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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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Washington, D.C. 20549
FORM 10-K
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(Mark One)
[X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _____________________ to _______________________
Commission file number: 0-17007
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REPUBLIC FIRST BANCORP, INC.
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(Exact name of registrant as specified in charter)
Pennsylvania 23-2486815
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(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)
1608 Walnut Street, Suite 1000, Philadelphia, PA 19103
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(Address of Principal Executive offices) (Zip Code)
Issuer's telephone number, including area code: (215) 735-4422
Securities registered pursuant to Section 12(b) of the Act: None.
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(Title of class)
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 such filing
requirements for the past 90 days.
YES X NO ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ X ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average of the bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
The aggregate market value of $36,474,342 was based on the average of the bid
and asked prices on the National Association of Securities Dealers Automated
Quotation System on February 28, 2003.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Common Stock $0.01 Par Value 6,230,420
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Title of Class Number of Shares Outstanding as of February 28, 2003
Documents incorporated by reference:
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2003 Annual Meeting of Shareholders.
REPUBLIC FIRST BANCORP | 1
REPUBLIC FIRST BANCORP, INC.
Form 10-K
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INDEX
PART I Page
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Item 1 Description of Business.............................................................................. 3
Item 2 Description of Properties............................................................................ 6
Item 3 Legal Proceedings.................................................................................... 7
Item 4 Submission of Matters to a Vote of Security Holders ................................................. 10
PART II
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Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .............................. 10
Item 6 Selected Financial Data............................................................................. 11
Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition................ 12
Item 8 Financial Statements and Supplementary Data.......................................................... 35
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 36
PART III
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Item 10 Directors, Executive Officers, Promoters and Control Persons of the Registrant ...................... 36
Item 11 Executive Compensation .............................................................................. 36
Item 12 Security Ownership of Certain Beneficial Owners and Management ...................................... 36
Item 13 Certain Relationships and Related Transactions ...................................................... 36
Item 14 Controls and Procedures ............................................................................. 36
PART IV
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Item 15 Exhibits, Certifications, Financial Statement Schedules and Reports on Form 8-K ..................... 37
REPUBLIC FIRST BANCORP | 2
PART I
Item 1: Description of Business
Republic First Bancorp, Inc.
Republic First Bancorp, Inc. (the "Company"), is a two-bank holding company
organized and incorporated under the laws of the Commonwealth of Pennsylvania.
Its wholly-owned subsidiaries, Republic First Bank (the "Bank"), and First Bank
of Delaware ("FBD"), (together the "Banks") offer a variety of credit and
depository banking services to individuals and businesses primarily in the
Greater Philadelphia and Delaware area through their offices and branches in
Philadelphia and Montgomery Counties in Pennsylvania and New Castle County,
Delaware.
As of December 31, 2002, the Company had total assets of approximately
$647.7 million, total shareholders' equity of approximately $51.3 million, total
deposits of approximately $456.3 million and net loans receivable outstanding of
approximately $457.0 million. The majority of such loans were made for
commercial purposes.
The Company provides banking services through the Banks and does not
presently engage in any activities other than banking activities. The principal
executive offices of the Company and the Bank are located at 1608 Walnut Street,
Suite 1000, Philadelphia, PA 19103. Its telephone number is (215) 735-4422.
The Company and the Banks have a total of 140 full time equivalent
employees.
Republic First Bank
The Bank is a commercial bank chartered pursuant to the laws of the
Commonwealth of Pennsylvania, and is a member of the Federal Reserve System.
Accordingly, its primary federal regulator is the Federal Reserve Board of
Governors. The deposits held by the Bank are insured up to applicable limits by
the Bank Insurance Fund of the Federal Deposit Insurance Corporation ("FDIC").
It presently conducts its principal banking activities through its five
Philadelphia offices and three suburban offices in Ardmore, East Norriton and
Abington, all of which are located in Montgomery County, Pennsylvania. The Bank
is in the process of changing its name to Republic First Bank.
As of December 31, 2002, the Bank had total assets of approximately $606.1
million, total shareholders' equity of approximately $49.4 million, total
deposits of approximately $424.8 million and net loans receivable of
approximately $428.4 million. The majority of such loans were made for
commercial purposes.
First Bank of Delaware
First Bank of Delaware is a Delaware state chartered Bank, located at
Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New
Castle, Delaware. FBD opened for business on June 1, 1999. FBD offers many of
the same services and financial products as Republic First Bank, described
above, and will serve to expand the Company's market penetration into Delaware.
It presently conducts its principal banking activities primarily through its two
offices in Wilmington, Delaware.
As of December 31, 2002, FBD had total assets of approximately $43.8
million, total shareholders' equity of approximately $5.9 million, total
deposits of approximately $34.7 million and net loans receivable of
approximately $28.6 million. The majority of such loans were made for commercial
purposes. FBD also offers short-term consumer loans and tax anticipation loans
not offered by Republic First Bank.
The Banks offer many commercial and consumer banking services with an
emphasis on serving the needs of individuals, small and medium-sized businesses,
executives, professionals and professional organizations in their service area.
The Banks attempt to offer a high level of personalized service to both
their small and medium-sized businesses and consumer customers. The Banks offer
both commercial and consumer deposit accounts, including checking accounts,
interest-bearing demand accounts, money market accounts, certificates of
deposit, savings accounts, sweep accounts, lockbox services and individual
retirement accounts (and other traditional banking services). The Banks actively
solicit both non-interest and interest-bearing deposits from their borrowers.
The Banks offer a broad range of loan and credit facilities to the
businesses and residents of their service area, including secured and unsecured
commercial loans including commercial real estate and construction loans,
residential mortgages, automobile loans, home improvement loans, home equity and
overdraft lines of credit, and other products.
REPUBLIC FIRST BANCORP | 3
The Banks manage credit risk through loan application evaluation and
monitoring for adherence with procedures. Since their inception, the Banks have
had a senior officer monitor compliance with the Banks' lending policies and
procedures by the Banks' loan officers.
The Banks also maintain investment securities portfolios. Investment
securities are purchased by the Banks within standards of the Banks' Investment
Policy, which is approved annually by the Banks' board of directors. The
Investment Policy addresses such issues as permissible investment categories,
credit quality, maturities and concentrations. At December 31, 2002, and 2001,
approximately 84% and 93%, respectively, of the aggregate dollar amount of the
investment securities consisted of either U.S. Government debt securities or
U.S. Government agency issued mortgage backed securities or collateralized
mortgage obligations (CMOs). Credit risk associated with these U.S. Government
debt securities and the U.S. Government Agency securities is minimal, with
risk-based capital weighting factors of 0% and 20%, respectively. The CMOs are
fixed and variable rate debt securities, with current weighted average lives of
approximately ten years.
Service Area/Market Overview
The Banks' primary market service area consists of the Greater Philadelphia
region, including Center City Philadelphia and the northern and western suburban
communities located principally in Montgomery County. The Banks also serve the
surrounding counties of Bucks, Chester and Delaware in Pennsylvania, southern
New Jersey and northern Delaware.
Competition
There is substantial competition among financial institutions in the Banks'
service area. The Banks compete with new and established local commercial banks,
as well as numerous regionally-based and super-regional commercial banks. In
addition to competing with new and established commercial banking institutions
for both deposits and loan customers, the Banks compete directly with savings
banks, savings and loan associations, finance companies, credit unions, factors,
mortgage brokers, insurance companies, securities brokerage firms, mutual funds,
money market funds, private lenders and other institutions for deposits,
commercial loans, mortgages and consumer loans, as well as other services.
Competition among financial institutions is based upon a number of factors,
including, but not limited to, the quality of services rendered, interest rates
offered on deposit accounts, interest rates charged on loans and other credit
services, service charges, the convenience of banking facilities, locations and
hours of operation and, in the case of loans to larger commercial borrowers,
relative lending limits. It is the view of Management that a combination of many
factors, including, but not limited to, the level of market interest rates, has
increased competition for loans and deposits.
Many of the banks with which the Banks compete have greater financial
resources than the Banks and offer a wider range of deposit and lending
instruments with higher legal lending limits. The Banks combined legal lending
limits were $9.0 million at December 31, 2002. The Banks are subject to
potential intensified competition from new branches of established banks in the
area as well as new banks that could open in its market area. Several de novo
banks with business strategies similar to those of the Banks have opened since
the Banks' inception. There are banks and other financial institutions which
serve surrounding areas and additional out-of-state financial institutions which
currently, or in the future, may compete in the Banks' market. The Banks compete
to attract deposits and loan applications both from customers of existing
institutions and from customers new to the greater Philadelphia area. The Banks
anticipate a continued increase in competition in their market area.
Operating Strategy
The Company's objective is for the Banks to become the primary alternative
to the large banks that dominate the Greater Philadelphia market. The Company's
management team has developed a business strategy consisting of the following
key elements to achieve this objective:
Providing Attentive and Personalized service. The Company believes that a
very attractive niche exists serving small- to medium-sized business customers
not adequately served by the Banks' larger competitors. The Company believes
this segment of the market responds very positively to the attentive and highly
personalized service provided by the Banks. The Banks offer individuals and
small to medium-sized businesses a wide array of banking products, informed and
professional service, extended operating hours, consistently applied credit
policies, and local, timely decision making. The banking industry is
experiencing a period of rapid consolidation, and many local branches have been
acquired by large out-of-market institutions. The Company is positioned to
respond to these dynamics by offering a community banking alternative and
tailoring its product offering to fill voids created as larger competitors
increase the price of products and services or de-emphasize such products and
services.
REPUBLIC FIRST BANCORP | 4
Attracting and Retaining Highly Experienced Personnel.
The Banks' officers and other personnel have substantial experience
acquired at larger banks in the region. Additionally, the Banks extensively
screen and train their staffs to instill a sales and service oriented culture
and maximize cross-selling opportunities and business relationships. The Company
offers meaningful sales-based incentives to certain customer contact employees.
Capitalizing on Market Dynamics.
In recent years, banks controlling large amounts of the deposits in the
Banks' primary market areas have been acquired by large and super-regional bank
holding companies. The ensuing cultural changes in these banking institutions
have resulted in a change in their product offerings and the degree of personal
attention they provide. The Company has sought to capitalize on these changes by
offering a community banking alternative. As a result of continuing
consolidations and its marketing efforts, the Company believes it has a
continuing opportunity to increase its market share.
Products and Services
Traditional Banking Products and Services.
The Banks offer a range of commercial and other banking services, including
secured and unsecured commercial loans, real estate loans, construction loans,
automobile loans, home improvement loans, mortgages, home equity and overdraft
lines of credit and others. The Banks offer both commercial and consumer deposit
accounts, including checking accounts, interest-bearing demand accounts, money
market accounts, certificates of deposit, savings accounts, sweep accounts,
lockbox services and individual retirement accounts (and other traditional
banking services). The Banks' commercial loans typically range between $250,000
and $3,000,000 but customers may borrow significantly larger amounts up to the
Banks combined legal lending limit of $9.0 million. Individual customers may
have several loans often secured by different collateral. Such relationships in
excess of $5.5 million at December 31, 2002, amounted to $12.9 million. The
Banks attempt to offer a high level of personalized service to both their
commercial and consumer customers. The Banks are members of the STAR(TM) and
PLUS(TM) networks in order to provide customers with access to automated teller
machines worldwide. The Banks currently have eight proprietary automated teller
machines at branch locations.
The Banks lending activities generally are focused on small and medium
sized businesses within the professional community. Commercial and construction
loans are the most significant category of the Banks lending activities,
representing approximately 84.6% of total loans outstanding at December 31,
2002. Repayment of these loans is, in part, dependent on general economic
conditions affecting the community and the various businesses within the
community. Although management continues to follow established underwriting
policies, and monitors loans through the Banks' loan review officer, credit risk
is still inherent in the portfolio. Although the majority of the Banks' loan
portfolio is collateralized with real estate or other collateral, a portion of
the commercial portfolio is unsecured, representing loans made to borrowers
considered to be of sufficient strength to merit unsecured financing.
Tax Refund Products.
FBD has a contractual relationship with Liberty Tax Service, one of the
Nation's largest tax preparation services, to provide tax refund products to
consumer taxpayers for whom Liberty Tax Service prepares and electronically
files federal and state income tax returns ("Tax Refund Products"). Tax Refund
Products consist of accelerated check refunds ("ACRs"), and refund anticipation
loans ("RALs").
While FBD is attempting to increase market penetration of these products,
competition is intense and there can be no assurance that revenue levels will be
significant in 2003 or any years thereafter.
Short-Term Consumer Loans.
In continuing efforts to expand and diversify is sources of fee income, FBD
began to offer short-term consumer loans. Similar in some respects to the tax
refund products previously discussed, loan terms are relatively short
(approximately 2 weeks) and have principal amounts of $1,000 or less. At
December 31, 2002, there were approximately $5.0 million of short-term consumer
loans outstanding, which were originated in Georgia, Texas, California, and
North Carolina through a small number of marketers. Legislation eliminating, or
limiting interest rates upon short-term consumer loans has from time to time
been proposed, primarily as a result of fee levels which approximate 17% per
$100 borrowed, for two week terms. If such proposals cease, a larger number of
competitors may begin offering the product, and increased competition could
result in lower fees. Further, FBD uses a small number of marketers under
contracts which can be terminated upon short notice, under various
circumstances. The impact of negative conditions influencing the above factors,
if any, is not possible to predict.
