UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2003
Commission File Number: 000-17007
Republic First Bancorp, Inc.
----------------------------
(Exact name of business issuer as specified in its charter)
23-2486815 Pennsylvania
--------------------------- -------------------------------
IRS Employer Identification (State or other jurisdiction of
Number incorporation or organization)
1608 Walnut Street, Philadelphia, Pennsylvania 19103
---------------------------------------------- --------
(Address of principal executive offices) (Zip code)
215-735-4422
-------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO ____
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.
6,692,231 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of October 31, 2003
Page 1 of 39
Exhibit index appears on page 38
1
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 September 30, 2003, (unaudited) and December 31, 2002...................... 4
(2) Consolidated Statements of Income for the three and nine months ended
September 30, 2003, and 2002(unaudited)...................................................................... 5
(3) Consolidated Statements of Cash Flows for the nine months ended
September 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 September 30, 2003 and December 31, 2002
dollars in thousands, except share data
ASSETS: September 30, 2003 December 31, 2002
--------------------- ------------------------
(unaudited)
Cash and due from banks $ 27,381 $ 18,114
Interest bearing deposits with banks 3,617 3,570
Federal funds sold and interest-bearing deposits with banks 63,921 51,126
--------------------- ------------------------
Total cash and cash equivalents 94,919 72,810
Other interest-earning restricted cash 3,584 4,228
Investment securities available for sale, at fair value 41,710 87,291
Investment securities held to maturity at amortized cost
(Fair value of $9,034 and $9,297, respectively) 8,992 9,270
Loans receivable (net of allowance for loan losses of
$8,731 and $6,642, respectively) 463,044 457,047
Premises and equipment, net 4,820 5,000
Other real estate owned 1,015 1,015
Accrued interest receivable 3,399 3,777
Business owned life insurance 11,653 -
Other assets 11,631 7,254
--------------------- ------------------------
Total Assets $ 644,767 $ 647,692
===================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 84,283 $ 59,194
Demand - interest-bearing 59,111 54,653
Money market and savings 123,452 119,213
Time under $100,000 115,566 139,356
Time $100,000 or more 65,201 83,886
--------------------- ------------------------
Total Deposits 447,613 456,302
FHLB Advances 125,000 125,000
Accrued interest payable 3,220 3,596
Other liabilities 7,968 5,518
Corporation-obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior
obligations of the corporation
6,000 6,000
--------------------- ------------------------
Total Liabilities 589,801 596,416
--------------------- ------------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares
authorized; shares issued 6,667,481 as of
September 30, 2003 and 6,405,592 as of December 31, 2002 67 64
Additional paid in capital 33,226 32,305
Retained earnings 22,437 18,760
Treasury stock at cost (175,172 shares) (1,541) (1,541)
Accumulated other comprehensive income 777 1,688
--------------------- ------------------------
Total Shareholders' Equity 54,966 51,276
--------------------- ------------------------
Total Liabilities and Shareholders' Equity $ 644,767 $ 647,692
===================== ========================
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30,
dollars in thousands, except per share data
(unaudited)
Quarter to Date Year to Date
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Interest income:
Interest and fees on loans $7,339 $9,204 $31,215 $28,124
Interest and dividend income on federal
funds sold and other interest-earning balances 243 192 735 584
Interest and dividends on investment securities 586 1,538 2,331 4,910
-------------- ------------ ------------ -------------
Total interest income 8,168 10,934 34,281 33,618
-------------- ------------ ------------ -------------
Interest expense:
Demand interest-bearing 108 123 355 363
Money market and savings 403 582 1,316 1,378
Time under $100,000 976 1,396 3,263 4,650
Time $100,000 or more 521 749 1,705 2,684
Other borrowed funds 2,079 2,076 6,168 6,393
-------------- ------------ ------------ -------------
Total interest expense 4,087 4,926 12,807 15,468
-------------- ------------ ------------ -------------
Net interest income 4,081 6,008 21,474 18,150
Provision for loan losses 647 965 6,345 3,493
-------------- ------------ ------------ -------------
Net interest income after provision
for loan losses 3,434 5,043 15,129 14,657
-------------- ------------ ------------ -------------
Non-interest income:
Loan advisory and servicing fees 167 357 462 989
Service fees on deposit accounts 410 322 1,062 920
Short-term loan fee income 2,051 - 2,051 -
Tax refund products 38 26 410 760
Other income 160 19 233 59
-------------- ------------ ------------ -------------
2,826 724 4,218 2,728
-------------- ------------ ------------ -------------
Non-interest expenses:
Salaries and benefits 2,311 2,170 7,202 6,652
Occupancy 371 363 1,129 1,074
Depreciation 304 278 901 757
Legal 249 454 759 1,181
Advertising 21 100 140 359
Other real estate owned 59 1,391 178 1,407
Other expenses 1,106 903 3,488 2,983
-------------- ------------ ------------ -------------
4,421 5,659 13,797 14,413
-------------- ------------ ------------ -------------
Income before income taxes 1,839 108 5,550 2,972
Provision for income taxes 606 42 1,873 1,097
-------------- ------------ ------------ -------------
Net income $1,233 $66 $3,677 $1,875
============== ============ ============ =============
Net income per share:
Basic $0.19 $0.01 $0.57 $0.30
============== ============ ============ =============
Diluted $0.18 $0.01 $0.55 $0.29
-------------- ------------ ------------ -------------
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
Dollars in thousands
(unaudited)
2003 2002
------------- -------------
Cash flows from operating activities:
Net income $ 3,677 $ 1,875
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 6,345 3,493
Write down of other real estate owned - 1,357
Depreciation 901 757
Amortization of discounts on investment securities 327 337
Increase in value of business owned life insurance (153) -
Increase in other assets (3,531) (2,289)
Increase (decrease) in accrued expenses
and other liabilities 2,074 (1,292)
------------- -------------
Net cash provided by operating activities 9,640 4,238
------------- -------------
Cash flows from investing activities:
Purchase of securities:
Held to maturity (2,461) (966)
Available for sale (5,554) (10,356)
Proceeds from principal receipts, calls and maturities of securities:
Held to maturity 2,739 3,342
Available for sale 49,428 26,405
Net increase in loans (12,342) (2,112)
Decrease in other interest-earning restricted cash 644 635
Purchase of business owned life insurance (11,500) -
Premises and equipment expenditures (721) (474)
------------- -------------
Net cash provided by investing activities 20,233 16,474
------------- -------------
Cash flows from financing activities:
Net proceeds from exercise of stock options 924 71
Net increase in demand, money market and savings deposits 33,786 47,972
Repayment of long-term borrowings - (17,500)
Net decrease in time deposits (42,474) (30,616)
------------- -------------
Net cash used in financing activities (7,764) (73)
------------- -------------
Increase in cash and cash equivalents 22,109 20,639
Cash and cash equivalents, beginning of period 72,810 41,420
------------- -------------
Cash and cash equivalents, end of period $ 94,919 $ 62,059
============= =============
Supplemental disclosure:
Interest paid $ 13,183 $ 15,969
============= =============
Taxes paid $ 1,950 $ 3,650
============= =============
(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, 1999, 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 national consumer products to
the underbanked consumer, including short-term consumer loans and tax refund
products.
