2.87% 599,482 5,094 3.41%
-------- ------- ---- ------- ----- ----
Noninterest-bearing
liabilites 12,876 7,351
Shareholders' equity 53,671 48,200
-------- --------
Total liabilities and
shareholders' equity $662,714 $655,033
======== ========
Net interest income $ 8,293 $ 6,142
======= =======
Net interest spread 5.31% 3.75%
==== ====
Net interest margin 5.40% 3.91%
==== ====
Net interest margin not including
short-term loan and tax refund products 2.63% 3.06%
==== ====
19
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 June 30,
2003 versus 2002
(dollars in thousands)
Due to change in:
Volume Rate Total
=============================================================================================================
Interest earned on:
Federal funds sold $ 106 $ (66) $ 40
Securities (484) (395) (879)
Loans (90) 2,246 2,156
=============================================================================================================
Total interest-earning assets (468) 1,785 1,317
Interest expense of
deposits
Interest-bearing demand deposits (34) 26 (8)
Money market and savings (112) 81 (31)
Time deposits 529 295 824
=============================================================================================================
Total deposit interest expense 383 402 785
Other borrowings 50 (1) 49
=============================================================================================================
Total interest expense 433 401 834
=============================================================================================================
Net interest income $ (35) $ 2,186 $ 2,151
=============================================================================================================
The Company's net interest margin increased 149 basis points to 5.40% for
the three months ended June 30, 2003, versus the prior year comparable period.
The improvement reflected increased revenue from the short-term loan product,
the 19% 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 which more than offset
the impact of prepayments in the mortgage-backed security and residential
mortgage portfolios. Fees on short-term consumer loans contributed $4.2 million
to net interest income in 2003 and 277 basis points to the margin versus $1.3
million and 85 basis points for the prior year comparable period. Excluding the
impact of those products, margins decreased to 2.63% in the second quarter of
2003 from 3.06% in the prior year comparable period. That decrease resulted from
the negative impact of the historically high residential mortgage and
mortgage-backed security prepayments. While management could replace significant
amounts of such prepayments, it has deferred security purchases in light of the
lower interest rate environment. A total of $125.0 million of Federal Home loan
Bank ("FHLB") advances which carry an average interest rate of 6.20% mature
beginning the third quarter of 2004 through the first quarter of 2005. These
advances would be repriceable to a significantly lower rate in the current
interest rate environment. The average yield on interest-earning assets improved
102 basis points to 8.17% for the three months ended June 30, 2003, from 7.15%
for the prior year comparable period due primarily to increased fees from the
short-term loan product. Overall, the average rate paid on interest-bearing
liabilities decreased 49 basis points to 3.26% for the three months ended June
30, 2003, from 3.75% in the prior year comparable period, as the Company
repriced its deposits to the lower rate environment.
The Company's net interest income increased $2.2 million, or 35.0%, to
$8.3 million for the three months ended June 30, 2003, from $6.1 million for the
prior year comparable period. As shown in the Rate Volume
20
table above, the increase in net interest income was due to the positive effect
of rate changes of approximately $2.2 million reflecting deposits repricing to
lower rates and the positive impact of higher short-term loan fees. Average
interest-earning assets decreased $13.6 million, to $615.9 million for the three
months ended June 30, 2003, from $629.5 million for the prior year comparable
period reflecting lower amounts of securities and residential mortgages
outstanding.
The Company's total interest income increased $1.3 million, or 11.7%,
to $12.6 million for the three months ended June 30, 2003, from $11.2 million
for the prior year comparable period. Interest and fees on loans increased $2.2
million to $11.5 million for the three months ended June 30, 2003, from $9.4
million for the prior year comparable period. Prepayments in the residential
mortgage portfolios which reduced interest income were more than offset by the
6% increase in average commercial loans and the short-term loan product
increases noted above. The increases in fees for short-term loans was the
principal factor in the increase in yield on loans 192 basis points to 9.98%.