REPUBLIC FIRST BANCORP | 5
Branch Expansion Plans and Growth Strategy
The Company plans to add one branch location in the year 2003. The
selection of the location will be completed after an extensive market analysis
has been conducted to ensure a strategic fit.
Item 2: Description of Properties
The Company leases approximately 26,961 square feet on the second, tenth
and eleventh floors of 1608 Walnut Street, Philadelphia, Pennsylvania, as its
headquarter facilities. The space is occupied by both the Company and the Bank
and is used as executive offices, Bank operations and commercial bank lending.
Management believes that its present space is adequate but that future staffing
needs may require the Bank to secure additional space. The current term of the
lease on its headquarter facilities expires on July 31, 2007 with annual rent
expense of $376,068 payable monthly. In addition to the base rent and building
operation expenses, the Company is required to pay its proportional share of all
real estate taxes, assessments, and sewer costs, water charges, excess levies,
license and permit fees under its lease and to maintain insurance on the
premises.
The Bank leases approximately 1,829 square feet on the ground floor at 1601
Market Street in Center City, Philadelphia. This space contains a banking area
and vault and represents the Banks' main office. The initial ten year term of
the lease expires March 2003 and contains a five year renewal option which has
been exercised. The annual rent for such location is $93,216, payable in monthly
installments.
The Bank leases approximately 1,743 square feet of space on the ground
floor at 1601 Walnut Street, Center City Philadelphia, PA. This space contains a
banking area and vault. The initial ten-year term of the lease expires August
2006 and contains one renewal option of five years. The annual rent for such
location is $49,848, payable in monthly installments.
The Bank leases approximately 972 square feet in the lower level of Pepper
Pavilion at Graduate Hospital, 19th and Lombard Streets, Philadelphia,
Pennsylvania. The space contains a banking area, lobby, office, and vault. The
current lease has an initial five year term and a one year renewal option which
expires June 2007. The annual rental at such location is $32,076, payable in
monthly installments.
The Bank leases approximately 798 square feet of space on the ground floor
and 903 square feet on the 2nd floor at 233 East Lancaster Avenue, Ardmore, PA.
The space contains a banking area and business development office. The initial
ten-year term of the lease expires in August 2005, and contains one renewal
option for five years. The annual rental at such location is $49,212, payable in
monthly installments.
The Bank leases approximately 2,143 square foot building at 4190 City Line
Avenue, Philadelphia, Pennsylvania. The space contains a retail banking
facility. The initial ten year term of the lease expires January 2007 and
contains a five year renewal option. The annual rent for such location is
$70,500, payable in monthly installments.
The Bank leases an approximately 4,500 square foot building at 75 East
Germantown Avenue, East Norriton, Pennsylvania. The space contains a banking
area and business development office. The initial ten year term contains two
five year renewal options and the initial lease term expires in December 2006.
The annual rent for such location is $70,176, payable in monthly installments.
The Bank purchased an approximately 2,800 square foot facility for its
Abington, Montgomery County office at 1480 York Road, Abington, Pennsylvania.
This space contains a banking area and a business development office.
The Bank leases approximately 1,850 square feet on the ground floor at 1818
Market St. Philadelphia, Pennsylvania. The space contains a banking area and a
vault. The initial ten year term of the lease expires in December 2008 and
contains two five year renewal options. The annual rent for such location is
$65,028, payable in monthly installments.
FBD has a land lease on approximately 2,000 sq. feet of ground at Concord
Pike and Rocky Run Pkwy, Brandywine Hundred, Delaware for its branch operations
and headquarters. The Delaware Bank opened for business on June 1, 1999. The
initial ten year term of the lease expires June 2008 and contains two five year
options to renew the lease. The annual rent for such location is $74,724,
payable in monthly installments.
FBD leases approximately 3,640 sq. feet on the ground floor of a building
at 824 Market Street, Wilmington, Delaware. The space contains a loan production
office, administrative offices and a branch that opened in November of 2000. The
initial five year term of the lease expires in October 2004. The annual rent for
such location is $72,288, payable in monthly installments.
REPUBLIC FIRST BANCORP | 6
Item 3: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and 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.
Supervision and Regulation
Various requirements and restrictions under the laws of the United States
and the Commonwealth of Pennsylvania affect the Company and the Banks.
General
The Company is a bank holding company subject to supervision and regulation
by the Federal Reserve Bank of Philadelphia ("FRB") under the Bank Holding
Company Act of 1956, as amended. As a bank holding company, the Company's
activities and those of the Banks are limited to the business of banking and
activities closely related or incidental to banking, and the Company may not
directly or indirectly acquire the ownership or control of more than 5% of any
class of voting shares or substantially all of the assets of any company,
including a bank, without the prior approval of the FRB.
The Banks are subject to supervision and examination by applicable federal
and state banking agencies. The Banks are members of the Federal Reserve System
and subject to the regulations of the FRB. Republic First Bank is also a
Pennsylvania-chartered bank subject to supervision and regulation by the
Pennsylvania Department of Banking. First Bank of Delaware is a
Delaware-chartered bank subject to the supervision and regulation of the
Delaware Department of Banking.
In addition, because the FDIC insures the deposits of the Banks, the Banks
are subject to regulation by the FDIC. The Banks are also subject to
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services that may be offered. Various consumer laws and regulations
also affect the operations of the Bank. In addition to the impact of regulation,
commercial banks are affected significantly by the actions of the FRB in
attempting to control the money supply and credit availability in order to
influence interest rates and the economy.
Holding Company Structure
The Banks are subject to restrictions under federal law which limit their
ability to transfer funds to the Company, whether in the form of loans, other
extensions of credit, investments or asset purchases. Such transfers by the
Banks to the Company are generally limited in amount to 10% of the Banks'
capital and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specific amounts, and all transactions are required to
be on an arm's length basis. The Banks have never made any loan or extension of
credit to the Company nor have they purchased any assets from the Company.
Under FRB policy, the Company is expected to act as a source of financial
strength to the Banks and to commit resources to support the Banks, i.e., to
downstream funds to the Banks. This support may be required at times when,
absent such policy, the Company might not otherwise provide such support. Any
capital loans by the Company to the Banks are subordinate in right of payment to
deposits and to certain other indebtedness of the Banks. In the event of the
Company's bankruptcy, any commitment by the Company to a federal bank regulatory
agency to maintain the capital of the Banks will be assumed by the bankruptcy
trustee and entitled to a priority of payment.
Gramm-Leach Bliley Act
On November 12, 1999, the GLB Act was passed into law. The GLB Act does
three fundamental things:
(a) The GLB Act repeals the key provisions of the Glass Steagall Act to
permit commercial banks to affiliate with investment banks (securities
firms).
(b) The GLB Act amends the BHCA to permit qualifying bank holding
companies to engage in any type of financial activities that are not
permitted for banks themselves.
REPUBLIC FIRST BANCORP | 7
(c) The GLB Act permits subsidiaries of banks to engage in a broad range
of financial activities that are not permitted for banks themselves.
The result is that banking companies will generally be able to offer a
wider range of financial products and services and will be more readily able to
combine with other types of financial companies, such as securities and
insurance companies.
The GLB Act creates a new kind of bank holding company called a "financial
holding company" (an "FHC"). An FHC is authorized to engage in any activity that
is "financial in nature or incidental to financial activities" and any activity
that the Federal Reserve determines is "complementary to financial activities"
and does not pose undue risks to the financial system. Among other things,
"financial in nature" activities include securities underwriting and dealing,
insurance underwriting and sales, and certain merchant banking activities. A
bank holding company qualifies to become an FHC if each of its depository
institution subsidiaries is "well capitalized," "well managed," and CRA-rated
"satisfactory" or better. A qualifying bank holding company becomes an FHC by
filing with the Federal Reserve an election to become an FHC. If an FHC at any
time fails to remain "well capitalized" or "well managed," the consequences can
be severe. Such an FHC must enter into a written agreement with the Federal
Reserve to restore compliance. If compliance is not restored within 180 days,
the Federal Reserve can require the FHC to cease all its newly authorized
activities or even to divest itself of its depository institutions. On the other
hand, a failure to maintain a CR rating of "satisfactory" will not jeopardize
any then existing newly authorized activities; rather, the FJC cannot engage in
any additional newly authorized activities until a "satisfactory" CRA rating is
restored.
In addition to activities currently permitted by law and regulation for
bank holding companies, an FHC may engage in virtually any other kind of
financial activity. Under limited circumstances, an FHC may even be authorized
to engage in certain non-financial activities. The most important newly
authorized activities are as follows:
(a) Securities underwriting and dealing;
(b) Insurance underwriting and sales;
(c) Merchant banking activities;
(d) Activities determined by the Federal Reserve to be "financial in
nature" and incidental activities; and
(e) "Complimentary: financial activities, as determined by the Federal
Reserve.
Bank holding companies that do not qualify or elect to become FHCs will be
limited in their activities to those currently permitted by law and regulation.
As of the date of this Report of Form 10-K, the Company has not elected to
become a FHC.
The GLB Act also authorizes national banks to create "financial
subsidiaries." This is in addition to the present authority of national banks to
create "operating subsidiaries: A "financial subsidiary" is a direct subsidiary
of a national bank that satisfies the same conditions as an FHC, plus certain
other conditions, and is approved in advance by the OCC. A "financial
subsidiary" can engage in most, but not all, of the newly authorized activities.
In addition, the GLB Act also provides significant new protections for the
privacy of customer information. These provisions apply to any company "the
business of which" is engaging in activities permitted for an FHC, even if it is
not itself an FHC. Basically, the GLB Act subjects a financial institution to
four new requirements regarding non-public information about a customer. The
financial institution must (1) adopt and disclose a privacy policy; (2) give
customers the right to "opt out" of disclosures to non-affiliated parties; (3)
not disclose any account information to third party marketers; and (4) follow
regulatory standards (to be adopted in the future) to protect the security and
confidentiality of customer information.
Although the long-range effects of the GLB Act cannot be predicted with
reasonable certainty, most probably it will further narrow the differences and
intensify competition between and among commercial banks, investment banks,
insurance firms and other financial service companies.
Regulatory Restrictions on Dividends
Dividend payments by the Banks to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking Code, no
dividends may be paid except from "accumulated net earnings" (generally,
undivided profits). Under the FRB's regulations, the Banks cannot pay dividends
that exceed its net income from the current year and the preceding two years.
Under the FDIA, an insured bank may pay no dividends if the bank is in arrears
in the payment of any insurance assessment due to the
REPUBLIC FIRST BANCORP | 8
FDIC. Under current banking laws, the Bank would be limited to $4.3 million of
dividends plus an additional amount equal to the Banks' net profit for 2003, up
to the date of any such dividend declaration. No dividend payments by the Banks
or the Company are expected to be declared or paid in 2003.
State and federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Adherence to such standards
further limits the ability of the Banks to pay dividends to the Company.
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. At the
present time, the Company does not foresee paying cash dividends to shareholders
and intends to retain all earnings to fund the growth of the Company and the
Banks.
FDIC Insurance Assessments
The FDIC has implemented a risk-related premium schedule for all insured
depository institutions that results in the assessment of premiums based on
capital and supervisory measures.
Under the risk-related premium schedule, the FDIC, on a semiannual basis,
assigns each institution to one of three capital groups (well capitalized,
adequately capitalized or under capitalized) and further assigns such
institution to one of three subgroups within a capital group corresponding to
the FDIC's judgment of the institution's strength based on supervisory
evaluations, including examination reports, statistical analysis and other
information relevant to gauging the risk posed by the institution. Only
institutions with a total capital to risk-adjusted assets ratio of 10.00% or
greater, a Tier 1 capital to risk-adjusted assets ratio of 6.00% or greater and
a Tier 1 leverage ratio of 5.00% or greater, are assigned to the well
capitalized group.
Capital Adequacy
The FRB adopted risk-based capital guidelines for bank holding companies,
such as the Company. The required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) is 8.0%. At least half of the total capital is required to be
Tier 1 capital, consisting principally of common shareholders' equity,
non-cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder, Tier 2
capital, may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a leverage
ratio of at least 1% to 2% above the 3% stated minimum. The Company is in
compliance with these guidelines. The FRB subjects the Bank to similar capital
requirements.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995
(the "Interstate Banking Law"), amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The interstate banking provisions allow for the acquisition by a bank
holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
were allowed effective September 1, 1998; however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting a law that
specifically prohibits such interstate transactions. States could, in the
alternative, enact legislation to allow interstate merger and purchase and
assumption transactions prior to September 1, 1999. States could also enact
legislation to allow for de novo interstate branching by out of state banks. In
July 1997, Pennsylvania adopted "opt-in" legislation which allows such
transactions.
Profitability, Monetary Policy and Economic Conditions
In addition to being affected by general economic conditions, the earnings
and growth of the Bank will be affected by the policies of regulatory
authorities, including the Pennsylvania Department of Banking, the FRB and the
FDIC. An important
REPUBLIC FIRST BANCORP | 9
function of the FRB is to regulate the supply of money and other credit
conditions in order to manage interest rates. The monetary policies and
regulations of the FRB have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future. The effects of such policies upon the future business, earnings and
growth of the Bank cannot be determined. See "Management's Discussion and
Analysis of Financial Condition" and "Results of Operations".