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 October 2, 2003 which disclosed that
effective October 1, 2003, the DE Bank terminated its membership in the Federal
Reserve System and would therefore be regulated by the Federal Deposit Insurance
Corporation ("FDIC") and it is expected that the PA Bank will terminate its
membership and will begin to be regulated by the FDIC in the near future. As
part of the transition, the DE Bank entered into a Memorandum of Understanding
with the FDIC and Office of the State Bank Commissioner ("Delaware
Commissioner") which requires, among other things, that in the event the FDIC
and Delaware Commissioner determine that the short-term consumer loan program of
the DE Bank is not operated in a safe and sound manner, the DE Bank will cease
making those loans. Thereafter, the Board of Directors of the DE Bank determined
to continue the short-term loan program in accordance with the provisions of the
guidelines issued by the FDIC and the laws and regulations of the State of
Delaware. The Company believes the continuation of the national consumer lending
programs including the short-term loan program will have a positive material
effect on the earnings of the Company. During the third quarter of 2003, the DE
Bank reduced the number of short-term loan servicers it contracts with and the
number of states that it currently serves. As of October 31, 2003, the DE Bank
contracts with three servicers and operates in Georgia, Texas, Ohio, Arizona,
and California.
Note 3: Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements include the accounts of the Company
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. All
significant inter-company accounts and transactions have been eliminated in the
consolidated financial statements.
7
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 September 30, 2003, there was approximately $981,000 of short-term consumer
loans outstanding, which were originated in North Carolina, Texas, California,
Georgia, Arizona, and Ohio. Effective in the third quarter of 2003, the DE Bank
began to sell a majority of these loans to independent third parties and retains
a portion of the interest income, which the DE Bank classifies as non-interest
income. 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 the short-term consumer loans to
the PA Bank.
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"). Prior to the incorporation of the DE Bank, the PA Bank
for many years offered 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, 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.
The Company accounts for short-term loan fee income as follows: For loans
that are retained on the books of the DE Bank, or prior to June 30, 2003 on the
PA Bank's books, fees earned are recorded as interest income. For loans that are
participated to independent third parties, the DE Bank records any fees
associated with these loans as fee income in the non-interest income category.
This reflects that no asset is retained on the books of the DE Bank.
8
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 September 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 Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
Net income as reported $ 1,233 $ 66 $ 3,677 $ 1,875
Less: Stock based compensation costs determined
under fair value method for all awards - - (102) (332)
------------- ------------- ------------ ------------
Net income, proforma $ 1,233 $ 66 $ 3,575 $ 1,543
============= ============= ============ ============
Earnings per common share-basic: As reported $ 0.19 $ 0.01 $ 0.57 $ 0.30
Pro-forma ------------- ------------- ------------ ------------
$ 0.19 $ 0.01 $ 0.56 $ 0.25
------------- ------------- ------------ ------------
Earnings per common share-diluted: As reported $ 0.18 $ 0.01 $ 0.55 $ 0.29
Pro-forma ------------- ------------- ------------ ------------
$ 0.18 $ 0.01 $ 0.54 $ 0.24
------------- ------------- ------------ ------------
The Company granted 56,667 and 128,167 options during the nine months
ended September 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 September 30, 2003 are $3.6 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 Trust
qualify as variable interest entities under FIN 46. The Trust issued mandatory
redeemable preferred stock to investors and loaned the proceeds to the Company.
The Trust holds, 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 Trust on the
mandatorily redeemable preferred stock. The Trust is currently included in the
Company's consolidated financial statements. Management believes that the Trust
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 Trust become available,
management will reevaluate its conclusion that the Trust 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 September 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. Adoption of FAS 149 did not have a material impact on the
Company's financial statements.
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.
Acquired Loans
- --------------
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the
evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 requires that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments recieveable in excess
of the amount of its cash flows accepted at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluation the provisions of SOP 03-3.