Interest and dividend income on investment securities decreased $879,000 to
$746,000 for the three months ended June 30, 2003, from $1.6 million for the
prior year comparable period. This decline was due principally to the $43.9
million, or 39.5%, decrease in average investment securities outstanding to
$67.3 million at June 30, 2003 from $111.3 million for the prior year period. In
addition, the average rate earned on investment securities declined 141 basis
points to 4.43% 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. Interest income on federal funds sold and other
interest-earning assets increased $40,000 as average fed funds sold outstanding
increased $34.0 million to $84.9 million as proceeds from maturities and calls
of investment securities and residential mortgage prepayments were temporarily
invested in federal funds sold. 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 $834,000, or 16.4%, to $4.3
million for the three months ended June 30, 2003, from $5.1 million for the
prior year comparable period, due to the lower rate environment. The Company
repriced deposits, particularly certificates of deposit and was able to lower
rates on other non-public core deposits. Interest-bearing liabilities averaged
$524.2 million for the three months ended June 30, 2003, versus $544.3 million
for the prior year comparable period reflecting lower amounts of higher cost
certificates of deposit. The average rate paid on interest-bearing liabilities
decreased 49 basis points to 3.26% for the three months ended June 30, 2003, due
primarily 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
$824,000, or 34.0%, to $1.6 million at June 30, 2003, from $2.4 million for the
prior year comparable period. This decline reflected the lower interest rate
environment as the average rate declined 45 basis points to 3.29%. In addition,
average certificates of deposit outstanding decreased $64.6 million, or 24.8%,
to $195.7 million, for the first quarter ended June 30, 2003, from $260.3
million in the prior year comparable period, as higher cost time deposits
matured and were not replaced due to the growth in non-public core deposits.
Interest expense on other borrowings, primarily FHLB advances,
decreased $49,000 or 2.3% to $2.0 million for the for the three months ended
June 30, 2003, compared to $2.1 million for the prior year comparable period.
This decrease resulted from a $3.2 million, or 2.4% decline in average other
borrowings to $131.0 million at June 30, 2003, versus $134.2 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. These expenses were $93,000 for the three months ended
June 30, 2003.
21
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
the known and estimated inherent losses in the portfolio. The provision for loan
losses increased $1.0 million to $2.3 million for the three months ended June
30, 2003, from $1.2 million for the prior year comparable period. This increase
reflected approximately $1.8 million of additional provisions for the short-term
consumer loans which were more than offset by related revenues. Partially
offsetting the increased short-term loan provisions were lower loan loss
provisions for commercial loans as large prior year provisions related to
several classified assets were repaid.
Non-Interest Income
Total non-interest income decreased $572,000, or 53.5% to $497,000 for
the three months ended June 30, 2003, versus $1.1 million for the prior year
comparable period due primarily to lower loan advisory fees and lower tax refund
product revenue.
Non-Interest Expenses
Total non-interest expenses increased $213,000, or 4.7% to $4.8 million
for the three months ended June 30, 2003, from $4.6 million for the prior year
comparable period. Salaries and employee benefits increased $172,000 or 7.9%, to
$2.4 million for the three months ended June 30, 2003, from $2.2 million for the
prior year comparable period. The increase also reflected operational support
for the tax refund and short-term consumer loan products, business development
efforts and normal merit increases.
Occupancy expense increased $11,000 to $374,000 for the three months ended
June 30, 2003, versus $363,000 for the prior year comparable period due
primarily to increased rent expense.
Depreciation expense increased $67,000, or 28.5% to $302,000 for the three
months ended June 30, 2003, versus $235,000 for the prior year comparable period
reflecting higher depreciation on computer equipment and software purchases
required for various loan and deposit applications and for the tax refund
anticipation loan product.
Legal fees decreased $111,000 to $271,000 for the three months ended June
30, 2003, from $382,000 for the prior year comparable period. The decrease
reflected lower legal expenses related to loan collections.
Advertising expense declined $52,000 to $46,000 as the Company reduced the
quantity of advertisements in the period.
Other operating expenses increased $126,000, or 10.2% to $1.4 million for
the three months ended June 30, 2003, from $1.2 million for the prior year
comparable period. The majority of that increase reflected a charge of $200,000
for severance related costs related to the consolidation of staff positions in
several departments. The increase also reflected higher data processing costs
related to support for the short-term loan products and higher expenses
associated with OREO properties. Prior quarter last year reflected a charge of
$195,000 for the write down of a receivable.