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5: Market for Registrant's for Common Equity and Related Stockholder
Matters
Market Information
Shares of the Common Stock are traded in the over-the-counter market and
are quoted on Nasdaq under the symbol "FRBK." The table below presents the range
of high and low trade prices reported for the Common Stock on Nasdaq for the
periods indicated. Market quotations reflect inter-dealer prices, without retail
mark-up, markdown, or commission, and may not necessarily reflect actual
transactions. As of December 31, 2002, there were approximately 1,659 holders of
record of the Common Stock. On February 28, 2003, the closing price of a share
of Common Stock on Nasdaq was $7.57.
Year Quarter High Low
------ ----------- ------- --------
2002........................... 4th $6.53 $5.25
3rd 6.15 5.05
2nd 6.80 6.00
1st 7.00 5.13
2001........................... 4th $5.29 $4.83
3rd 5.97 4.82
2nd 5.95 4.88
1st 5.94 4.06
2000........................... 4th $4.31 $3.50
3rd 4.63 3.88
2nd 5.13 4.25
1st 6.63 4.75
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. At the
present time, the Company does not intend to pay cash dividends to shareholders
and intends to retain all earnings to fund the growth of the Company and the
Banks. The payment of dividends in the future, if any, will depend upon
earnings, capital levels, cash requirements, the financial condition of the
Company and the Banks, applicable government regulations and policies and other
factors deemed relevant by the Company's Board of Directors, including the
amount of cash dividends payable to the Company by the Banks. The principal
source of income and cash flow for the Company, including cash flow to pay cash
dividends on the Common Stock, is dividends from the Banks. Various federal and
state laws, regulations and policies limit the ability of the Banks to pay cash
dividends to the Company. For certain limitations on the Banks' ability to pay
cash dividends to the Company, see "Supervision and Regulation".
REPUBLIC FIRST BANCORP | 10
Item 6: Selected Financial Data
As of or for the Years Ended December 31,
---------------------------------------------------------------
(Dollars in thousands, except per share data) 2002 2001 2000 1999 1998
INCOME STATEMENT DATA:
Total interest income........................................... $44,123 $ 49,014 $ 46,887 $ 39,448 $ 34,404
Total interest expense.......................................... 20,162 28,659 29,792 24,512 20,845
---------- --------- --------- ---------- ----------
Net interest income............................................. 23,961 20,355 17,095 14,936 13,559
Provision for loan losses....................................... 5,303 3,964 666 880 370
Non-interest income............................................. 3,282 2,944 1,724 3,805 3,773
Non-interest expenses........................................... 18,586 16,180 13,132 10,956 11,302
Federal income taxes............................................ 1,154 1,041 1,657 2,271 1,862
---------- --------- --------- ---------- ----------
Net income...................................................... $2,200 $ 2,114 $ 3,364 $ 4,634 $ 3,798
========== ========= ========== ========== ==========
PER SHARE DATA (1)
Basic earnings per share........................................ $ 0.35 $ 0.34 $ 0.54 $ 0.77 $ 0.63
Diluted earnings per share...................................... 0.34 0.33 0.54 0.74 0.59
Book value per share............................................ 8.23 7.58 6.96 5.68 6.22
BALANCE SHEET DATA
Total assets.................................................... $647,692 $652,329 $655,637 $586,330 $516,361
Total loans, net (2)............................................ 457,047 463,888 418,313 359,606 306,768
Total investment securities..................................... 96,561 125,442 169,841 187,308 177,552
Total deposits.................................................. 456,302 447,217 425,551 305,793 283,084
FHLB Advances .................................................. 125,000 142,500 176,442 236,640 188,009
Trust preferred securities...................................... 6,000 6,000 - - -
Total shareholders' equity...................................... 51,276 46,843 43,030 35,040 36,622
PERFORMANCE RATIOS
Return on average assets........................................ 0.34% 0.33% 0.55% 0.85% 0.81%
Return on average shareholders' equity.......................... 4.52 4.59 7.73 10.94 10.21
Net interest margin............................................. 3.85 3.25 2.91 2.85 3.09
Total other expenses as a percentage of average assets (3)...... 2.63 2.49 2.16 2.02 2.42
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of loans (2).......... 1.43% 1.16% 0.96% 0.88% 0.79%
Allowance for loan losses as a percentage of non-performing loans 94.57 124.89 118.96 151.97 213.27
Non-performing loans as a percentage of total loans (2)......... 1.51 0.93 0.81 0.58 0.36
Non-performing assets as a percentage of total assets........... 1.24 0.95 0.52 0.47 0.36
Net charge-offs (recoveries) as a percentage of average loans,
net (2)......................................................... 0.87 0.58 (0.05) 0.02 0.00
LIQUIDITY AND CAPITAL RATIOS
Average equity to average assets................................ 7.57% 7.02% 6.12% 6.70% 7.97%
Leverage ratio.................................................. 8.56 8.07 6.91 7.23 7.50
Tier 1 capital to risk-weighted assets.......................... 13.24 12.73 11.99 12.37 11.76
Total capital to risk-weighted assets........................... 14.49 13.98 13.08 13.33 12.54
- ----------
(1) Adjusted to reflect a 10% Stock Dividend paid on March 18, 1999 and two
six-for-five stock splits effected in the form of 20% Stock Dividends, paid
on March 27, 1998.
(2) Includes loans held for sale.
(3) Excluding other real estate owned expenses of $1.5 million in 2002.
REPUBLIC FIRST BANCORP | 11
Item 7: Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following is management's discussion and analysis of the significant
changes in the Company's results of operations, financial condition and capital
resources presented in the accompanying consolidated financial statements of
Republic First Bancorp, Inc. This discussion should be read in conjunction with
the accompanying notes to the consolidated financial statements.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may", "believes", "expect", "estimate", "project", "anticipate",
"should", "intend", "probability", "risk", "target", "objective" and similar
expressions or variations on such expressions. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. For example, risks and uncertainties can arise with changes in:
general economic conditions, including their impact on capital expenditures;
business conditions in the financial services industry; the regulatory
environment, including evolving banking industry standards; rapidly changing
technology and competition with community, regional and national financial
institutions; new service and product offerings by competitors, price pressures;
and similar items. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, Quarterly Reports on Form 10-Q
filed by the Company in 2002, and any Current Reports on Form 8-K filed by the
Company, as well as similar filings in 2002.
Results of Operations for the years ended December 31, 2002 and 2001
Overview
The Company's net income increased $86,000 to $2.2 million for the year
ended December 31, 2002, from $2.1 million for the year ended December 31, 2001.
Diluted earnings per share for the year ended December 31, 2002, were $0.34 per
share compared to $0.33 per share, for the year ended December 31, 2001. The
year 2002 included a provision to write down the value of one other real estate
owned property. That provision amounted to $1.4 million pre-tax, or $909,000 and
$0.14 per diluted share after tax. Net interest income increased $3.6 million,
or 17.7 % for the year ended December 31, 2002 versus 2001 reflecting a lower
cost of funds and commercial loan growth. In 2002, the Company reduced the rates
paid on average core non-public deposits, which also grew 16.5% to $210.7
million (excluding $7.0 million of non-public deposits) while repricing maturing
time deposits to the lower rate environment. Average commercial and construction
loans increased 7.4% to $386.6 million over the same period. The increases in
net interest income resulted in a 60 basis point increase in net interest margin
to 3.85% in 2002 versus 3.25% for the prior year. Non-interest income increased
11.5% reflecting an increase in tax refund product revenue. Partially offsetting
the impact of these increases was a higher loan loss provision reflecting a
change in methodology relating to the economic component of the reserve for loan
losses accounting for approximately $900,000 of the $1.3 million increase. Total
expenses, excluding the $1.5 million of other real estate owned ("OREO")
expense, increased $1.0 million or 5.9% reflecting increased legal expenses
related to loan collections. This resulted in returns on average assets and
equity of 0.34% and 4.52%, respectively, in 2002, compared to 0.33% and 4.59%,
respectively, for 2001.
Analysis of Net Interest Income
Historically, the Company's earnings have depended primarily 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 affected by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities. The following table
provides an analysis of net interest income on an annualized basis, setting
forth for the periods (i) average assets, liabilities, and shareholders' equity,
(ii) interest income earned on interest-earning assets and interest expense on
interest-bearing liabilities, (iii) average yields earned on interest-earning
assets and average rates on interest-bearing liabilities, and (iv) the Banks'
net interest margin (net interest income as a percentage of average total
interest-earning assets). All averages are computed based on daily balances.
Non-accrual loans are included in average loans receivable. Yields are not
adjusted for tax equivalency, as the Banks had no tax-exempt income, but may
have such income in the future.
REPUBLIC FIRST BANCORP | 12
Interest Yield/ Interest Yield/ Interest Yield/
Average Income/ Rate Average Income/ Rate Average Income/ Rate
Balance Expense (1) Balance Expense (1) Balance Expense (1)
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in thousands) For the Year For the Year For the Year
Ended Ended Ended
December 31, 2002 December 31, 2001 December 31, 2000
------------------------------ ------------------------------ ------------------------------
Interest-earning assets:
Federal funds sold and other
interest-earning assets...... $42,835 $759 1.77% $ 30,540 $ 1,304 4.27% $ 11,652 $ 754 6.47%
Investment securities......... 111,486 6,284 5.64% 147,971 9,124 6.17% 186,804 12,121 6.49%
Loans receivable (3).......... 468,239 37,080 7.92% 448,397 38,586 8.61% 389,156 34,012 8.74%
---------- ---------- -------- ---------- ---------- -------- ----------- -------- --------
Total interest-earning assets.... 622,560 44,123 7.09% 626,908 49,014 7.82% 587,612 46,887 7.98%
Other assets.................. 29,180 22,302 21,169
---------- ---------- -----------
Total assets..................... $651,740 $649,210 $608,781
========== ========== ==========
Interest-bearing liabilities:
Demand - non-interest
bearing...................... $ 58,338 $ - N/A $ 50,179 $ - N/A $ 37,445 $ - N/A
Demand - interest-bearing..... 47,019 497 1.06% 37,214 636 1.71% 24,437 586 2.40%
Money market & savings........ 112,321 1,907 1.70% 93,447 2,948 3.15% 63,226 2,823 4.46%
Time deposits................. 240,230 9,290 3.87% 261,281 15,767 6.03% 241,738 14,985 6.20%
---------- ---------- -------- ---------- ---------- -------- ----------- -------- --------
Total deposits .................. 457,908 11,694 2.55% 442,121 19,351 4.38% 366,846 18,394 5.01%
---------- ---------- ---------- ---------- ----------- --------
Total interest-
bearing deposits.............. 399,570 11,694 2.93% 391,942 19,351 4.94% 329,401 18,394 5.58%
---------- ---------- ---------- ---------- ----------- --------
Other borrowings................. 135,505 8,468 6.25% 151,610 9,308 6.14% 196,091 11,398 5.81%
---------- ---------- ---------- ---------- ---------- ---------
Total interest-bearing
liabilities .................. 535,075 20,162 3.77% 543,552 28,659 5.27% 525,492 29,792 5.67%
---------- ---------- -------- ---------- ---------- -------- ----------- -------- --------
Total deposits and
other borrowings.............. 593,413 20,162 3.40% 593,731 28,659 4.83% 562,937 29,792 5.29%
---------- ---------- -------- ---------- ---------- -------- ----------- -------- --------
Non-interest-bearing
Other liabilities............. 8,958 9,907 8,591
Shareholders' equity............. 49,369 45,572 37,253
---------- ---------- -----------
Total liabilities and
Shareholders' equity.......... $651,740 $649,210 $608,781
========== ========== ==========
Net interest income.............. $23,961 $20,355 $17,095
========== ========== ==========
Net interest spread.............. 3.69% 2.99% 2.69%
========== ========== ==========
Net interest margin (2).......... 3.85% 3.25% 2.91%
========== ========== ==========
- ----------
(1) Yields on investments are calculated based on amortized cost.
(2) The net interest margin is calculated by dividing net interest income by
average total interest earning assets.
(3) Includes loans held for sale.
REPUBLIC FIRST BANCORP | 13
Rate/Volume Analysis of Changes in Net Interest Income
Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table sets
forth an analysis of volume and rate changes in net interest income for the
periods indicated. For purposes of this table, changes in interest income and
expense are allocated to volume and rate categories based upon the respective
changes in average balances and average rates.
Year ended December 31, Year ended December 31,
2002 vs. 2001 2001 vs. 2000
-------------------------------------- ------------------------------------
Change due to Change due to
Average Average Average Average
(Dollars in thousands) Volume Rate Total Volume Rate Total
---------- ------------------------- ------------------------------------
Interest earned on:
Federal funds sold and other
interest-earning assets.............. $218 $(763) $(545) $806 $(256) $550
Securities........................... (2,056) (784) (2,840) (2,394) (603) (2,997)
Loans................................ 1,570 (3,076) (1,506) 5,099 (525) 4,574
---------- ----------- ----------- ---------- ----------- ---------
Total interest earning assets........... $(268) $(4,623) $(4,891) $3,511 $(1,384) $2,127
---------- ----------- ----------- ---------- ----------- ---------
Interest expense of
Deposits
Interest-bearing demand deposits.... $(104) $243 $139 $(218) $168 $(50)
Money market and savings............ (321) 1,362 1,041 (962) 837 (125)
Time deposits ...................... 815 5,662 6,477 (1,179) 397 (782)
---------- ----------- ----------- ---------- ----------- ---------
Total deposit interest expense.......... 390 7,267 7,657 (2,359) 1,402 (957)
---------- ----------- ----------- ---------- ----------- ---------
Other borrowings..................... 1,007 (167) 840 2,730 (640) 2,090
---------- ----------- ----------- ---------- ----------- ---------
Total interest expense.................. 1,397 7,100 8,497 371 762 1,133
---------- ----------- ----------- ---------- ----------- ---------
Net interest income.................. $1,129 $2,477 $3,606 $3,882 $(622) $3,260
========== =========== =========== =========== =========== ==========
Net Interest Income
The Company's net interest margin increased 60 basis points to 3.85% for
the year ended December 31, 2002 from 3.25% for the year ended December 31,
2001. The improvement reflected the 7.4% average growth in commercial and
construction loans, the 16.5% increase in average lower cost core deposits
(non-public demand, money market and savings accounts), an increase in
short-term consumer loan program fees and the repricing of core deposits and
certificates of deposit due to the lower interest rate environment. Fees on
short-term consumer loans contributed $4.8 million to interest income in 2002
and 77 basis points to the margin versus $3.0 million and 49 basis points for
the year ended December 31, 2001. The margin was reduced by prepayments in both
the investment securities and residential portfolios, also reflecting the impact
of the lower interest rate environment. The average yield on interest-earning
assets declined 73 basis points to 7.09% for the year ended December 31, 2002,
from 7.82% for the year ended December 31, 2001, due principally to the decline
in the prime rate partially offset by higher yielding short-term consumer loans.