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. The Company additionally offers
national consumer products to the underbanked consumer including tax refund
products and short-term consumer loans. 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 nine months ended September 30, 2003 and 2002, is as
follows:
11
As of and for the nine months ended
September 30, 2003
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
----------------- ------------- ----------------- ------------- ---------------
Net interest income $ 11,351 $ 1,146 $ 1,191 $ 7,786 $ 21,474
Provision for loan losses 60 91 1,042 5,152 6,345
Non-interest income 1,559 198 410 2,051 4,218
Non-interest expenses 10,688 1,142 545 1,422 13,797
Net income $ 1,472 $ 73 $ 9 $ 2,123 $ 3,677
================= ============= ================= ============= =================
Selected Balance Sheet Accounts:
Total assets 594,353 42,705 - 7,709 644,767
Total loans 440,611 30,183 - 981 471,775
Total deposits 411,686 35,927 - - 447,613
September 30, 2002
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
----------------- ------------- ----------------- ------------- ---------------
Net interest income (expense) $ 13,730 $ 936 $ (21) $ 3,505 $ 18,150
Provision for loan losses 2,300 10 - 1,183 3,493
Non-interest income 1,575 393 760 - 2,728
Non-interest expenses 12,186 1,122 376 729 14,413
Net income $ 548 $ 132 $ 219 $ 976 $ 1,875
================= ============= ================= ============= =================
Selected Balance Sheet Accounts:
Total assets $ 611,778 $ 39,090 $ - $ 4,201 $ 655,069
Total loans 432,508 26,424 - 3,576 462,508
Total deposits 433,180 31,393 - - 464,573
12
As of and for the three months ended
September 30, 2003
(dollars in thousands)
Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
----------------- ------------ ----------- ------------ ---------
Net interest income $ 3,599 $ 407 $ -- $ 75 $ 4,081
Provision for loan losses -- 30 -- 617 647
Non-interest income 687 51 37 2,051 2,826
Non-interest expenses 3,470 376 145 430 4,421
Net income (loss) $ 563 $ 32 $ (68) $ 706 $ 1,233
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets 594,353 42,705 -- 7,709 644,767
Total loans 440,611 30,183 -- 981 471,775
Total deposits 411,686 35,927 -- -- 447,613
September 30, 2002
(dollars in thousands)
Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
------------------ ------------- ----------- ------------- ---------
Net interest income $ 4,797 $ 323 $ -- $ 888 $ 6,008
Provision for loan losses 700 -- -- 265 965
Non-interest income 544 154 26 -- 724
Non-interest expenses 4,924 347 119 269 5,659
Net income (loss) $ (190) $ 79 $ (57) $ 234 $ 66
========= ========= ========= ========= =========
Selected Balance Sheet Accounts:
Total assets $ 611,778 $ 39,090 $ -- $ 4,201 $ 655,069
Total loans 432,508 26,424 -- 3,576 462,508
Total deposits 433,180 31,393 -- -- 464,573
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 September 30, 2003, and 2002,
respectively, there were 0 and 211,507 of stock options that were not included
in the calculation of EPS because the option exercise 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
September 30, 2003, and 2002.
Quarter to Date Year to Date
2003 2002 2003 2002
Net Income
$1,233,000 $66,000 $3,677,000 $1,875,000
Per Per Per Per
Shares Share Shares Share Shares Share Shares Share
----------------------------------------------------------------------------------------------
Weighted average shares
For period 6,492,309 6,215,836 6,402,933 6,199,395
Basic EPS $0.19 $0.01 $0.57 $0.30
Add common stock equivalents
representing dilutive stock options 308,660 216,187 279,433 248,435
------- ------- ------- -------
Effect on basic EPS of dilutive CSE $(0.01) - $(0.02) $(0.01)
------- ------- --------
Equals total weighted average
shares and CSE (diluted) 6,800,969 6,432,023 6,682,366 6,447,830
========= ========= ========= =========
Diluted EPS $0.18 $0.01 $0.55 $0.29
-------- -------- -------- --------
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 Nine months ended
September 30, September 30,
--------------------------------- ----------------------------------
2003 2002 2003 2002
------------ ------------ ------------- -------------
Net income $ 1,233 $ 66 $ 3,677 $ 1,875
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses)
during the period (228) 894 (911) 2,182
------------ ------------ ------------- -------------
Comprehensive income $ 1,005 $ 960 $ 2,766 $ 4,057
============ ============ ============= =============
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:
September 30, 2003, Compared to December 31, 2002
Total assets decreased $2.9 million to $644.8 million at September 30,
2003, versus $647.7 million at December 31, 2002. This net decrease reflected
lower security and residential mortgage outstandings resulting from 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 $8.1 million, to $471.8
million at September 30, 2003, versus $463.7 million at December 31, 2002. The
increase reflected $46.5 million of growth in commercial and construction loans
versus a $33.1 million decline in residential mortgage loans resulting primarily
from historically high prepayments. 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
$5,000,000 but customers may borrow significantly larger amounts up to the
Banks' combined legal lending limit of $9.0 million at September 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 September 30, 2003, was $19.8 million. The $5.8 million threshold
approximates 10% of total capital and reserves and reflects an
15
additional internal monitoring guideline. At September 30, 2003, the Company
through the DE Bank had $981,000 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 at September 30, 2003, 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
$41.7 million at September 30, 2003, a decrease of $45.6 million or 52.2%, 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 September 30, 2003, and December 31,
2002, the portfolio had net unrealized gains of $1.2 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 September 30, 2003, securities
held to maturity totaled $9.0 million, a decrease of $278,000, or 3.0% 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 $22.1 million, to $94.9 million at September 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 September 30,
2003, the balance was $3.6 million versus $4.2 million at December 31, 2002.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$180,000 to $4.8 million at September 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 September 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. The income
earned on these policies is reflected in other income.