Provision for Income Taxes
The provision for income taxes increased $98,000, or 20.2%, to $583,000
for the three months ended June 30, 2003, from $485,000 for the prior year
comparable period. This increase was primarily the result of the increase in
pre-tax income. The effective tax rate was 33.6% for the three months ended June
30, 2003, versus 34.5% for the prior year comparable period. The decline in tax
rate reflected lower state income tax in 2003 which is not deductible for
federal tax purposes.
22
Six Months Ended June 30, 2003 Compared to June 30, 2002
- --------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased $635,000, or 35% to $2.4 million or
$0.37 per diluted share for the three months ended June 30, 2003, compared to
$1.8 million, or $0.28 per diluted share for the prior year comparable period.
The 35% improvement in earnings reflected a significant increase in net interest
income. Net interest income increased $5.3 million or 43% compared to the prior
year period. Interest margins were significantly impacted by prepayments of the
residential real estate and mortgage-backed securities portfolios which lowered
net interest income, but continued reductions in deposit rates and increased
short-term loan and tax refund product fees more than offset the impact of those
prepayments. Of the approximately $6.3 million increase in net interest income
from the short-term loan and tax refund products, approximately $4.7 million was
offset by increased loan loss provisions. Average core non-public deposits
increased 17% in the first six months of 2003 compared to the prior year
comparable period. The increases in net interest income resulted in an 171 basis
point increase in net interest margin to 5.59% for the six months ended June 30,
2003 versus 3.88% at June 30, 2002. The provision for loan losses increased $3.2
million between those periods reflecting higher charge-offs principally related
to the short-term loan and tax refund products partially offset by lower
provisions related to the commercial loan portfolio. Increased revenues from the
short-term loan and tax refund prodiucts more than offset these provisions. In
those periods, operating expenses increased 6%. The increased net income
resulted in a return on average assets and average equity of .74% and 9.26%
respectively, compared to .56% and 7.65% respectively for the same period in
2002.
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.
23
For the six months ended For the six months ended
June 30, 2003 June 30, 2002
----------------------------------------------------------------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------------------
Interest-earning assets:
Federal funds sold
and other interest-
earning assets 76,512 492 1.30% 45,162 393 1.75%
Securities 76,158 1,745 4.58% 115,785 3,371 5.82%
Loans receivable 474,606 23,876 10.14% 467,253 18,920 8.16%
-------- ------- ---- -------- -------- ----
Total interest-earning assets 627,276 26,113 8.39% 628,200 22,684 7.27%
Other assets 40,469 31,128
-------- --------
Total assets $667,745 $659,328
======== ========
Interest-bearing liabilities:
Demand-non interest
bearing 74,555 - 58,172 -
Demand interest-bearing 58,979 247 0.84% 45,968 241 1.06%
Money market & savings 129,847 913 1.42% 100,804 795 1.59%
Time deposits 207,072 3,471 3.38% 256,696 5,189 4.08%
-------- ------- ---- -------- -------- ----
Total deposits 470,453 4,631 1.99% 461,640 6,225 2.72%
Total interest-bearing
deposits 395,898 4,631 2.36% 403,468 6,225 3.11%
-------- ------- ---- -------- -------- ----
Other borrowings 132,959 4,089 6.20% 140,235 4,317 6.21%
-------- ------- ---- -------- -------- ----
Total interest-bearing
liabilities $528,857 $ 8,720 3.33% $543,703 $ 10,542 3.91%
======== ======= ==== ======== ======== ====
Total deposits and
other borrowings 603,412 8,720 2.91% 601,875 10,542 3.53%
-------- ------- ---- -------- -------- ----
Noninterest-bearing
liabilites 11,105 9,797
Shareholders' equity 53,228 47,656
-------- --------
Total liabilities and
shareholders' equity $667,745 $659,328
======== ========
Net interest income $ 17,393 $ 12,142
======== ========
Net interest spread 5.48% 3.75%
==== ====
Net interest margin 5.59% 3.88%
==== ====
Net interest margin not including
short-term loan and rax refund products 2.71% 3.02%
==== ====
24
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
Six months ended June 30,
2003 versus 2002
(dollars in thousands)
Due to change in:
Volume Rate Total
======================================================================================================================
Interest earned on:
Federal funds sold $ 202 $ (103) $ 99
Securities (908) (718) (1,626)
Loans 370 4,586 4,956
======================================================================================================================
Total interest-earning assets (336) 3,765 3,429
Interest Expense of
Deposits
Interest-bearing demand deposits (54) 48 (6)
Money market and savings (204) 86 (118)
Time deposits 832 886 1,718
======================================================================================================================
Total deposit interest expense 574 1,020 1,594
Other borrowed funds 224 4 228
======================================================================================================================
Total interest expense 798 1,024 1,822
======================================================================================================================