The average rate paid on interest-bearing liabilities decreased 150 basis points
from 5.27% from the year ended December 31, 2001 to 3.77% for the year ended
December 31, 2002, reflecting the lower interest rate environment.
The Company's net interest income increased $3.6 million, or 17.7%, to
$24.0 million for the year ended December 31, 2002, from $20.4 million for the
year ended December 31, 2001. As shown in the Rate/Volume table above, the
increase in net interest income was due to the positive effect of volume changes
of approximately $1.1 million, and the repricing of deposits, which contributed
$2.5 million to net interest income. The positive impact of volume changes
reflected a decrease in higher cost time deposits and other borrowed funds,
which decreased 8.1% and 10.6% on average, respectively, from year to year.
The Company's total interest income decreased $4.9 million, or 10.0%, to
$44.1 million for the year ended December 31, 2002, from $49.0 million for the
year ended December 31, 2001. That decrease reflected a $4.6 million decline due
to the lower interest rate environment with the remaining decline of $268,000
reflecting lower volume, primarily in securities. Interest and fees on loans
decreased $1.5 million to $37.1 million for the year ended December 31, 2002
versus $38.6 million for the prior year comparable period. The decline reflected
the lower interest rate environment and average prime rate during 2002. It also
reflects the prepayments in the mortgage portfolios, which declined $11.1
million or 15.3% on average, from year to year. These
REPUBLIC FIRST BANCORP | 14
declines were partially offset by volume increases in average commercial and
construction loans of $26.5 million, or 7.4%. The full year impact of the
short-term loan program also contributed to the positive volume variance. The
impact of the lower prime rate was the principal factor reducing the yield on
loans 69 basis points to 7.92%. Interest and dividend income on securities
decreased $2.8 million, or 31.1% to $6.3 million for the year ended December 31,
2002, from $9.1 million for the year ended December 31, 2001. This decline was
due principally to the $36.5 million decrease in average securities outstanding
to $111.5 million at December 31, 2002 from $148.0 million at the prior year
end. In addition, the average rate earned on securities declined 53 basis points
to 5.64% as higher coupon investments prepaid more rapidly than lower coupon
investments and the rates earned on variable rate securities declined due to the
lower interest rate environment. The Company made $18.8 million of securities
purchases in 2002, and did not replace the majority of maturities and
prepayments. Instead, related proceeds were utilized to fund commercial loan
growth and reduce FHLB borrowings. Interest income on federal funds sold and
other interest-earning assets decreased $545,000, reflecting the lower interest
rate environment.
Total interest expense decreased $8.5 million, or 29.7%, to $20.2 million
for the year ended December 31, 2002, from $28.7 million for the year ended
December 31, 2001, due principally to the lower rate environment as the Company
repriced deposits, particularly certificates of deposit and was able to increase
lower cost core deposits. Interest-bearing liabilities averaged $535.1 million
for the year ended December 31, 2002, a decrease of $8.5 million, or 1.6%, from
$543.6 million for the year ended December 31, 2001. Average higher cost
certificates of deposit and other borrowings decreased $21.1 million and $16.1
million, respectively, while lower cost core deposits increased $29.8 million or
16.5%. The average rate paid on interest-bearing liabilities decreased 150 basis
points to 3.77% for the year ended December 31, 2002, due to the decrease in
average rates paid on all deposit products as a result of the lower interest
rate environment.
Interest expense on time deposits (certificates of deposit) decreased $6.5
million or 41.1% to $9.3 million at December 31, 2002, from $15.8 million at
December 31, 2001. This decline reflected the lower interest rate environment
and the ability of the Banks to reprice certificates at lower average rates
which declined 216 basis points to 3.87%. In addition, average certificates of
deposit outstanding declined $21.1 million, or 8.1% to $240.2 million, for the
year ended December 31, 2002, from $261.3 million for the prior year comparable
period as the Company was able to increase its lower cost core deposits.
Interest expense on other borrowings, primarily FHLB advances, decreased
$840,000 or 9.0% to $8.5 million for the year ended December 31, 2002, compared
to $9.3 million for the year ended December 31, 2001. This decrease resulted
from a $16.1 million, or 10.6%, decline in average other borrowings during 2002
to $135.5 million from $151.6 million for 2001. This decline in average
borrowings resulted in a $1.0 million decline in interest expense. The decline
in average other borrowings reflected increased deposit generation and
securities maturities and prepayments. The decline in average volume was
partially offset by a 11 basis point increase in the average rate paid on other
borrowings to 6.25%, resulting from the maturity of lower cost borrowings. The
Company issued $6.0 million of trust preferred securities in November 2001, the
expense for which is included in other borrowings expense. (See "Capital
Resources"). Such expenses for 2002 were $392,000 versus $33,000 in 2001.
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
the known and estimated inherent losses in the portfolio. The provision for loan
losses increased $1.3 million to $5.3 million for the year ended December 31,
2002, from $4.0 million for the year ended December 31, 2001. This increase
reflects a $900,000 change in the economic component of the Company's loan loss
methodology in 2002, an increase of $600,000 in provisions relating to the first
full year for the short-term loan product and additional provisions based on
regulatory classifications. The additional methodology provisions were not
necessitated by any specific problem loans but were effected to enhance the
economic portion of the reserve. (See "Allowance for Loan Losses".)
Non-Interest Income
Total non-interest income increased $351,000, or 11.5%, to $3.3 million for
the year ended December 31, 2002, from $2.9 million for the year ended December
31, 2001. This increased reflected increased revenue resulting from a greater
volume of tax refund products, which offset a decline in loan advisory and
servicing fees. Loan advisory and servicing fees declined $140,000, or 10.3%,
reflecting a decrease in advisory activity.
Non-Interest Expenses
Total non-interest expenses increased $2.4 million, or 14.9% to $18.6
million for the year ended December 31, 2002, from $16.2 million at December 31,
2001. This increase includes a write down of one OREO property totaling $1.4
million.
REPUBLIC FIRST BANCORP | 15
Excluding the OREO write down, expenses increased $1.0 million or 5.9% to $17.2
million. Salaries and employee benefits increased $87,000 to $8.5 million for
the year ended December 31, 2002, from $8.4 million for the year ended December
31, 2001.
Occupancy expense increased $62,000, or 4.5%, to $1.4 million for the year
ended December 31, 2002 from $1.3 million for the year ended December 31, 2001.
The increase reflected higher rent and maintenance expenses.
Depreciation expense increased $91,000, or 9.5% to $1.0 million in 2002,
reflecting higher depreciation on computer equipment purchases required for
various loan and deposit applications.
Legal fees increased $825,000, to $1.7 million for the year ended December
31, 2002, from $826,000 for the year ended December 31, 2001. This increase
reflected legal expenses related to loan collections.
Advertising expense declined $148,000, or 26.4% to $413,000, as the Company
reduced the number of advertisements placed during the year.
OREO expense was $1.5 million in 2002, reflecting the write down of one
property by $1.4 million to $500,000.
Other operating expenses decreased $14,000 to $4.0 million for the year
ended December 31, 2002, from $4.1 million in 2001.
Provision for Income Taxes
The provision for income taxes increased $113,000, or 10.9%, to $1.2
million for the year ended December 31, 2002, from $1.0 million for the year
ended December 31, 2001 reflecting higher net income and a higher effective tax
rate. The effective tax rate was 34.4% for 2002 and 33.0% for 2001. The increase
reflected state tax expense which is not deductible for federal tax purposes.
Results of Operations for the years ended December 31, 2001 and 2000
The Company's net interest margin increased 34 basis points to 3.25% for
the year ended December 31, 2001, from 2.91% for the year ended December 31,
2000. The improvement reflected the 19.3% average growth in commercial and
construction loans, the 44.5% increase in average lower costing core deposits
(demand, money market and savings accounts) and the addition of the short-term
consumer loan program fees. Fees on short-term consumer loans, first offered in
2001, contributed $3.0 million to interest income and 49 basis points to the
margin. The Company was negatively impacted by the 475 basis point decline in
the prime interest rate during the year 2001 which immediately impacted the
yield on interest-earning assets, especially loans tied to the prime rate of
interest. The repricing of loans generally took effect in advance of the Banks
repricing certificates of deposit. The average yield on interest-earning assets
declined 16 basis points to 7.82% for the year ended December 31, 2001, from
7.98% for the year ended December 31, 2000, due principally to the decline in
prime rate partially offset by higher yielding short-term consumer loans. The
average rate paid on interest-bearing liabilities decreased 40 basis points from
5.67% from the year ended December 31, 2000 to 5.27% for the year ended December
31, 2001, reflecting the lower interest rate environment.
The Company's net interest income increased $3.3 million, or 19.1%, to
$20.4 million for the year ended December 31, 2001, from $17.1 million for the
year ended December 31, 2000. As shown in the Rate Volume table above, the
increase in net interest income was due to the positive effect of volume changes
of approximately $3.9 million, partially offset by the effect of lower interest
rates, which totaled $622,000. The positive impact of volume changes was
attributable to an increase in average interest earning assets, which increased
$39.3 million, or 6.7%, to $626.9 million for the year ended December 31, 2001,
from $587.6 million for the year ended December 31, 2000.
The Company's total interest income increased $2.1 million, or 4.5%, to
$49.0 million for the year ended December 31, 2001, from $46.9 million for the
year ended December 31, 2000. Approximately $3.5 million of increases in
interest income were the result of the $39.3 million increase in average
interest-earning assets. These increases were partially offset by lower rates,
which led to a $1.4 million decline in interest income and reduced the average
yield on interest-earning assets 16 basis points to 7.82%. Interest and fees on
loans increased $4.6 million, or 13.4%, to $38.6 million for the year ended
December 31, 2001, from $34.0 million for the year ended December 31, 2000. This
increase reflected an increase in average loans of $59.2 million, or 15.2% to
$448.4 million and the addition of the short-term consumer loan product, which
contributed $3.0 million in interest income versus $0 in 2000. These increases
were partially offset by the impact of the lower prime rate of
REPUBLIC FIRST BANCORP | 16
interest during 2001. The impact of the lower prime rate was the principal
factor reducing the yield on loans 13 basis points in 2001, to 8.61%. The
majority of 2001 loan growth was in the commercial and construction categories.
Interest and dividend income on securities decreased $3.0 million to $9.1
million for the year ended December 31, 2001, from $12.1 million for the year
ended December 31, 2000. This decline was due principally to the $38.8 million
decrease in average securities outstanding to $148.0 million at December 31,
2001 from $186.8 million at the prior year end. In addition, the average rate
earned on securities declined 32 basis points to 6.17% as higher coupon
investments prepaid more rapidly than lower coupons. The Company made only $4.6
million of securities purchases in 2001, and generally did not replace
maturities and prepayments. Instead, related proceeds were utilized to fund
commercial loan growth and reduce FHLB borrowings. Interest income on federal
funds sold and other interest-earning assets increased $550,000 due to an
increase in average federal funds sold outstanding during the year partially
offset by the lower rate environment.
Total interest expense decreased $1.1 million, or 3.8%, to $28.7 million
for the year ended December 31, 2001, from $29.8 million for the year ended
December 31, 2000, due principally to the lower rate environment.
Interest-bearing liabilities averaged $543.6 million for the year ended December
31, 2001, an increase of $18.1 million, or 3.4%, from $525.5 million for the
year ended December 31, 2000. Average total interest-bearing deposits increased
$62.5 million or 19.0% to $391.9 million at December 31, 2001, from $329.4
million for 2000. A portion of these funds was used to reduce FHLB borrowings,
which declined $44.5 million on average compared to 2000. The average rate paid
on interest-bearing liabilities decreased 40 basis points to 5.27% for the year
ended December 31, 2001, due to the decrease in average rates paid on all
deposit products as a result of the lower interest rate environment.
Interest expense on time deposits increased $782,000 or 5.2% to $15.8
million at December 31, 2001, from $15.0 million at December 31, 2000. This
increase reflected an increase in average certificates of deposit of $19.6
million, or 8.1%, to $261.3 million for the year ended December 31, 2001, from
$241.7 million for the year ended December 31, 2000. These higher balances
reflected the Company's strategy to increase deposits and thereby reduce
reliance on borrowed funds. The average rate of interest paid on time deposits
decreased 17 basis points to 6.03% at December 31, 2001, versus 6.20% at
December 31, 2000, due principally to the lower interest rate environment, and
partially offset the expense impact of higher volume.