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 decreased by $8.7 million, or 1.9% to $447.6 million at
September 30, 2003, from $456.3 million at December 31, 2002. Average core
non-public deposits increased 17%, or $36.6 million more than the prior year
period to $247.3 million in the first nine 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 $42.5 million, or 19.0% to $180.8 million
at September 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 September 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 $3.7 million to $55.0 million at
September 30, 2003, versus $51.3 million at December 31, 2002. This increase was
primarily the result of year-to-date 2003 net income of $3.7 million.
17
Three Months Ended September 30, 2003 Compared to September 30, 2002
- --------------------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased to $1.2 million or $0.18 per diluted
share for the three months ended September 30, 2003, compared to $66,000, or
$0.01 per diluted share for the prior year comparable period. The prior year
period reflected an after tax write down of one other real estate owned property
of $909,000, or $0.14 per diluted share. The improvement in earnings reflected
lower expenses due to the absence of the OREO write down and an increase in fee
income related to short-term consumer loans. Net interest income decreased $1.9
million or 32% compared to the prior year period reflecting the decision to
participate the short-term consumer loans to third parties. Non-interest income
increased $2.1 million due to the reclassification of interest income from the
short-term loan product resulting from the participation of these loans to
independent third parties. A majority of the income related to these loans is
now classified as fee income due to the Company's decision to sell a majority of
the loans to independent third parties beginning in the third quarter of 2003.
Interest margins were significantly impacted by prepayments in the residential
real estate and mortgage-backed securities portfolios, but the Banks' continued
reductions in deposit rates and lower cost core deposit growth partially offset
the impact of those prepayments. Average core non-public deposits increased 16%
in the third quarter of 2003 compared to the prior year comparable period. The
provision for loan losses decreased $318,000 between those periods reflecting
lower commercial loan provisions. The increased net income resulted in a return
on average assets and average equity of .75% and 8.94% respectively, in the
third quarter compared to .04% and .53% 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.
18
For the three months ended For the three months ended
September 30, 2003 September 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 76,927 243 1.25% 41,640 192 1.83%
Securities 54,552 586 4.30% 110,216 1,538 5.58%
Loans receivable 458,719 7,339 6.35% 469,726 9,204 7.77%
------------------ ------------- ------------- ----------------- ------------ -------------
Total interest-earning assets 590,198 8,168 5.49% 621,582 10,934 6.98%
Other assets 57,736 26,634
------------------ -----------------
Total assets $ 647,934 $ 648,216
================== =================
Interest-bearing liabilities:
Demand-non interest
bearing $ 71,029 $ 57,777
Demand interest-bearing 59,463 108 0.72% 45,163 123 1.08%
Money market & savings 129,265 403 1.24% 119,065 582 1.94%
Time deposits 186,149 1,497 3.19% 235,760 2,145 3.61%
------------------ ------------- ------------- ----------------- ------------ -------------
Total deposits 445,906 2,008 1.79% 457,765 2,850 2.47%
Total interest-bearing
deposits 374,876 2,008 2.13% 399,988 2,850 2.83%
------------------ ------------- ------------- ----------------- ------------ -------------
Other borrowings 134,074 2,079 6.15% 131,000 2,076 6.29%
------------------ ------------- ------------- ----------------- ------------ -------------
Total interest-bearing
liabilities $ 508,950 $ 4,087 3.19% 530,988 4,926 3.68%
================== ============= ============= ================= ------------ =============
Total deposits and
other borrowings 579,980 4,087 2.80% 588,765 4,926 3.32%
------------------ ------------- ------------- ----------------- ------------ -------------
Noninterest-bearing
liabilites 13,227 8,481
Shareholders' equity 54,727 50,970
------------------ -----------------
Total liabilities and
shareholders' equity $ 647,934 $ 648,216
================== =================
Net interest income $ 4,081 $ 6,008
============= ============
Net interest spread 2.69% 3.66%
============= =============
Net interest margin 2.74% 3.83%
============= =============
Net interest margin not including
short-term loan and tax refund products 2.65% 3.25%
============= =============
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 September 30,
2003 versus 2002
(dollars in thousands)
Due to change in:
Volume Rate Total
------------------- ------------- -------------------
Interest earned on:
Federal funds sold $ 111 $ (60) $ 51
Securities (602) (350) (952)
Loans (176) (1,689) (1,865)
=============================================================================================================
Total interest-earning assets (667) (2,099) (2,766)
Interest expense of
deposits
Interest-bearing demand deposits (26) 41 15
Money market and savings (32) 211 179
Time deposits 399 249 648
=============================================================================================================
Total deposit interest expense 341 501 842
Other borrowings (48) 45 (3)
=============================================================================================================
Total interest expense 293 546 839
=============================================================================================================
Net interest income $ (374) $ (1,553) $ (1,927)
=============================================================================================================
The Company's net interest margin decreased 109 basis points to 2.74% for
the three months ended September 30, 2003, versus the prior year comparable
period. The decline reflected the decision to participate a majority of the
short-term loan outstandings to independent third parties beginning in the third
quarter of 2003, thereby reducing interest income and the negative impact of
prepayments in the mortgage-backed security and residential mortgage portfolios.
Fees on short-term consumer loans contributed $158,000 to net interest income in
2003 and 9 basis points to the margin versus $937,000 and 58 basis points for
the prior year comparable period. Excluding the impact of those products,
margins decreased to 2.65% in the third quarter of 2003 from 3.25% in the prior
year comparable period. That decrease reflected the negative impact of the
historically high residential mortgage and mortgage-backed security prepayments,
partially offset by the 16% 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. While management could replace significant amounts of such security
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 declined 149 basis
points to 5.49% for the three months ended September 30, 2003, from 6.98% for
the prior year comparable period due primarily to lower interest income from the
short-term loan product and lower income from the securities and residential
mortgages. Overall, the average rate paid on interest-bearing liabilities
decreased 49 basis points to 3.19% for the three months ended September 30,
2003, from 3.68% in the prior year comparable period, as the Company repriced
its deposits to the lower rate environment.