Net interest income $ 462 $ 4,789 $ 5,251
======================================================================================================================
The Company's net interest margin increased 171 basis points to 5.59% for
the six months ended June 30, 2003, versus the prior year comparable period. The
improvement reflected increased revenue from the short-term loan and tax refund
products, the 17% 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 which more
than offset the impact of prepayments in the mortgage-backed security and
residential mortgage portfolios. Fees on short-term consumer loans and tax
refund anticipation loans contributed $8.9 million to net interest income in
2003 and 288 basis points to the margin versus $2.6 million and 86 basis points
for the prior year comparable period. Excluding the impact of those products,
margins decreased to 2.71% in the first six months of 2003 from 3.02% in the
prior year comparable period. That decrease reflected the impact of the
historically high residential mortgage and mortgage-backed security prepayments.
While management could replace significant amounts of such prepayments, it has
deferred security purchases in light of the lower interest rate environment. A
total of $125.0 million of Federal Home loan Bank ("FHLB") advances which carry
an average interest rate of 6.20% mature beginning the third quarter of 2004
through the first quarter of 2005. These advances would be repriceable to a
significantly lower rate in the current interest rate environment. The average
yield on interest-earning assets improved 112 basis points to 8.39% for the six
months ended June 30, 2003, from 7.27% for the prior year comparable period due
primarily to increased fees from short-term loan and tax refund products.
Overall, the average rate paid on interest-bearing liabilities decreased 58
basis points to 3.33% for the six months ended June 30, 2003, from 3.91% in the
prior year comparable period, as the Company repriced its deposits to the lower
rate environment.
25
The Company's net interest income increased $5.3 million, or 43.3%, to
$17.4 million for the three months ended June 30, 2003, from $12.1 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 rate changes
of approximately $4.8 million reflecting deposits repricing to lower rates and
the positive impact of higher short-term consumer loan and tax refund
anticipation loan fees. The positive variance of $462,000 related to volume
reflects fewer certificates of deposit outstanding during the period.
The Company's total interest income increased $3.4 million, or 15.1%, to
$26.1 million for the six months ended June 30, 2003, from $22.7 million for the
prior year comparable period. Interest and fees on loans increased $5.0 million,
or 26.2% to $23.9 million for the six months ended June 30, 2003, from $18.9
million for the prior year comparable period. Prepayments in the residential
mortgage portfolios which reduced interest income were more than offset by the
6% increase in average commercial and construction loans and the short-term
consumer loan and tax refund product increases noted above. The increases in
fees for short-term and tax refund loans are the principal factors in the
increase in yield on loans of 198 basis points to 10.14%. Interest and dividend
income on investment securities decreased $1.6 million, or 48.2% to $1.7 million
for the six months ended June 30, 2003, from $3.4 million for the prior year
comparable period. This decline was due principally to the $39.6 million, or
34.2%, decrease in average investment securities outstanding to $76.2 million at
June 30, 2003 from $115.8 million for the prior year period. In addition, the
average rate earned on investment securities declined 124 basis points to 4.58%
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. Interest income on federal funds sold and other interest-earning
assets increased $99,000 as average fed funds sold outstanding increased $31.3
million to $76.5 million as proceeds from maturities and calls of investment
securities and residential mortgage prepayments had to be invested in federal
funds sold. 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 $1.8 million, or 17.3%, to
$8.7 million for the six months ended June 30, 2003, from $10.5 million for the
prior year comparable period, due to the lower rate environment as the Company
repriced deposits, particularly certificates of deposit and was able to lower
rates on other non-public core deposits. Interest-bearing liabilities averaged
$528.9 million for the six months ended June 30, 2003, versus $543.7 million for
the prior year comparable period reflecting lower amounts of higher cost
certificates of deposit. The average rate paid on interest-bearing liabilities
decreased 58 basis points to 3.33% for the six months ended June 30, 2003, due
primarily 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
$1.7 million, or 33.1%, to $3.5 million at June 30, 2003, from $5.2 million for
the prior year comparable period. This decline reflected the lower interest rate
environment as the average rate declined 70 basis points to 3.38%. In addition,
average certificates of deposit outstanding decreased $49.6 million, or 19.3%,
to $207.1 million, for the six months ended June 30, 2003, from $256.7 million
in the prior year comparable period, as higher cost time deposits matured and
were not replaced due to the growth in non-public core deposits.