Interest expense on other borrowings, primarily FHLB advances, decreased
$2.1 million, or 18.3% to $9.3 million for the year ended December 31, 2001,
compared to $11.4 million for the year ended December 31, 2000. This decrease
resulted from a $44.5 million, or 22.7% decline in average other borrowings
during 2001 to $151.6 million from $196.1 million for 2000. This decline in
average borrowings resulted in a $2.7 million decline in interest expense. The
decline in average other borrowings resulted from increased deposit generation
and securities maturities and prepayments. The decline in average volume was
partially offset by a 33 basis point increase in the average rate paid on other
borrowings to 6.14%, resulting from the maturity of lower cost borrowings. The
Company issued $6.0 million of trust preferred securities in November 2001, the
expense for which is included in other borrowings expense. (See "Capital
Resources").
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
the known and estimated inherent losses in the portfolio. The provision for loan
losses increased $3.3 million to $4.0 million for the year ended December 31,
2001, from $666,000 for the year ended December 31, 2000. This increase
reflected charges of $1.9 million related to loans to one borrower during the
year. In addition, the short-term consumer loan program, first offered in 2001,
resulted in a provision of $1.0 million related to the loans made during that
year versus $0 in 2000. Additionally, provisions reflected loan growth and other
elements of the Company's loan loss methodology. (See "Allowance for Loan
Losses")
Non-Interest Income
Total non-interest income increased $1.2 million, or 70.8%, to $2.9 million
for the year ended December 31, 2001, from $1.7 million for the year ended
December 31, 2000. Loan advisory and servicing fees increased $890,000 to $1.4
million due primarily to an increase in loan volume during 2001. Service charges
on deposits increased $221,000 to $1.2 million due to increases in
transaction-based account volume and service charge rates. Tax Refund Products
revenue increase $102,00 to $283,000 as a result of re-entry in that line of
business with a new partner in 2001.
Non-Interest Expenses
Total non-interest expenses increased $3.0 million, or 23.2% to $16.2
million for the year ended December 31, 2001, from $13.1 million at December 31,
2000. Salaries and employee benefits increased $1.5 million or 22.2%, to $8.4
million
REPUBLIC FIRST BANCORP | 17
for the year ended December 31, 2001, from $6.9 million for the year ended
December 31, 2000. The increase reflected an increase in staff associated with
the commercial loan department, a one-time increase in accrued pension benefits
reflecting plan changes, operational support for the tax refund and short-term
consumer loan products and business development efforts. In addition, incentive
payments, higher health insurance costs, normal merit increases and lower loan
cost deferrals contributed to the rise in salary and benefits from year to year.
Occupancy expense increased $100,000, or 7.9%, to $1.4 million for the year
ended December 31, 2001, from $1.3 million for the year ended December 31, 2000.
The increase reflected higher rent and maintenance expenses.
Equipment expense increased $242,000, or 34% to $954,000 in 2001,
reflecting higher depreciation on computer equipment purchases.
Legal expense increased $300,000 to $826,000 for the year ending December
31, 2001 versus $526,000 for the prior year comparable period. This increase
reflected legal expenses related to loan collections and the additions of the
short-term consumer loan product.
Advertising expense declined $140,000, or 20% to $561,000, which reflected
a Company branding program limited to the year 2000.
Other operating expenses increased $1.0 to $4.0 million for the year ended
December 31, 2001, from $3.1 million in 2000. This increase reflected higher
FDIC insurance, telephone expense and a combination of other smaller items.
Provision for Income Taxes
The provision for income taxes decreased $616,000, or 37.2%, to $1.0
million for the year ended December 31, 2001, from $1.7 million for the year
ended December 31, 2000. This decrease was mainly the result of the decrease in
pre-tax income from 2000 to 2001. The effective tax rate was 33.0% for both 2001
and 2000.
Financial Condition
December 31, 2002 Compared to December 31, 2001
Total assets decreased $4.6 million, approximately 0.7%, to $647.7 million
at December 31, 2002, from $652.3 million at December 31, 2001, reflecting
prepayments in the securities and residential mortgage portfolio.
Loans:
The loan portfolio, which represents the Company's largest asset, is its
most significant source of interest income. The Company's lending strategy is to
focus on small and medium sized businesses and professionals that seek highly
personalized banking services. Total loans decreased $5.6 million, or 1.2% to
$463.7 million at December 31, 2002, versus $469.3 million at December 31, 2001.
The decline reflected prepayments in the non-commercial residential mortgage
portfolio totaling approximately $16.6 million for the year. The loan portfolio
consists of secured and unsecured commercial loans including commercial real
estate, construction loans, residential mortgages, automobile loans, home
improvement loans, short-term consumer loans beginning in 2001 and home equity
loans and lines of credit and overdraft lines of credit and others. The Banks'
commercial loans typically range between $250,000 and $3,000,000 but customers
may borrow significantly larger amounts up to the Banks' combined legal lending
limit of $9.0 million at December 31, 2002. Individual customers may have
several loans often secured by different collateral. Such relationships in
excess of $5.5 million at December 31, 2002, amounted to $12.9 million. The $5.5
million threshold approximates 10% of total capital and reserves and reflects an
additional internal monitoring guideline. At December 31, 2002, the Company had
$5.0 million in short-term consumer loans outstanding versus $6.9 million at
December 31, 2001. The decline reflected the termination of business in Indiana
in the second quarter of 2002. These loans were first offered in the second
quarter of 2001. These loans have principal amounts of less than $1,000, and
terms of approximately two weeks and were originated in North Carolina, Georgia,
Texas 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, collateralized mortgage obligations and debt
securities which include corporate bonds and corporate trust preferred
securities. Collateralized
REPUBLIC FIRST BANCORP | 18
mortgage obligations consist of securities issued by the Federal Home Loan
Mortgage Corporation. Available-for-sale securities totaled $87.3 million at
December 31, 2002, a decrease of $26.6 million or 23.3%, from year-end 2001.
This decrease reflected principal repayments on mortgage-backed securities,
which were used to reduce borrowings and otherwise provide liquidity.
Additionally, the Company experienced a $3.1 million improvement in the market
value of available-for-sale securities, which is reflected on the balance sheet.
At December 31, 2002, the portfolio had net unrealized gains of $2.6 million,
compared to unrealized losses of $540,000 at the end of the prior year.
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 December 31, 2002, securities
held to maturity totaled $9.3 million, a decrease of $2.3 million, or 19.9% from
$11.6 million at year-end 2001. 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 $31.4 million, to $72.8 million at December 31, 2002, from $41.4 million at
December 31, 2001, as maturities of the investment securities portfolio and
paydowns in the residential mortgage portfolio were invested in federal funds.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. At December 31, 2002,
the balance was $4.2 million versus $4.9 million at December 31, 2001.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$211,000 to $5.0 million at December 31, 2002, from $5.2 million at December 31,
2001. The decrease reflected depreciation of equipment.
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 shopping center, which was acquired in the fourth quarter of 2002 and is
carried at an estimated realizable value of $515,000. Appraisals for both
properties (commercial real estate) support their carrying values at year end.
Deposits:
Deposits, which include non-interest and interest-bearing demand deposits,
money market, savings and time deposits, are the Banks' major source of funding.
Deposits are generally solicited from the Company's market area through the
offering of a variety of products to attract and retain customers, with a
primary focus on multi-product relationships.
Total deposits increased by $9.1 million, or 2.0% to $456.3 million at
December 31, 2002, from $447.2 million at December 31, 2001. Average core
non-public deposits increased 16.5%, or $29.8 million more than the prior year
to $210.7 million in 2002. Deposit growth benefited from the Company's business
development efforts and bank consolidations in the Philadelphia market which has
left some customers underserved. Time deposits decreased $27.0 million, or 10.8%
to $223.2 million at December 31, 2002, versus $250.3 million at prior year-end
as the Company replaced higher rate certificates of deposit with core deposits.
FHLB Borrowings:
FHLB borrowings are used to supplement deposit generation. FHLB borrowings
declined by $17.5 million, or 12.3% to $125.0 million at December 31, 2002, from
$142.5 million at December 31, 2001, and were replaced by deposits or repaid
investment securities prepayments.
Corporation-Obligated Mandatorily Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Obligations of the Corporation:
REPUBLIC FIRST BANCORP | 19
On November 28, 2001, Republic First Bancorp, Inc., through a pooled
offering with Sandler O' Neill & Partners, issued $6.0 million of
corporation-obligated mandatorily redeemable capital securities of the
subsidiary trust holding solely junior subordinated debentures of the
corporation, more commonly known as Trust Preferred Securities. The purpose of
the issuance was to increase capital as a result of the Company's continued loan
and core deposit growth. The trust preferred securities qualify as Tier 1
capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
The Company may call the securities on any interest payment date after five
years, without a prepayment penalty, notwithstanding their final 30 year
maturity. The interest rate is variable and adjustable semi -annually at 3.75%
over the 6 month London Interbank Offered Rate ("Libor"). The interest rate cap
of 11% is effective through the initial 5-year call date.
Shareholders' Equity:
Total shareholders' equity increased $4.4 million, or 9.5% to $51.3 million
at December 31, 2002, versus $46.8 million at December 31, 2001. This increase
was the result of 2002 net income of $2.2 million and the improvement in the
unrealized gain on available for sale securities of $2.0 million, net of tax.
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 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 mortgages and other fixed rate loans
and mortgage-backed securities may cause significant fluctuations in interest
margins.
FBD began to offer short-term consumer loans through the Delaware Bank in
2001. At December 31, 2002, there were approximately $5.0 million of short-term
consumer loans outstanding, which were originated in Texas, California, Georgia,
and North Carolina through a small number of marketers. These loans generally
have principal amounts of $1,000 or less and terms of approximately two weeks.
Legislation eliminating, or limiting interest rates upon short-term consumer
loans has from time to time been proposed, primarily as a result of fee levels
which approximate 17% per $100 borrowed, for two week terms. If such proposals
cease, a larger number of competitors may begin offering the product, and
increased competition could result in lower fees. Further, FBD uses a small
number of marketers under contracts which can be terminated upon short notice,
under various circumstances. The impact of negative conditions influencing the
above factors, if any, is not possible to predict.
After a hiatus, FBD began offering two tax refund products in 2001 with
Liberty Tax Service. Liberty Tax Service is a nationwide professional tax
service provider which prepares and electronically files federal and state
income tax returns ("Tax Refund Products"). Tax Refund Products consist of
accelerated check refunds ("ACRs"), and refund anticipation loans ("RALs"). The
Company realized revenues of $761,000 and $283,000 in the years 2002 and 2001
respectively for the program. There can be no assurances that revenues 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 require 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 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 the real
estate owned could differ materially in the near term.
The Company and its subsidiaries are subject to federal and state
regulations governing virtually all aspects of their activities, including but
not limited to, lines of business, liquidity, investments, the payment of
dividends, and others. Such regulations and the cost of adherence to such
regulations can have a significant impact on earnings and financial condition.
REPUBLIC FIRST BANCORP | 20
Commitments, Contingencies and Concentrations
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same underwriting
standards and policies in making credit commitments as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit
risk are commitments to extend credit of approximately $52.3 million and $57.7
million and standby letters of credit of approximately $7.2 million and $5.3
million at December 31, 2002 and 2001, respectively. The $52.3 million of
commitments to extend credit at December 31, 2002, were substantially all
variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee
the performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
---------------------------------------------
The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of December 31,
2002:
One to Four to After
Less than Three Five Five
Total One Year Years Years Years
----- -------- ----- ----- -----
(dollars in thousands)
Minimum annual rentals or noncancellable
Operating leases $ 4,189 $ 953 $ 1,803 $ 1,285 $ 148
Remaining contractual maturities of time
Deposits 223,242 159,667 61,010 2,557 8
Contingent liabilities on equipment 470 348 122 - -
Benefit plans 1,254 598 656
Loan commitments 52,251 44,237 4,500 - 3,514
Long-term borrowed funds 125,000 - 125,000 - -
Standby letters of credit 7,217 7,217 - - -
---------- --------- -------- -------- --------
Total $413,623 $222,020 $193,091 $3,842 $3,670
========== ========= ======== ======== ========
As of December 31, 2002, the Company had entered into non-cancelable lease
agreements for its main office and operations center, seven Republic First Bank
retail branch facilities and two First Bank of Delaware branches, expiring
through August 31, 2008. The leases are accounted for as operating leases. The
minimum annual rental payments required
REPUBLIC FIRST BANCORP | 21
under these leases are $4.2 million through the year 2008. Prior to 2001, the
Company participated in a joint venture with the MBM/ATM Group Ltd. Although the
Company's participation in the venture was terminated, the Company remains
contingently liable on repayments totaling $470,000 through 2005. (See Note 12
"Commitments").
The Company has entered into employment agreements with the President of
the Company and the President of the Bank. The aggregate commitment for future
salaries and benefits under these employment agreements at December 31, 2002 is
approximately $1.3 million.
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and 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.
At December 31, 2002, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to real
estate operators and lessors in the aggregate amount of $142.4 million, which
represented 30.7% of gross loans receivable at December 31, 2002. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and others. Loan
concentrations are considered to exist when there is amounts loaned to a
multiple number of borrowers engaged in similar activities that management
believes would cause them to be similarly impacted by economic or other
conditions.