20
The Company's net interest income decreased $1.9 million, or 32.1%, to
$4.1 million for the three months ended September 30, 2003, from $6.0 million
for the prior year comparable period. As shown in the Rate Volume table above,
the decrease in net interest income was due primarily to lower rates earned on
loans reflecting lower short-term loan income. Average interest-earning assets
decreased $31.4 million, to $590.2 million for the three months ended September
30, 2003, from $621.6 million for the prior year comparable period reflecting
lower amounts of securities and residential mortgages outstanding.
The Company's total interest income decreased $2.8 million, or 25.3%, to
$8.2 million for the three months ended September 30, 2003, from $10.9 million
for the prior year comparable period. Interest and fees on loans decreased $1.9
million to $7.3 million for the three months ended September 30, 2003, from $9.2
million for the prior year comparable period. This decline reflects prepayments
in the residential mortgage portfolios which reduced interest income, lower
yields on commercial and construction loans reflecting the lower rate
environment and lower short-term loan interest income as a majority of these
loans are now sold to third parties. The yield on loans declined 142 basis
points to 6.35% reflecting the lower interest rate environment and lower
short-term loan interest income. Interest and dividend income on investment
securities decreased $952,000 to $586,000 for the three months ended September
30, 2003, from $1.5 million for the prior year comparable period. This decline
was due principally to the $55.7 million, or 50.5%, decrease in average
investment securities outstanding to $54.6 million at September 30, 2003 from
$110.2 million for the prior year period. In addition, the average rate earned
on investment securities declined 128 basis points to 4.30% 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 $51,000 as average fed funds sold outstanding increased $35.3 million
to $76.9 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 balances offset the lower yields earned on these
balances due to the lower interest rate environment.
The Company's total interest expense decreased $839,000, or 17.0%, to $4.1
million for the three months ended September 30, 2003, from $4.9 million for the
prior year comparable period, due to the lower rate environment. The Company
repriced deposits to the lower rate environment, particularly certificates of
deposit and other non-public core deposits. Interest-bearing liabilities
averaged $508.9 million for the three months ended September 30, 2003, versus
$531.0 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 3.19% for the three months ended
September 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
$648,000, or 30.2%, to $1.5 million at September 30, 2003, from $2.1 million for
the prior year comparable period. This decline reflected the lower interest rate
environment as the average rate declined 42 basis points to 3.19%. In addition,
average certificates of deposit outstanding decreased $49.6 million, or 21.0%,
to $186.1 million, for the third quarter ended September 30, 2003, from $235.8
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, increased
$3,000 to $2.1 million for the for the three months ended September 30, 2003,
compared to $2.1 million for the prior year comparable period. 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 September 30, 2003 and $99,000 for the prior year
comparable period.
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 decreased $318,000 to $647,000 for the three months ended September 30,
2003, from $1.0 million for the prior year comparable period. This decrease
reflected lower provisions in the commercial loan portfolio as large prior year
provisions related to several classified assets were repaid.
Non-Interest Income
Total non-interest income increased $2.1 million to $2.8 million for the
three months ended September 30, 2003, versus $724,000 for the prior year
comparable period due to short-term loan fee income. A majority of these loans
are now participated to third parties effective in the third quarter of 2003.
Income earned on these participated loans is treated as fee income. The Company
also realized income from business owned life insurance purchased in the second
quarter of 2003 totaling $152,000. These items more than offset lower loan
administration fees.
Non-Interest Expenses
Total non-interest expenses decreased $1.2 million, or 21.9% to $4.4
million for the three months ended September 30, 2003, from $5.7 million for the
prior year comparable period. Prior year included a $1.4 million provision for
the write down of one other real estate owned property. Salaries and employee
benefits increased $141,000 or 6.5%, to $2.3 million for the three months ended
September 30, 2003, from $2.2 million for the prior year comparable period
reflecting additional incentive expense related to loan generation.
Occupancy expense increased $8,000 to $371,000 for the three months ended
September 30, 2003, versus $363,000 for the prior year comparable period due
primarily to increased rent expense.
Depreciation expense increased $26,000, or 9.4% to $304,000 for the three
months ended September 30, 2003, versus $278,000 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 $205,000 to $249,000 for the three months ended
September 30, 2003, from $454,000 for the prior year comparable period. The
decrease reflected lower legal expenses related to loan collections.
Advertising expense declined $79,000 to $21,000 as the Company reduced the
quantity of advertisements in the period.
Other real estate owned expenses declined by $1.3 million as prior year
2002 quarter reflected a write down of one OREO property of $1,357,000.
Other expenses increased $203,000, or 22.5% to $1.1 million for the three
months ended September 30, 2003, from $903,000 for the prior year comparable
period. The increase reflected higher data processing costs related to support
for the short-term loan product and higher audit and state tax expense.
Provision for Income Taxes
The provision for income taxes increased $564,000, to $606,000 for the
three months ended September 30, 2003, from $42,000 for the prior year
comparable period. This increase was primarily the result of the increase in
pre-tax income. The effective tax rate declined to 33.0% from 38.9% due to
business owned life insurance income, a portion of which is not taxable.