Interest expense on other borrowings, primarily FHLB advances,
decreased $228,000 or 5.3% to $4.1 million for the six months ended June 30,
2003, compared to $4.3 million for the prior year comparable period. This
decrease resulted from a $7.3 million, or 5.2% decline in average other
borrowings to $133.0 million at June 30, 2003, versus $140.2 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. Those expenses were $186,000 for the six months ended
June 30, 2003.
26
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 $3.2 million to $5.7 million for the six months ended June 30,
2003, from $2.5 million for the prior year comparable period. This increase
reflected approximately $4.7 million of additional provisions for the short-term
consumer tax refund anticipation loan products which were more than offset by
related revenues. Partially offsetting the increased short-term loan provisions
were lower loan loss provisions as prior year included large provisions related
to several classified assets that have now been repaid.
Non-Interest Income
Total non-interest income decreased $612,000, or 30.6% to $1.4 million
for the six months ended June 30, 2003, versus $2.0 million for the prior year
comparable period due primarily to lower loan advisory fees and lower tax refund
product revenue.
Non-Interest Expenses
Total non-interest expenses increased $514,000, or 5.8% to $9.4 million
for the six months ended June 30, 2003, from $8.9 million for the prior year
comparable period. Salaries and employee benefits increased $409,000 or 9.1%, to
$4.9 million for the six months ended June 30, 2003, from $4.5 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 $48,000 to $759,000 for the six months ended
June 30, 2003, versus $711,000 for the prior year comparable period due
primarily to increased rent and repairs and maintenance expense.
Depreciation expense increased $118,000, or 24.6% to $597,000 for the six
months ended June 30, 2003, versus $479,000 for the prior year comparable period
reflecting higher depreciation on computer equipment and software purchases
required for various loan and deposit applications and for the tax refund
anticipation loan product.
Legal fees decreased $216,000, or 29.7% to $511,000 for the six months
ended June 30, 2003, from $727,000 for the prior year comparable period. This
decrease reflected lower legal expenses related to loan collections.
Advertising expense declined $141,000 to $118,000 as the Company reduced
the number of advertisements during the period.
Other operating expenses increased $296,000, or 13.4% to $2.5 million for
the six months ended June 30, 2003, from $2.2 million for the prior year
comparable period. The majority of that increase reflected a charge of $200,000
for severance related costs related to the consolidation of staff positions in
several departments. The increase also reflected higher data processing costs
related to support for the short-term loan products and higher expenses
associated with OREO properties. Prior year included a charge of $195,000 for
the write down of a receivable.
27
Provision for Income Taxes
The provision for income taxes increased $321,000, or 33.9%, to $1.3
million for the six months ended June 30, 2003, from $946,000 for the prior year
comparable period. This increase was primarily the result of the increase in
pre-tax income. The effective tax rate was 34.1% for the three months ended June
30, 2003, versus 34.3% for the prior year comparable period.