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Company attempts to optimize net interest income while managing period-to-period
fluctuations therein. The Company typically defines interest-sensitive assets
and interest-sensitive liabilities as those that reprice within one year or
less.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods, and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP ratio suggests that a financial institution
may be better positioned to take advantage of declining interest rates rather
than increasing interest rates, and a positive GAP ratio suggests the converse.
Static GAP analysis describes interest rate sensitivity at a point in time.
However, it alone does not accurately measure the magnitude of changes in net
interest income since changes in interest rates do not impact all categories of
assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also requires assumptions about repricing certain categories of assets
and liabilities. For purposes of interest rate sensitivity analysis, assets and
liabilities are stated at either their contractual maturity, estimated likely
call date, or earliest repricing opportunity. Mortgage-backed securities and
amortizing loans are scheduled based on their anticipated cash flow, including
prepayments based on historical data and current market trends. Savings, money
market and interest-bearing demand accounts do not have a stated maturity or
repricing term and can be withdrawn or repriced at any time. Management
estimates the repricing characteristics of these accounts based on historical
performance and other deposit behavior assumptions. These deposits are not
considered to reprice simultaneously, and accordingly, a portion of the deposits
are moved into time brackets exceeding one year. However, management may choose
not to reprice liabilities proportionally to changes in market interest rates,
for competitive or other reasons.
Shortcomings, inherent in a simplified and static GAP analysis, may result
in an institution with a negative GAP having interest rate behavior associated
with an asset-sensitive balance sheet. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Furthermore, repricing
characteristics of certain assets and liabilities may vary substantially within
a given time period. In the event of a change in interest rates, prepayments and
other cash flows could also deviate significantly from those assumed in
calculating GAP in the manner presented in the table below.
The Company attempts to manage its assets and liabilities in a manner that
optimizes net interest income in a range of interest rate environments.
Management uses GAP analysis and simulation models to monitor behavior of its
interest sensitive assets and liabilities. Adjustments to the mix of assets and
liabilities are made periodically in an effort to provide steady growth in net
interest income.
REPUBLIC FIRST BANCORP | 22
Management presently believes that the effect on the Banks of any future
fall in interest rates, reflected in lower yielding assets, would be detrimental
since the Banks do not have the immediate ability to commensurately decrease
rates on its interest bearing liabilities, primarily time deposits, other
borrowings and certain transaction accounts. An increase in interest rates could
have a positive effect on the Banks, due to repricing of certain assets,
primarily adjustable rate loans and federal funds sold, and a possible lag in
the repricing of core deposits not assumed in the model.
The following tables present a summary of the Company's interest rate
sensitivity GAP at December 31, 2002. For purposes of these tables, the Company
has used assumptions based on industry data and historical experience to
calculate the expected maturity of loans because, statistically, certain
categories of loans are prepaid before their maturity date, even without regard
to interest rate fluctuations. Additionally, certain prepayment assumptions were
made with regard to investment securities based upon the expected prepayment of
the underlying collateral of the mortgage-backed securities. The interest rate
on the trust preferred securities is variable and adjusts semi-annually.
Interest Sensitivity Gap
At December 31, 2002
(Dollars in thousands)
More Financial
0-90 91-180 181-365 1-2 2-3 3-4 4-5 than 5 Statement Fair
Days Days Days Years Years Years Years Years Total Value
---- ---- ---- ----- ----- ----- ----- ----- ----- -----
Interest Sensitive
Assets:
Investment
securities and other
interest
-bearing balances. $81,028 $11,455 $ 24,957 $ 24,411 $ 5,539 $ 1,107 $ 117 $ 6,871 $155,485 $155,512
Average interest
rate........ 2.27% 6.01% 5.20% 6.21% 6.33% 6.58% 6.48% 4.98%
Loans receivable..... 209,206 23,886 38,817 80,480 41,240 30,243 19,001 14,174 457,047 464,126
Average interest
rate........ 5.44% 7.61% 7.50% 7.31% 7.63% 7.26% 7.03% 6.73%
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total................ 290,234 35,341 63,774 104,891 46,779 31,350 19,118 21,045 612,532 619,638
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Cumulative Totals.... $290,234 $325,575 $389,349 $494,240 $541,019 $572,369 $591,487 $612,532
========== ========= ========= ========= ========= ========= ========= =========
Interest Sensitive
Liabilities:
Demand Interest
Bearing.................$30,252 $ 865 $ 740 $ 1,481 $ 1,481 $ 1,481 $ 18,353 $ - $54,653 54,653
Average interest
rate........ .79% 0.79% 0.79% 0.79% 0.79% 0.79% 0.79% -
Savings Accounts........ 8,776 285 244 489 489 489 6,056 - 16,828 16,828
Average interest
rate........ 1.90% 1.90% 1.90% 1.90% 1.90% 1.90% 1.90%
Money Market Accounts 45,582 2,016 1,805 3,609 3,609 3,609 42,155 - 102,385 102,385
Average interest
rate........ 1.42% 1.42% 1.42% 1.42% 1.42% 1.42% 1.42%
Time Deposits........... 55,909 49,497 54,261 51,365 9,645 1,178 1,379 8 223,242 225,646
Average interest
rate........ 2.69% 3.01% 3.44% 3.76% 6.68% 4.07% 3.91%
FHLB Advances........... - - - 100,000 25,000 - - - 125,000 135,183
Average interest
rate........ 6.06% 6.71%
Trust Preferred
Securities.............. - 6,000 - - - - - - 6,000 6,000
Average interest
rate........ 6.01%
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Total................ 140,519 58,663 57,050 156,944 40,224 6,757 67,943 8 528,108 540,695
---------- ---------- ---------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Cumulative Totals.... $140,519 $199,182 $ 256,232 $ 413,176 $ 453,400 $460,157 $ 528,100 $ 528,108
========== ========= ========= ========= ========= ========= ========= =========
Interest Rate
Sensitivity GAP... $149,715 $(23,322)) $ 6,724 $ (52,053) $ 6,555 $24,593 $(48,825) $21,037
Cumulative GAP....... $149,715 $126,393 $133,117 $ 81,064 $ 87,619 $112,212 $ 63,387 $84,424
Interest Sensitive
Assets/
Interest Sensitive
Liabilities....... 206% 163% 152% 120% 119% 124% 112% 116%
Cumulative GAP/
Total Earning
Assets............ 24% 21% 22% 13% 14% 18% 10% 14%
(1) FHLB has the option of calling these advances prior to the scheduled
maturity shown in the table, whereupon they might be replaced by borrowings
at then current market rates.
In addition to the GAP analysis, the Company utilizes income simulation
modeling in measuring its interest rate risk and managing its interest rate
sensitivity. Income simulation considers not only the impact of changing market
interest rates on
REPUBLIC FIRST BANCORP | 23
forecasted net interest income, but also other factors such a yield curve
relationships, the volume and mix of assets and liabilities and general market
conditions.
Through the use of income simulation modeling the Company has estimated net
interest income for the year ending December 31, 2003, based upon the assets,
liabilities and off-balance sheet financial instruments at December 31, 2002.
The Company has also estimated changes to that estimated net interest income
based upon immediate and sustained changes in interest rates ("rate shocks").
Rate shocks assume that all of the interest rate increases or decreases occur on
the first day of the period modeled and remain at that level for the entire
period. The following table reflects the estimated percentage change in
estimated net interest income for the years ending December 31:
Percent change
---------------------------------
Rate shocks to interest rates 2003 2002
----------------------------------- ----------- ----------
+2% 13.6% 0.2%
+1% 7.9 (0.2)
-1% (6.5) (1.8)
-2% (16.8) (6.1)
The Company's management believes that the assumptions utilized in
evaluating the Company's estimated net interest income are reasonable; however,
the interest rate sensitivity of the Company's assets, liabilities and
off-balance sheet financial instruments as well as the estimated effect of
changes in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from the experience on which the assumptions were based. Prepayments on
residential mortgage loans and mortgage-backed securities have increased over
historical levels due to the lower interest rate environment and may result in
reductions in margins.
Capital Resources
The Company is required to comply with certain "risk-based" capital
adequacy guidelines issued by the FRB and the FDIC. The risk-based capital
guidelines assign varying risk weights to the individual assets held by a bank.
The guidelines also assign weights to the "credit-equivalent" amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts. Under these guidelines, banks are expected to meet a
minimum target ratio for "qualifying total capital" to weighted risk assets of
8%, at least one-half of which is to be in the form of "Tier 1 capital".
Qualifying total capital is divided into two separate categories or "tiers".
"Tier 1 capital" includes common stockholders' equity, certain qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited
in the aggregate to one-half of total qualifying capital) includes allowances
for credit losses (within limits), certain excess levels of perpetual preferred
stock and certain types of "hybrid" capital instruments, subordinated debt and
other preferred stock. Applying the federal guidelines, the ratio of qualifying
total capital to weighted-risk assets, was 14.49% and 13.98% at December 31,
2002, and 2001, respectively, and as required by the guidelines, at least
one-half of the qualifying total capital consisted of Tier l capital elements.
Tier l risk-based capital ratios on December 31, 2002 and 2001 were 13.24% and
12.73%, respectively. At December 31, 2002, and 2001, the Company exceeded the
requirements for risk-based capital adequacy under both federal and Pennsylvania
state guidelines.
Under FRB and FDIC regulations, a bank is deemed to be "well capitalized"
when it has a "leverage ratio" ("Tier l capital to total assets") of at least
5%, a Tier l capital to weighted-risk assets ratio of at least 6%, and a total
capital to weighted-risk assets ratio of at least 10%. At December 31, 2002, and
2001, the Company's leverage ratio was 8.56% and 8.07%, respectively.
Accordingly, at December 31, 2002 and 2001, the Company was considered "well
capitalized" under FRB and FDIC regulations.
On November 28, 2001, Republic First Bancorp, Inc., through a pooled
offering with Sandler O' Neill & Partners, issued $6.0 million of
corporation-obligated mandatorily redeemable capital securities of the
subsidiary trust holding solely junior subordinated debentures of the
corporation more commonly known as Trust Preferred Securities. The purpose of
the issuance was to increase capital as a result of the Company's continued loan
and core deposit growth. The trust preferred securities qualify as Tier 1
capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
The Company may call the securities on any interest payment date after five
years, without a prepayment penalty, notwithstanding their final 30 year
maturity. The interest rate is variable and adjustable semi -annually at 3.75%
over the 6 month London Interbank Offered Rate ("Libor").
The shareholders' equity of the Company as of December 31, 2002, totaled
approximately $51.3 million compared to approximately $46.8 million as of
December 31, 2001. This increase of $4.4 million was substantially all
attributable to net
REPUBLIC FIRST BANCORP | 24
income for the year of approximately $2.2 million and a net of tax improvement
in the unrealized gain on securities of $2.0 million. These factors also
increased the book value per share of the Company's common stock, which
increased from $7.58 as of December 31, 2001, based upon 6,182,954 shares
outstanding, to $8.23 as of December 31, 2002, based upon 6,230,420 shares
outstanding at December 31, 2002. The increase was primarily attributable to net
income for the year and the improvement in the market value of available for
sale securities.
Regulatory Capital Requirements
Federal banking agencies impose three minimum capital requirements on the
Company's risk-based capital ratios based on total capital, Tier 1 capital, and
a leverage capital ratio. The risk-based capital ratios measure the adequacy of
a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level or
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
The following table presents the Company's regulatory capital ratios at
December 31, 2002, and 2001:
To be well
For Capital capitalized under
Actual Adequacy Purposes FRB capital guidelines
------------------------- ------------------------ ------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
----------- ----------- ------------------------ ----------- ----------
At December 31, 2002
Total risk based capital
Republic First Bank.......... $52,400 13.39% $31,308 8.00% $39,135 10.00%
First Bank of DE............. 6,144 22.59% 2,176 8.00% 2,720 10.00%
Republic First Bancorp, Inc.. 60,581 14.49% 33,447 8.00% - -
Tier one risk based capital
Republic First Bank.......... 47,493 12.14% 15,654 4.00% 23,481 6.00%
First Bank of DE............. 5,801 21.33% 1,088 4.00% 1,632 6.00%
Republic First Bancorp, Inc.. 55,337 13.24% 16,724 4.00% - -
Tier one leverage capital
Republic First Bank.......... 47,493 7.82% 30,377 5.00% 30,377 5.00%
First Bank of DE............. 5,801 13.94% 2,081 5.00% 2,081 5.00%
Republic First Bancorp, Inc.. 55,337 8.56% 32,231 5.00% - -
At December 31, 2001
Total risk based capital
Republic First Bank.......... $51,000 12.96% $31,493 8.00% $39,366 10.00%
First Bank of DE............. 5,288 23.13% 1,829 8.00% 2,286 10.00%
Republic First Bancorp, Inc.. 58,151 13.98% 33,275 8.00% - -
Tier one risk based capital
Republic First Bank.......... 46,078 11.70% 15,747 4.00% 23,620 6.00%
First Bank of DE............. 5,001 21.87% 915 4.00% 1,372 6.00%
Republic First Bancorp, Inc.. 52,949 12.73% 16,638 4.00% - -
Tier one leverage capital
Republic First Bank.......... 46,078 7.46% 30,884 5.00% 30,884 5.00%
First Bank of DE............. 5,001 12.74% 1,963 5.00% 1,963 5.00%
Republic First Bancorp, Inc.. 52,949 8.07% 32,793 5.00% - -
Management believes that the Company and Banks meet as of December 31,
2002, and 2001, all capital adequacy requirements to which they are subject. As
of December 31, 2002, the most recent notification from the Federal Reserve Bank
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action provisions of the Federal Deposit Insurance Act. There
are no calculations or events since that notification, that management believes
would have changed the Banks' category.