22
Nine Months Ended September 30, 2003 Compared to September 30, 2002
- -------------------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased $1.8 million, or 96% to $3.7 million or
$0.55 per diluted share for the nine months ended September 30, 2003, compared
to $1.9 million, or $0.29 per diluted share for the prior year comparable
period. Prior year comparable period reflected an after tax write down of one
other real estate owned property of $909,000, or $0.14 per diluted share. The
96% improvement in earnings reflected a significant increase in net interest
income and non-interest income and the absence of the OREO write down. Net
interest income increased $3.3 million or 18% 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 $5.5 million increase in net interest income from the
short-term loan and tax refund products, approximately $5.0 million was offset
by increased loan loss provisions. Average core non-public deposits increased
17% in the first nine months of 2003 compared to the prior year comparable
period. The provision for loan losses increased $2.9 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 products more than offset these provisions. In the nine months ended
September 30, 2003, non-interest income increased $1.5 million reflecting
increased revenue from the short-term loan product resulting from the
participation of these loans to independent third parties. Income earned on
these participated loans is treated as fee income. Non-interest expenses net of
OREO expense increased 4.7%. The increased net income resulted in a return on
average assets and average equity of .74% and 9.26% respectively, compared to
..38% and 5.18% 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 nine months ended For the nine months ended
September 30, 2003 September 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 76,684 735 1.28% 42,439 584 1.84%
Securities 68,877 2,331 4.51% 113,909 4,910 5.75%
Loans receivable 468,853 31,215 8.90% 468,146 28,124 8.03%
------------------ ------------- ------------- ---------------- ------------ -------------
Total interest-earning assets 614,414 34,281 7.46% 624,494 33,618 7.20%
Other assets 44,210 29,098
------------------ ----------------
Total assets $ 658,624 $ 653,592
================== ================
Interest-bearing liabilities:
Demand-non interest
bearing 73,116 - 57,964 -
Demand interest-bearing 59,142 355 0.80% 45,697 363 1.06%
Money market & savings 129,993 1,316 1.35% 107,023 1,378 1.72%
Time deposits 200,979 4,968 3.30% 248,105 7,334 3.95%
------------------ ------------- ------------- ---------------- ------------ -------------
Total deposits 463,230 6,639 1.92% 458,789 9,075 2.64%
Total interest-bearing
deposits 390,114 6,639 2.28% 400,825 9,075 3.03%
------------------ ------------- ------------- ---------------- ------------ -------------
Other borrowings 133,316 6,168 6.19% 137,023 6,393 6.24%
------------------ ------------- ------------- ---------------- ------------ -------------
Total interest-bearing
liabilities $ 523,430 $ 12,807 3.27% $ 537,848 $ 15,468 3.85%
================== ============= ============= ================ ============ =============
Total deposits and
other borrowings 596,546 12,807 2.87% 595,812 15,468 3.47%
---------------------------------- ------------- ------------------------------- -------------
Noninterest-bearing
liabilites 8,978 9,037
Shareholders' equity 53,100 48,743
------------------ ----------------
Total liabilities and
shareholders' equity $ 658,624 $ 653,592
================== ================
Net interest income $ 21,474 $ 18,150
============= ============
Net interest spread 4.59% 3.73%
============= =============
Net interest margin 4.67% 3.89%
============= =============
Net interest margin not including
short-term loan and rax refund products 2.69% 3.12%
============= =============
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
Nine months ended September 30,
2003 versus 2002
(dollars in thousands)
Due to change in:
Volume Rate Total
------------------- ------------- ---------------
Interest earned on:
Federal funds sold $ 328 $ (177) $ 151
Securities (1,524) (1,055) (2,579)
Loans 47 3,044 3,091
===================================================================================================================
Total interest-earning assets (1,149) 1,812 663
Interest Expense of
Deposits
Interest-bearing demand deposits (81) 89 8
Money market and savings (232) 294 62
Time deposits 1,165 1,201 2,366
===================================================================================================================
Total deposit interest expense 852 1,584 2,436
Other borrowings 172 53 225
===================================================================================================================
Total interest expense 1,024 1,637 2,661
===================================================================================================================
Net interest income $ (125) $ 3,449 $ 3,324
===================================================================================================================
The Company's net interest margin increased 78 basis points to 4.67% for
the nine months ended September 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 cost 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 all of 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 $9.0 million to net
interest income in 2003 and 198 basis points to the margin versus $3.5 million
and 77 basis points for the prior year comparable period. Excluding the impact
of those products, margins decreased to 2.69% in the first nine months of 2003
from 3.12% 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 26 basis
points to 7.46% for the nine months ended September 30, 2003, from 7.20% 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 3.27% for the nine months ended
25
September 30, 2003, from 3.85% in the prior year comparable period, as the
Company repriced its deposits to the lower rate environment.
The Company's net interest income increased $3.3 million, or 18.3%, to
$21.5 million for the nine months ended September 30, 2003, from $18.1 million
for the prior year comparable period. As shown in the Rate Volume table above,
the increase in net interest income reflected the positive effect of higher
short-term consumer loan and tax refund anticipation loan fees as well as the
impact of lower amounts of certificates of deposit and lower rates paid there
on.
The Company's total interest income increased $663,000, or 2.0%, to $34.3
million for the nine months ended September 30, 2003, from $33.6 million for the
prior year comparable period. Interest and fees on loans increased $3.1 million,
or 11.0% to $31.2 million for the nine months ended September 30, 2003, from
$28.1 million for the prior year comparable period. Prepayments in the
residential mortgage portfolio which reduced interest income were more than
offset by a 7% 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 87 basis points to 8.90%. Interest and
dividend income on investment securities decreased $2.6 million, or 52.5% to
$2.3 million for the nine months ended September 30, 2003, from $4.9 million for
the prior year comparable period. This decline was due principally to the $45.0
million, or 39.5%, decrease in average investment securities outstanding to
$68.9 million at September 30, 2003 from $113.9 million for the prior year
period. In addition, the average rate earned on investment securities declined
124 basis points to 4.51% 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 $151,000 as average federal funds sold
outstanding increased $34.2 million to $76.7 million. Proceeds from securities
and residential mortgage prepayments were temporarily invested in federal funds
sold, and the resulting increased average balances more than offset the lower
yields.