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 $70.2 million at June 30, 2003. 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 $63.1 million and $52.3
million and standby letters of credit of approximately $7.1 million and $7.2
million at June 3, 2003, and December 31, 2002, 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 June 30, 2003, 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 $148.6 million, which
represented 31.9% of gross loans receivable at June 30, 2003. 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.
28
Regulatory Matters
The following table presents the Company's capital regulatory ratios at
June 30, 2003, and December 31, 2002:
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ----------- ----------- -----------
Dollars in thousands
At June 30, 2003
Total risk based capital
Republic First Bank $55,676 13.76% $32,359 8.00% $40,448 10.00%
First Bank of Delaware 7,029 20.17% 2,789 8.00% 3,486 10.00%
Republic First Bancorp, 64,201 14.69% 34,969 8.00% - N/A
Inc.
Tier one risk based capital
Republic First Bank 50,594 12.51% 16,179 4.00% 24,269 6.00%
First Bank of Delaware 6,590 18.91% 1,394 4.00% 2,091 6.00%
Republic First Bancorp, 58,706 13.43% 17,485 4.00% - N/A
Inc.
Tier one leveraged capital
Republic First Bank 50,594 8.29% 30,508 5.00% 30,508 5.00%
First Bank of Delaware 6,590 12.74% 2,586 5.00% 2,586 5.00%
Republic First Bancorp, 58,706 8.88% 33,062 5.00% - N/A
Inc.
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ----------- ----------- ---------- ----------- ----------
At December 31, 2002
Total risk based capital
Republic First Bank $52,400 13.39% $31,308 8.00% $39,135 10.00%
First Bank of Delaware 6,144 22.59% 2,176 8.00% 2,720 10.00%
Republic First Bancorp, Inc. 60,581 14.49% 33,447 8.00% - N/A
Tier one risk based capital
Republic First Bank 47,493 12.14% 15,654 4.00% 23,481 6.00%
First Bank of Delaware 5,801 21.33% 1,088 4.00% 1,632 6.00%
Republic First Bancorp, Inc. 55,337 13.24% 16,724 4.00% - N/A
Tier one leveraged capital
Republic First Bank 47,493 7.82% 30,377 5.00% 30,377 5.00%
First Bank of Delaware 5,801 13.94% 2,081 5.00% 2,081 5.00%
Republic First Bancorp, Inc. 55,337 8.56% 32,231 5.00% - 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.
29
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 $100.7 million at June 30, 2003,
compared to $72.8 million at December 31, 2002, due to an increase in federal
funds sold and cash and due from banks. Loan maturities and repayments are a
primary source of asset liquidity. At June 30, 2003, the Company estimated that
in excess of $50.0 million of loans would mature or be repaid in the six month
period that will end December 31, 2003. Additionally, the majority of its
securities are available to satisfy liquidity requirements through pledges to
the Federal Home Loan Bank System ("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,
buying federal funds and utilizing the facilities of the FHLB. At June 30, 2003,
the PA Bank had $87.1 million in unused lines of credit available under
arrangements with the FHLB and correspondent banks compared to $109.0 million at
December 31, 2002. These lines of credit enable the PA 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 June 30, 2003, the Company had aggregate outstanding commitments
(including unused lines of credit and letters of credit) of $70.2 million.
Certificates of deposit scheduled to mature in one year totaled $131.4 million
at June 30, 2003, 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 PA 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 PA
Bank has established a line of credit from a correspondent to assist in managing
the PA Banks' liquidity position. That line of credit totaled $10.0 million at
June 30, 2003. As noted previously, the PA Bank has established a line of credit
with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity
of approximately $202.1 million. As of June 30, 2003, and December 31, 2002, the
PA Bank had borrowed $125.0 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 portfolio is also available for liquidity, usually as
collateral for FHLB advances. Because of the FHLB's AAA
30
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.
Investment Securities Portfolio
At June 30, 2003, 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 $52.2 million and $53.7 million as of June
30, 2003, respectively. The net unrealized gain on securities available for sale
as of that date was $1.5 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,
short-term consumer and other consumer 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
$9.0 million at June 30, 2003. Individual customers may have several loans often
secured by different collateral. The aggregate amount of those relationships
that exceeded $5.8 million (an internal monitoring guideline which approximates
10% of capital and reserves) at June 30, 2003, was $13.5 million.