REPUBLIC FIRST BANCORP | 25
The Company and the Banks' ability to maintain the required levels of
capital is substantially dependent upon the success of their capital and
business plans, the impact of future economic events on the Banks' loan
customers and the Banks' ability to manage their interest rate risk, growth and
other operating expenses.
In addition to the above minimum capital requirements, the Federal Reserve
Bank approved a rule that became effective on December 19, 1992, implementing a
statutory requirement that federal banking regulators take specified "prompt
corrective action" when an insured institution's capital level falls below
certain levels. The rule defines five capital categories based on several of the
above capital ratios. The Banks currently exceed the levels required for a bank
to be classified as "well capitalized". However, the Federal Reserve Bank may
consider other criteria when determining such classifications, which criteria
could result in a downgrading in such classifications.
The Company's equity to assets ratio increased from 7.18% as of December
31, 2001, to 7.92% as of December 31, 2002. The increase at year-end 2002 was a
result of the improvement in net income and an improvement in the market value
of available-for sale securities. The Company's average equity to assets ratio
for 2002, 2001 and 2000 was 7.57%, 7.02% and 6.12%, respectively. The Company's
average return on equity for 2002, 2001 and 2000 was 4.52%, 4.59, and 7.73%,
respectively; and its average return on assets for 2002, 2001, and 2000, was
0.34%, 0.33%, and 0.55%, respectively.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, time investment purchases to market
conditions and provide a cushion against unforeseen needs. Liquidity needs can
be met by either reducing assets or increasing liabilities. The most liquid
assets consist of cash, amounts due from banks and federal funds sold.
Regulatory authorities require the Company to maintain certain liquidity
ratios such that 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 Company has formed
an Asset/Liability Committee (ALCO), comprised of certain members of the Banks
board of directors and senior management, which monitors such ratios. The
purpose of the committee is, in part, to monitor the Banks' liquidity and
adherence to the ratios in addition to managing relative interest rate risk. The
ALCO meets at least quarterly.
The Company's most liquid assets totaled $72.8 million at December 31,
2002, compared to $41.4 million at December 31, 2001 due primarily to an
increase in federal funds sold. Loan maturities and repayments are another
source of asset liquidity. At December 31, 2002, the Bank estimated that in
excess of $50.0 million of loans would mature or repay in the six-month period
ended June 30, 2003. Additionally, the majority of its securities are available
to satisfy liquidity requirements through pledges to the FHLB to access the
Banks' line of credit.
Funding requirements have historically been satisfied by generating core
deposits and certificates of deposit with competitive rates, buying federal
funds or utilizing the facilities of the Federal Home Loan Bank System ("FHLB").
At December 31, 2002, the Bank had $109.0 million in unused lines of credit
available under arrangements with the FHLB and with correspondent banks,
compared to $162.5 million at December 31, 2001. The reduction in available
lines resulted from prepayments of the Bank's mortgage-backed securities and
loans pledged as collateral against those lines. Notwithstanding these
reductions, management believes it satisfactorily exceeds regulatory liquidity
guidelines. These lines of credit enable the Bank to purchase funds for short to
long-term needs at rates often lower than other sources and require pledging of
securities or loan collateral.
At December 31, 2002, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $59.5 million. Certificates of
deposit scheduled to mature in one year totaled $159.7 million at December 31,
2002, and no borrowings are scheduled to mature within that period. The Company
anticipates that it will have sufficient funds available to meet its current
commitments. The bank has an additional $125.0 million in other borrowings that
are callable by the FHLB, whereupon they would be replaced by borrowings at then
current rates and certificates of deposit. If these borrowings are in fact
called, net interest income could be affected. In addition, the Company can use
overnight borrowings or other term borrowings to replace these borrowed funds.
The Banks target and actual liquidity levels are determined by comparisons
of the estimated repayment and marketability of the Banks interest-earning
assets with projected future outflows of deposits and other liabilities. The
Bank has established a line of credit from a correspondent to assist in managing
the Banks' liquidity position. That line of credit totaled $10.0 million at
December 31, 2002. The Company had not drawn down on this line at December 31,
2002. Additionally, the Bank has established a line of credit with the Federal
Home Loan Bank of Pittsburgh with a maximum borrowing capacity of
REPUBLIC FIRST BANCORP | 26
approximately $224.0 million. As of December 31, 2002, and 2001, the Company had
borrowed $125.0 million and $142.5 million, respectively, under its lines of
credit. Investment securities represent a primary source of liquidity for the
Bank. Accordingly, investment decisions generally reflect liquidity over other
considerations.
Operating cash flows are primarily derived from cash provided from net
income during the year and are another source of liquidity. In 2002, significant
cash flows were provided from the maturities and principal paydowns of
securities.
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 Bank has historically been
able to generate certificates of deposit by matching Philadelphia market rates
or paying a premium rate of 25 to 50 basis points over those market rates. It is
anticipated that this source of liquidity will continue to be available;
however, the incremental cost may vary depending on market conditions. The
Company's securities portfolio is also available for liquidity, most likely as
collateral for FHLB advances. Because of the FHLB's AAA rating, it is unlikely
those advances would not be available. But even if they are not, numerous
investment companies would likely provide repurchase agreements up to the amount
of the market value of the securities.
The Banks' ALCO is responsible for managing the liquidity position and
interest sensitivity of the Banks. That committee's primary objective is to
maximize net interest income while configuring the Banks' interest-sensitive
assets and liabilities to manage interest rate risk and provide adequate
liquidity for projected needs.
Investment Securities Portfolio
The Banks investment securities portfolio is intended to provide liquidity
and contribute to earnings while diversifying credit risk. The decline in
securities in 2002 was a result of the Company's strategy to reduce the amount
of the investment securities portfolio and redeploy these assets into
higher-yielding commercial loans. The lower interest rate environment also
contributed to higher prepayments of mortgage backed securities, as these
securities refinanced more rapidly than normal.
A summary of investment securities available-for-sale and investment
securities held-to-maturity at December 31, 2002, 2001, and 2000 follows.
Investment Securities Available for Sale at
December 31,
----------------------------------------------
(Dollars in thousands)
2002 2001 2000
----------- ----------- -----------
U.S. Government Agencies............................ $ 5,759 $ 897 $ 2,246
Mortgage backed Securities/CMOs (1)................. 71,623 113,511 153,002
Other debt securities (3)........................... 7,352 - -
----------- ----------- -----------
Total amortized cost of securities.................. $84,734 $114,408 $155,248
----------- ----------- -----------
Total fair value of investment securities........... $87,291 $113,868 $152,134
----------- ----------- -----------
----------------------------------------------
Investment Securities Held to Maturity at
December 31,
----------------------------------------------
(Dollars in thousands)
2002 2001 2000
----------- ----------- -----------
U.S. Government Agencies............................ $ 122 $ 997 $ 1,650
Mortgage backed Securities/CMOs (1)................. 760 1,399 1,732
Other securities (2)................................ 8,388 9,178 14,325
----------- ----------- -----------
Total amortized cost of investment securities....... $ 9,270 $ 11,574 $ 17,707
----------- ----------- -----------
Total fair value of investment securities........... $ 9,297 $ 11,601 $ 17,750
----------- ----------- -----------
- ----------
(1) Substantially all of these obligations consist of U.S. Government Agency
issued securities.
(2) Comprised primarily of FHLB and Federal Reserve Bank stock.
(3) Comprised primarily of corporate bonds and trust preferred securities.
REPUBLIC FIRST BANCORP | 27
The following table presents the contractual maturity distribution and
weighted average yield of the securities portfolio of the Company at December
31, 2002. Mortgage backed securities are presented without consideration of
amortization or prepayments.
Investment Securities Available for Sale at December 31, 2002
--------------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years Past 10 Years Total
--------------- ----------------- ----------------- --------------- ----------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Fair value Cost Yield
--------------------------------- -------- -------- -------- ----- ------------ -------- -------
(Dollars in thousands)
U.S. Government
Agencies........... $5,077 1.67% $136 1.91% $566 3.11% - - $5,779 $5,759 1.82%
Other debt securities - - 2,083 4.74% - - 5,368(1) 3.91% 7,451 7,352 4.14%
Mortgage-backed
securities/
CMOs................. 210 5.68% - - - - 73,851 5.83% 74,061 71,623 5.83%
------- ------- ------- --------- -------- -------- -------- ------- --------- --------- -------
Total AFS securities....$5,287 1.83% $2,219 4.57% $566 3.11% $79,219 5.70% $87,291 $84,734 5.42%
======= ======= ======= ========= ======== ======== ======== ======= ========= ========= =======
Investment Securities Held to Maturity at December 31, 2002
--------------------------------------------------------------------------------------------
Within One Year One to Five Years Five to Ten Years Past 10 Years Total
------------------ ------------------ ---------------- ------------------ -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- --------- -------- --------- ------- -------- --------- ------- --------- -------
(Dollars in thousands)
U.S. Government Agencies... $-- $-- $109 5.23% $-- -- $13 3.13% $122 5.01%
Mortgage-backed securities/
CMOs.................... -- -- -- -- -- -- 760 5.04% 760 5.04%
Other securities........... -- -- 225 6.99% 155 6.73% 8,008 3.49% 8,388 3.65%
-------- --------- --------- -------- ------- -------- --------- -------- --------- -------
Total HTM securities....... $-- $-- $334 6.41% $155 6.73% $8,781 3.63% $9,270 3.78%
======== ========= ========= ======== ======= ======== ======== ======= ========= =======
(1) Variable rate instruments
Loan Portfolio
The Company's loan portfolio consists of secured and unsecured commercial
loans including commercial real estate loans, loans secured by one-to-four
family residential property, commercial construction and residential
construction loans as well as residential mortgages, home equity loans,
short-term consumer and other consumer loans. Commercial loans are primarily
term loans made to small to medium-sized businesses and professionals for
working capital, asset acquisition and other purposes. The Banks commercial
loans typically range between $250,000 and $3,000,000 but customers may borrow
significantly larger amounts up to the Banks combined legal lending limit of
$9.0 million at December 31, 2002. Individual customers may have several loans
often secured by different collateral. Such relationships in excess of $5.5
million (an internal monitoring guideline which approximates 10% of capital and
reserves) at December 31, 2002, amounted to $12.9 million.
While commercial loans increased as shown below, the Company's total loans
decreased $5.6 million, or 1.2%, to $463.7 million at December 31, 2002, from
$469.3 million at December 31, 2001. The decline reflected the prepayments in
the residential real estate mortgage portfolio resulting from the lower rate
environment as these loans declined $16.5 million in 2002, while commercial
loans increased $10.0 million as shown in the table below.
The following table sets forth the Company's gross loans by major
categories for the periods indicated:
At December 31,
---------------------------------------------------------------------
(Dollars in thousands)
2002 2001 2000 1999 1998
----------- ------------ ------------ ------------ ------------
Commercial:
Real estate secured (1).................... $329,570 $321,579 $284,082 $233,702 $187,098
Non real estate secured.................... 54,163 53,388 39,016 36,600 35,294
Non real estate unsecured.................. 8,513 7,229 10,543 4,467 6,686
----------- ------------ ------------ ------------ ------------
Total commercial......................... 392,246 382,196 333,641 274,769 229,078
Residential real estate (2)................... 51,265 67,821 74,825 76,975 71,020
Consumer and other............................ 20,178 19,302 13,919 11,069 9,065
----------- ------------ ------------ ------------ ------------
Total loans, net of unearned income...... $463,689 $469,319 $422,385 $362,813 $309,163
=========== ============ ============ ============ =============
- ----------
(1) Includes loans held for sale.
(2) Residential real estate secured is comprised of jumbo residential first
mortgage loans for all years presented.
REPUBLIC FIRST BANCORP | 28
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of the dates indicated,
which are due in (i) one year or less, (ii) more than one year through five
years and (iii) over five years, is shown in the following table. Loan balances
are also categorized according to their sensitivity to changes in interest
rates: (dollars in thousands).
At December 31, 2002
------------------------------------------------------------------
(Dollars in thousands)
One Year More Than One Year Over Total
or Less Through Five Years Five Years Loans
----------- ---------------------- ------------ ------------
Total Commercial and Commercial Real Estate.......... $133,850 $212,659 $ 45,737 $392,246
Total Residential Real Estate........................ 204 815 50,246 51,265
Total Consumer and Other............................. 6,734 1,889 11,555 20,178
----------- ----------- ------------ ------------
Total........................................... $104,788 $215,363 $107,538 $463,689
=========== ============ ============ ============
Loans with Fixed Rates............................... 33,340 163,581 81,819 278,740
Loans with Floating Rates............................ 107,448 51,782 25,719 184,949
----------- ----------- ------------ ------------
Total........................................... $140,788 $215,363 $107,538 $463,689
=========== ============ ============ ============
Percent Composition by Maturity...................... 30.36% 46.44% 23.20% 100.00%
Fixed Rate Loans as Percent of Total................. 23.68 75.96 76.08 60.11
Floating Rate Loans as Percent of Total.............. 76.32 24.04 23.92 39.89
In the ordinary course of business, loans maturing within one year may be
renewed, in whole or in part, as to principal amount, at interest rates
prevailing at the date of renewal.