The Company's total interest expense decreased $2.7 million, or 17.2%, to
$12.8 million for the nine months ended September 30, 2003, from $15.5 million
for the prior year comparable period, due to the lower rate environment as the
Company repriced deposits to the lower rate environment, including certificates
of deposit and other non-public core deposits. Interest-bearing liabilities
averaged $523.4 million for the nine months ended September 30, 2003, versus
$537.8 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 3.27% for the nine months ended
September 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 $2.4
million, or 32.3%, to $5.0 million at September 30, 2003, from $7.3 million for
the prior year comparable period. This decline reflected the lower interest rate
environment as the average rate declined 65 basis points to 3.30%. In addition,
average certificates of deposit outstanding decreased $47.1 million, or 19.0%,
to $201.0 million, for the nine months ended September 30, 2003, from $248.1
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
$225,000 or 3.6% to $6.2 million for the nine months ended September 30, 2003,
compared to $6.4 million for the prior year comparable period. This decrease
resulted from a $3.7 million, or 2.7% decline in average other borrowings to
$133.3 million at September 30, 2003, versus $137.0 million for the prior year
comparable period. The decline in average other borrowings reflected increased
deposit generation and securities maturities and prepayments which were used to
pay down borrowings. The Company issued $6.0 million of trust preferred
securities in November 2001, the expense for which is included in other
borrowings expense. That expense was $279,000 for the nine months ended
September 30, 2003 versus $292,000 for the prior year comparable period.
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 $2.9 million to $6.3 million for the nine months ended
September 30, 2003, from $3.5 million for the prior year comparable period. This
increase reflected approximately $5.0 million of additional provisions for the
short-term consumer and tax refund anticipation loan products that were more
than offset by related revenues. Partially offsetting the increased short-term
loan provisions were lower loan loss provisions in the commercial loan
portfolio.
Non-Interest Income
Total non-interest income increased $1.5 million to $4.2 million for the
nine months ended September 30, 2003, versus $2.7 million for the prior year
comparable period due primarily to short-term loan fee income related to
participated loans. A majority of these loans are now participated to
independent third parties effective in the third quarter of 2003. Income earned
on these particpated loans is treated as fee income. These fees were partially
offset by lower loan advisory fees and lower tax refund product revenue.
Non-Interest Expenses
Total non-interest expenses decreased $616,000, or 4.3% to $13.8 million
for the nine months ended September 30, 2003, from $14.4 million for the prior
year comparable period. The prior year period included an OREO write down of
$1.4 million. Salaries and employee benefits increased $550,000 or 8.3%, to $7.2
million for the nine months ended September 30, 2003, from $6.7 million for the
prior year comparable period. The increase reflected increased operational
support for the tax refund and short-term consumer loan products, business
development efforts, increased incentives related to loan generation and normal
merit increases.
Occupancy expense increased $55,000 to $1.1 million for the nine months
ended September 30, 2003, due primarily to increased rent and repairs and
maintenance expense.
Depreciation expense increased $144,000, or 19.1% to $901,000 for the nine
months ended September 30, 2003, versus $757,000 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 $422,000, or 35.7% to $759,000 for the nine months
ended September 30, 2003, from $1.2 million for the prior year comparable
period. This decrease reflected lower legal expenses related to loan
collections.
Advertising expense declined $219,000 to $140,000 as the Company reduced
the number of advertisements during the period.
Other real estate owned expense declined $1.2 million to $178,000. The
prior year included a write down on one property of $1,357,000.
Other expenses increased $505,000, or 16.9% to $3.5 million for the nine
months ended September 30, 2003, from $3.0 million for the prior year comparable
period. The majority of that increase reflected a second quarter charge of
$200,000 for severance 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 audit and state
tax expense. The 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 $776,000 to $1.9 million for the
nine months ended September 30, 2003, from $1.1 million for the prior year
comparable period. This increase was primarily the result of the increase in
pre-tax income. The effective tax rate declined to 33.7% for the nine months
ended September 30, 2003 from 36.9% for the prior year comparable period due to
business owned life insurance income, a portion of which is not taxable.
Commitments, Contingencies and Concentrations
The Banks are party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit totaling $79.0 million at September 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 $75.4 million and $52.3
million and standby letters of credit of approximately $3.6 million and $7.2
million at September 30, 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 Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
At September 30, 2003, the Banks 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 $147.4 million, which
represented 31.2% of gross loans receivable at September 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
September 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 September 30, 2003
Total risk based capital
Republic First Bank $56,168 13.95% $32,218 8.00% $40,275 10.00%
First Bank of Delaware 7,702 23.24% 2,651 8.00% 3,313 10.00%
Republic First Bancorp, 65,404 15.07% 34,718 8.00% - N/A
Inc.
Tier one risk based capital
Republic First Bank 51,106 12.69% 16,109 4.00% 24,164 6.00%
First Bank of Delaware 7,277 21.96% 1,325 4.00% 1,988 6.00%
Republic First Bancorp, 59,940 13.82% 17,359 4.00% - N/A
Inc.
Tier one leveraged capital
Republic First Bank 51,106 8.61% 29,670 5.00% 29,670 5.00%
First Bank of Delaware 7,277 13.12% 2,774 5.00% 2,774 5.00%
Republic First Bancorp, 59,940 9.27% 32,345 5.00% - N/A
Inc.