Total loans increased $2.5 million, to $466.2 million at June 30, 2003,
from $463.7 million at December 31, 2002. Commercial loan and construction loans
increased $34.3 million due to increased volume in the commercial real estate
and commercial and industrial loan portfolios. This offset a decline in the
residential real estate mortgage portfolio of $27.0 million which reflected
historically high prepayments in that portfolio resulting from the lower rate
environment. Short-term loans declined $4.2 million reflecting the decision to
participate a majority of these loans to independent third party investors.
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
31
(dollars in thousands) As of June 30, 2003 As of December 31, 2002
-------------------------------------------------------------------------------------------
Balance % of Total Balance % of Total
-------------------------------------------------------------------------------------------
Commercial:
Real estate secured $ 360,364 77.3 $ 329,570 71.1
Non real estate secured 57,870 12.4 54,163 11.7
Unsecured 8,297 1.8 8,513 1.8
-------------------------------------------------------------------------------------------
426,531 91.5 392,246 84.6
Residential real estate 24,257 5.2 51,265 11.1
Consumer, short-term & other 15,408 3.3 20,178 4.3
-------------------------------------------------------------------------------------------
Total loans 466,196 100.0% 463,689 100.0%
Less allowance for loan losses (7,876) (6,642)
--------- ---------
Net loans $ 458,320 $ 457,047
========= =========
Credit Quality
The Banks' written lending policies require specified underwriting,
loan documentation and credit analysis standards to be met prior to funding,
with independent credit department approval for the majority of new loan
balances. A committee of the Board of Directors oversees the loan approval
process to monitor that proper standards are maintained, while approving the
majority of commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of interest or principal for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. 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.
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
32
June 30, December 31,
2003 2002
---------------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $5,326 $4,051
Non-accrual loans 2,942 2,972
---------------------------------------------
Total non-performing loans (1) 8,268 7,023
Other real estate owned 1,015 1,015
---------------------------------------------
Total non-performing assets (2) $9,283 $8,038
=============================================
Non-performing loans as a percentage of total
loans net of unearned
Income 1.77% 1.51%
Non-performing assets as a percentage of total
assets 1.41% 1.24%
<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>
Problem loans consist of loans that are included in performing loans,
but for which potential credit problems of the borrowers have caused management
to have serious doubts as to the ability of such borrowers to continue to comply
with present repayment terms. At June 30, 2003, all identified problem loans are
included in the preceding table or are classified as substandard or doubtful,
with a specific reserve allocation in the allowance for loan losses (see
"Allowance For Loan Losses"). Management believes that the appraisals and other
estimates of the value of the collateral pledged against the non-accrual loans
generally exceed the amount of its outstanding balances.
The recorded investment in loans which are impaired totaled $2.9
million at June 30, 2003, and $3.0 million at December 31, 2002, and the amount
of such valuation allowances were $750,000 and $665,000, respectively. There
were no commitments to extend credit to any borrowers with impaired loans as of
the end of the periods presented herein.
At June 30, 2003, and December 31, 2002, internally classified accruing
substandard loans totaled approximately $15.0 million and $12.9 million
respectively; and doubtful loans totaled approximately $834,000 and $493,000
respectively. There were no loans classified as loss at those dates.
The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at
June 30, 2003 and December 31, 2002, in the aggregate principal amount of $1.2
million for both periods; and (ii) 60 to 89 days past due, at June 30, 2003 and
December 31, 2002, in the aggregate principal amount of $1.1 million and $2.6
million, respectively.
At June 30, 2003, 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 $148.6 million,
33
which represented 31.9% of gross loans receivable at June 30, 2003. 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.