At December 31, 2002
Total risk based capital
Actual For Capital To be well
Adequacy Purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ----------- ----------- -----------
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 is 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 $94.9 million at September 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 September 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 March 31, 2004. 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 September 30,
2003, the PA Bank had $69.8 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 September 30, 2003, the Company had aggregate outstanding commitments
(including unused lines of credit and letters of credit) of $75.4 million.
Certificates of deposit scheduled to mature in one year totaled $116.4 million
at September 30, 2003, borrowings scheduled to mature within one year totaled
$25.0 million. 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
September 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 $184.8 million. As of September 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 September 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 $41.7 million and $42.9 million as of
September 30, 2003, respectively. The net unrealized gain on securities
available for sale as of that date was $1.2 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 $5,000,000 but customers may borrow
significantly larger amounts up to the Banks combined legal lending limit of
$9.0 million at September 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 September 30, 2003, was $19.8
million.
Total loans increased $8.1 million, to $471.8 million at September 30,
2003, from $463.7 million at December 31, 2002. Commercial and construction
loans increased $46.5 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 $33.1 million, which reflected
historically high prepayments in that portfolio resulting from the lower rate
environment. Short-term loans declined $4.1 million reflecting the decision to
participate a majority of these loans to independent third party investors.
31
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
(dollars in thousands) As of September 30, 2003 As of December 31, 2002
-------------------------------------------------------------------------------
Balance % of Total Balance % of Total
-------------------------------------------------------------------------------
Commercial:
Real estate secured $ 373,467 79.1 $ 329,570 71.1
Non real estate secured 56,498 12.0 54,163 11.7
Unsecured 8,901 1.9 8,513 1.8
-------------------------------------------------------------------------------
438,866 93.0 392,246 84.6
Residential real estate 18,157 3.9 51,265 11.1
Consumer, short-term & other 14,752 3.1 20,178 4.3
-------------------------------------------------------------------------------
Total loans 471,775 100.0% 463,689 100.0%
Less allowance for loan losses (8,731) (6,642)
---------------- ------------------
Net loans $ 463,044 $ 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.
32
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
September 30, December 31,
2003 2002
-------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $5,146 $4,051
Non-accrual loans 1,837 2,972
-------------------------------------
Total non-performing loans (1) 6,983 7,023
Other real estate owned 1,015 1,015
-------------------------------------
Total non-performing assets (2) $7,998 $8,038
=====================================
Non-performing loans as a percentage of total
loans net of unearned
Income 1.48% 1.51%
Non-performing assets as a percentage of total
assets 1.24% 1.24%
(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).
Problem loans consist of loans that are included in performing loans, but
for which potential credit problems of the borrowers have caused management to
have serious doubts as to the ability of such borrowers to continue to comply
with present repayment terms. At September 30, 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 $1.8 million
at September 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 September 30, 2003, and December 31, 2002, internally classified
accruing substandard loans totaled approximately $14.8 million and $16.3 million
respectively; and doubtful loans totaled approximately $922,000 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
September 30, 2003 and December 31, 2002, in the aggregate principal amount of
$916,000 at September 30, 2003 and $1.2 million at December
33
31,2002; and (ii) 60 to 89 days past due, at September 30, 2003 and December 31,
2002, in the aggregate principal amount of $1.7 million and $2.6 million,
respectively.
At September 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 $147.4 million, which
represented 31.2% of gross loans receivable at September 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. 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 September 30, 2003,
and December 31, 2002.
At September 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 nine
months ended September 30, 2003, and 2002, and the twelve months ended December
31, 2002 is as follows:
For the nine months For the twelve months For the nine months
ended ended ended
(dollars in thousands) September 30, 2003 December 31, 2002 September 30, 2002
--------------------- --------------------- -----------------------
Balance at beginning of period $ 6,642 $ 5,431 $ 5,431
Charge-offs:
Commercial and construction 1 2,542
94
Short-term loans 4,218 1,670 --
Tax refund loans 1,393 -- --
Consumer -- 3
1,332
-------- -------- -----------
Total charge-offs 5,612 4,215
1,462
-------- -------- -----------
Recoveries:
Commercial and construction 123
1,023 35
Short-term loans -- -- --
Tax refund loans 333 -- --
Consumer -- -- --
-------- -------- -----------
Total recoveries 1,356 123 35
-------- -------- -----------
Net charge-offs 4,256 4,092 1,391
-------- -------- -----------
Provision for loan losses 6,345 5,303 3,493
-------- -------- -----------
Balance at end of period $ 8,731 $ 6,642 $ 7,533
======== ======== ===========
Average loans outstanding (1) $468,853 $468,239 $ 468,146
======== ======== ===========
As a percent of average loans (1):
Net charge-offs (annualized) 1.21% 0.87% 0.40%
Provision for loan losses 1.35% 1.13% 0.75%
Allowance for loan losses 1.86% 1.42% 1.61%
Allowance for loan losses to:
Total loans, net of unearned income at
period end 1.85% 1.43% 1.60%
Total non-performing loans at period
end 125.04% 94.57% 82.07%
(1) Includes nonaccruing loans.
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, annualized net charge-offs (recoveries) to
average loans were (.29%) for the first nine months of 2003, 0.52% for the year
ended December 31, 2002 and .02% for the first nine 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
35
adequacy of the loan loss reserve. Any additions deemed necessary to the
allowance for loan losses are charged to operating expenses.
The Company has an existing loan review program, which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
who reports quarterly, directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any
given date is difficult, particularly in a continually changing economy. In
management's opinion, the allowance for loan losses was appropriate at September
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 September 30, 2003, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $438.9
million, $18.2 million and $14.7 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 Bank, 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
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 October 23, 2003.
Other events dated October 2, 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: November 14, 2003
39