Other Real Estate Owned:
At the beginning of 2002, the company had one other real estate owned
property with a carrying value of $1.9 million. That property was subsequently
written down to a carrying value of $500,000 in the third quarter of 2002. In
the fourth quarter of 2002, the Company charged off $2.2 million of a $2.7
million loan to one borrower, which had been placed on non-accrual status in the
second quarter of 2002. The Company was able to recover approximately $700,000
related to this loan in the second quarter of 2003 and continues to pursue
further recovery opportunities, but the amount and timing of any such recoveries
can not be predicted. After the $2.2 million charge-off, the remainder of the
balance totaling $515,000 was transferred to other real estate owned. The
$500,000 and $515,000 comprise the balance of other real estate owned at June
30, 2003, and December 31, 2002.
At June 30, 2003, the Company had no credit exposure to "highly
leveraged transactions" as defined by the Federal Reserve Bank.
34
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the six
months ended June 30, 2003, and 2003, and the twelve months ended December 31,
2002 is as follows:
For the six months For the twelve months For the six months
ended ended ended
(dollars in thousands) June 30, 2003 December 31, 2003 June 30, 2002
---------------------- ----------------------- -----------------------
Balance at beginning of period .......... $ 6,642 $ 5,431 $ 5,431
Charge-offs:
Commercial and construction ............ 1 2,542 91
Short-term loans ...................... 4,153 1,670 1,067
Tax refund loans ...................... 1,393 - -
Consumer ............................... - 3 4
-------- -------- --------
Total charge-offs ................. 5,547 4,215 1,162
-------- -------- --------
Recoveries:
Commercial and construction ........... 750 123 9
Short-term loans ...................... - - -
Tax refund loans ...................... 333 - -
Consumer .............................. - - -
-------- -------- --------
Total recoveries .................. 1,083 123 9
-------- -------- --------
Net charge-offs ......................... 4,464 4,092 1,153
-------- -------- --------
Provision for loan losses ............... 5,698 5,303 2,529
-------- -------- --------
Balance at end of period ............. $ 7,876 $ 6,642 $ 6,807
======== ======== ========
Average loans outstanding (1) ........ $474,606 $468,239 $467,253
======== ======== ========
As a percent of average loans (1):
Net charge-offs (annualized) ......... 1.88% 0.87% 0.49%
Provision for loan losses ............ 1.20% 1.13% 0.54%
Allowance for loan losses ............ 1.66% 1.42% 1.46%
Allowance for loan losses to:
Total loans, net of unearned income at
period end ........................ 1.69% 1.43% 1.43%
Total non-performing loans at period
end ............................... 95.26% 94.57% 69.93%
<FN>
(1) Includes nonaccruing loans.
</FN>
The increase in net charge-offs reflects the increased volume in
short-term loan and tax refund loans and was more than offset with revenue
increases. Excluding these loans, net charge-offs to average loans were (.16%)
for the first six months of 2003, 0.52% for the year ended December 31, 2002 and
..02% for the first six months of 2002.
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, historical charge-off activity, economic conditions and
other relevant factors in reviewing the adequacy of the loan loss reserve. Any
additions deemed necessary to the allowance for loan losses are charged to
operating expenses.
35
The Company has an existing loan review program, which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
who reports quarterly, directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any
given date is difficult, particularly in a continually changing economy. In
Management's opinion, the allowance for loan losses was appropriate at June 30,
2003. However, there can be no assurance that, if asset quality deteriorates in
future periods, additions to the allowance for loan losses will not be required.
The Banks' management is unable to determine in what loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for loan losses among various categories. The
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb loan losses in any loan category:
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 June 30, 2003, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $426.5
million, $24.3 million and $15.4 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.
36
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 2003 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, haS 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 its 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.
37
Part II Other Information
Item 1: LEGAL PROCEEDINGS
-----------------
None.
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 2003.
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-K for an annual
report on Form 10-K)
Exhibit No.
- -----------
10 Material Contracts.- None
21 Subsidiaries of the Company
Republic First
First Bank of Delaware
31.1 Certification of the Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act
32.1 Section 1350 certifications pursuant to Section 906 of the
Sarbanes-Oxley Act 2002 (furnished but not filed for purposes of the
Securities Exchange Act of 1934.
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
**Incorporated by reference in the Company's Form 10-K, filed March 13,
2003.
Reports on Form 8-K and 8-KA
Press release dated July 21, 2003.
Other events dated June 27, 2003
38
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: August 14, 2003
39