At December 31, 2002, 60.1% of total loans were fixed rate compared to
61.3% at December 31, 2001.
Credit Quality
The Banks' written lending policies require specified underwriting, loan
documentation and credit analysis standards to be met prior to funding, with
independent credit department approval for the majority of new loan balances. A
committee of the Board of Directors oversees the loan approval process to
monitor that proper standards are maintained, while approving the majority of
commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of interest or principal for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case where a
non-accrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
REPUBLIC FIRST BANCORP | 29
At December 31,
--------------------------------------------------------
2002 2001 2000 1999 1998
--------- -------- --------- -------- --------
(Dollars in thousands)
Loans accruing, but past due 90 days or more.................. $4,051 $ 518 $ 91 $ 333 $ 121
Restructured loans............................................ - - 1,982 - -
Non-accrual loans............................................. 2,972 3,830 1,350 1,778 1,002
--------- -------- --------- -------- --------
Total non-performing loans.................................... 7,023 4,348 3,423 2,111 1,123
Other real estate owned....................................... 1,015 1,858 - 643 718
--------- -------- --------- -------- --------
Total non-performing assets(1)................................ $8,038 $6,206 $3,423 $2,754 $1,841
========= ======== ========= ======== ========
Non-performing loans as a percentage of total
loans, net of unearned income (1)(2)....................... 1.51% 0.93% 0.81% 0.58% 0.36%
Non-performing assets as a percentage of total assets......... 1.24% 0.95% 0.52% 0.47% 0.36%
- ----------
(1) Non-performing loans are comprised of (i) loans that are on a non-accrual
basis, (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans. Non-performing assets are composed of non-performing
loans and other real estate owned.
(2) Includes loans held for sale.
Problem loans consist of loans that are included in performing loans, but
for which potential credit problems of the borrowers have caused management to
have serious doubts as to the ability of such borrowers to continue to comply
with present repayment terms. At December 31, 2002, 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 following summary shows the impact on interest income of non-accrual
loans for the periods indicated:
For the Year Ended December 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ---------- ----------- ------------ -----------
Interest income that would have been recorded
Had the loans been in accordance with their
original terms................................... $241,000 $203,000 $125,000 $189,000 $79,000
Interest income included in net income............. $ - $ - $171,000 $ - $55,000
At December 31, 2002, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to real
estate operators and lessors in the aggregate amount of $142.4 million, which
represented 30.7% of gross loans receivable at December 31, 2002. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and others. Loan
concentrations are considered to exist when multiple number of borrowers are
engaged in similar activities that management believes would cause them to be
similarly impacted by economic or other conditions. The Bank had no credit
exposure to "highly leveraged transactions" at December 31, 2002 as defined by
the FRB.
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. This 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. In both cases the Banks is pursuing recoveries, 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.
REPUBLIC FIRST BANCORP | 30
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for the
years ended December 31, 2002, 2001, 2000, 1999, and 1998 is as follows:
(dollars in thousands)
For the Year Ended December 31,
-------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Balance at beginning of period.............. $ 5,431 $ 4,072 $ 3,208 $ 2,395 $ 2,028
Charge-offs:
Commercial and construction............... 2,542 2,077 66 91 76
Consumer.................................. 3 - 90 117 34
Short-term loans.......................... 1,670 802 - - -
------------ ------------ ------------ ------------ ------------
Total charge-offs....................... 4,215 2,879 156 208 110
------------ ------------ ------------ ------------ ------------
Recoveries:
Commercial and construction............... 123 257 340 124 13
Consumer.................................. - 17 14 17 94
------------ ------------ ------------ ------------ ------------
Total recoveries........................ 123 274 354 141 107
------------ ------------ ------------ ------------ ------------
Net charge-offs (recoveries)................ 4,092 2,605 (198) 67 3
------------ ------------ ------------ ------------ ------------
Provision for loan losses................... 5,303 3,964 666 880 370
------------ ------------ ------------ ------------ ------------
Balance at end of period.................. $ 6,642 $ 5,431 $ 4,072 $ 3,208 $ 2,395
=========== ============ ============ ============ ============
Average loans outstanding (1)............. $468,239 $448,397 $389,156 $325,544 $248,479
As a percent of average loans (1):
Net charge-offs (recoveries) (2).......... 0.87% 0.58% (0.05)% 0.02% 0.00%
Provision for loan losses................. 1.13 0.88 0.17 0.27 0.15
Allowance for loan losses................. 1.42 1.21 1.05 0.99 0.96
Allowance for loan losses to:
Total loans, net of unearned income....... 1.43% 1.16% 0.96% 0.88% 0.79%
Total non-performing loans................ 94.57% 124.89% 118.96% 151.97% 213.27%
- ----------
(1) Includes non-accruing loans.
(2) Not including short-term loan charge-offs, ratios are 0.52% and 0.40% in
2002 and 2001 respectively.
The increase in commercial loan charge-offs related primarily to
charge-offs for one borrower in the amount of $2.2 million. The remainder of
this loan was subsequently transferred to other real estate owned with a value
of $515,000 as discussed previously. The increase in short-term loan charge-offs
reflected the first full year offering of the product, which was in 2002.
Management makes at least a quarterly determination as to an appropriate
provision from earnings to maintain an allowance for loan losses that is
management's best estimate of known and inherent losses. The Company's Board of
Directors periodically reviews the status of all non-accrual and impaired loans
and loans classified by the Banks' regulators or internal loan review officer,
who reviews both the loan portfolio and overall adequacy of the allowance for
loan losses. The Board of Directors also considers specific loans, pools of
similar loans, historical charge-off activity, economic conditions and other
relevant factors in reviewing the adequacy of the loan loss reserve. Any
additions deemed necessary to the allowance for loan losses are charged to
operating expenses.
The Company has an existing loan review program, which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
who reports quarterly, directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any
given date is difficult, particularly in a continually changing economy. In
Management's opinion, the allowance for loan losses was appropriate at December
31, 2002. However, there can be no assurance that, if asset quality deteriorates
in future periods, additions to the allowance for loan losses will not be
required.
REPUBLIC FIRST BANCORP | 31
The Banks' management is unable to determine in what loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for loan losses among various categories. The
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb loan losses in any loan category:
At December 31,
----------------------------------------------------------------
(dollars in thousands)
2002 2001 2000 1999 1998
------------------------------------- -------------------------
Amount(1) Amount(1) Amount(1) Amount(1) Amount(1)
------------------------------------- -------------------------
Allocation of allowance for loan losses:
Commercial (2).............................................. $5,695 $4,814 $3,144 $2,119 $1,638
Residential real estate..................................... 205 203 224 423 391
Consumer and other.......................................... 104 104 110 84 71
Short-term loans............................................ 97 78 47 - -
Unallocated................................................. 541 232 547 582 295
---------- --------- --------- ---------- ----------
Total.................................................... $6,642 $5,431 $4,072 $3,208 $2,395
========== ========= ========== ======== ==========
- ----------
(1) Gross loans net of unearned income.
(2) Includes loans held for sale.
The methodology utilized to estimate the amount of the allowance for loan
losses is as follows: The Company first applies an estimated loss percentage
against all loan categories outstanding. Net charge-offs (excluding short-term
loans) to average loans were 0.52% and 0.40%, respectively in 2002 and 2001.
Substantially all of such charge-offs related to individual borrowers in each of
those years. In the previous three years, that ratio did not exceed .21%. In the
absence of sustained charge-off history, management estimates loss percentages
based upon the purpose and/or collateral of various commercial loan categories.
While such loss percentages exceed the percentages suggested by historical
experience, the Company maintained those percentages in 2002. Additionally, in
view of economic conditions, the Bank increased the economic component of the
estimated loss percentage. The Company applied historical loss percentages for
consumer loans and short-term consumer loans. The Company will continue to
evaluate these percentages and may adjust these estimates on the basis of
charge-off history, economic conditions or other relevant factors. The Company
also provides specific reserves for impaired loans to the extent the estimated
realizable value of the underlying collateral is less than the loan balance,
when the collateral is the only source of repayment. Further, the Company
attempts to classify any applicable loans according to regulatory definitions,
for loans which may have characteristics which may decrease the probability of
full compliance with original loan terms. Consistent with regulatory reserve
allocations the classifications and percentage of principal which are allocated
to the allowance for loan losses are as follows: special mention-3%,
substandard-15%, doubtful-50% and loss-100%. Also, the Company may estimate and
recognize reserve allocations above these regulatory reserve percentages based
upon any factor which might impact the loss estimates. Those factors include but
are not limited to the impact of economic conditions on the borrower and
management's potential alternative strategies for loan or collateral
disposition. In 2002, the unallocated component increased $309,000 to $541,000,
primarily for economic reasons. The unallocated allowance is established for
losses which have not been identified through the formula and specific portions
of the allowance described above. The unallocated portion is more subjective and
requires a high degree of management judgment and experience. Management has
identified several factors that impact credit losses that are not considered in
either the formula or the specific allowance segments. These factors consist of
industry and geographic loan concentrations, changes in the composition of the
loan portfolio, changes in underwriting processes and trends in problem loan and
loss recovery rates. The impact of the above is considered in light of
management's conclusions as to the overall adequacy of underlying collateral and
other factors.
The majority of the Company's loan portfolio represents loans made for
commercial purposes, while significant amounts of residential property may serve
as collateral for such loans. The Company attempts to evaluate larger loans
individually, on the basis of its loan review process, which scrutinizes loans
on a selective basis; and other available information. Even if all commercial
purpose loans could be reviewed, there is no assurance that information on
potential problems would be available. The Company's portfolios of loans made
for purposes of financing residential mortgages and consumer loans are evaluated
in groups. At December 31, 2002, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $392.3
million, $51.3 million and $20.2 million.
The recorded investment in loans which are impaired in accordance with SFAS
114 totaled $3.0 million, $3.8 million and $1.4 million at December 31, 2002,
2001, and 2000 respectively. The amounts of related valuation allowances were
$665,000, $288,000, and $139,000 respectively at those dates. For the years
ended December 31, 2002, 2001, and 2000 the
REPUBLIC FIRST BANCORP | 32
average recorded investment in impaired loans was approximately $3.4 million,
$2.6 million, and $1.6 million, respectively. During 2000, the Bank recognized
interest income of $171,000 on impaired loans. The Bank did not recognize any
interest income on impaired loans during 2002 or 2001. There were no commitments
to extend credit to any borrowers with impaired loans as of the end of the
periods presented herein.
At December 31, 2002, and 2001, accruing substandard loans totaled
approximately $12.9 million and $8.7 million respectively; and doubtful loans
totaled approximately $493,000 and $62,000, respectively. There were no loans
classified as loss at those dates.
The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at
December 31, 2002, and 2001, in the aggregate principal amount of $1.2 million
and $6.1 million respectively; and (ii) 60 to 89 days past due, at December 31,
2002, and 2001 in the aggregate principal amount of $2.6 million and $853,000
respectively.
The following table is an analysis of the change in Other Real Estate Owned
for the years ended December 31, 2002 and 2001.
Dollars in thousands
2002 2001
------------- -------------
Balance at January 1,......................................... $1,858 $ -
Additions, net................................................ 515 1,858
Sales......................................................... - -
Write downs................................................... 1,358 -
------------- -------------
Balance at December 31,....................................... $1,015 $1,858
============= =============
Deposit Structure
Of the total daily average deposits of approximately $457.9 million held by
the Banks during the year ended December 31, 2002, approximately $58.3 million,
or 12.7%, represented non-interest bearing demand deposits, compared to
approximately $50.2 million, or 11.3%, of approximately $442.1 million total
daily average deposits during 2001. Total deposits at December 31, 2002,
consisted of $59.2 million in non-interest-bearing demand deposits, $54.6
million in interest-bearing demand deposits, $119.2 million in savings and money
market accounts, $139.4 million in time deposits under $100,000 and $83.9
million in time deposits greater than $100,000. In general, the Banks pay higher
interest rates on time deposits compared to other deposit categories. The Banks
various deposit liabilities may fluctuate from period-to-period, reflecting
customer behavior and strategies to optimize net interest income.
The following table is a distribution of the average balances of the Banks'
deposits and the average rates paid thereon, for the twelve month periods ended
December 31, 2002, 2001 and 2000.
For the Years Ended December 31,
-------------------------------------------------------------------------------------
(Dollars in thousands)
2002 2001 2000
-------------------------- -------------------------- --------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------------ ----------- ------------ ----------- ------------ ----------
Demand deposits, interest-bearing..... $47,019 1.06% $ 37,214 1.71% $ 24,437 2.40%
Money market & savings deposits....... 112,321 1.70% 93,447 3.15% 63,226 4.46%
Time deposits......................... 240,230 3.87% 261,281 6.03% 241,738 6.20%
------------ ----------- ------------ ----------- ------------ ----------
Total interest-bearing deposits....... $399,570 2.93% $391,942 4.94% $329,401 5.58%
============ ============ ============ =========== ============ ==========
The following is a breakdown by contractual maturity, of the Company's time
certificates of deposit issued in denominations of $100,000 or more as of
December 31, 2002, 2001 and 2000.
REPUBLIC FIRST BANCORP | 33
Certificates of Deposit
-----------------------------------------
(Dollars in thousands)
2002 2001 2000
---------- ---------- ----------
Maturing in:
Three months or less............................... $25,306 $40,285 $30,614
Over three months through six months............... 22,494 34,463 15,440
Over six months through twelve months.............. 10,061 10,710 28,218
Over twelve months................................. 26,025 12,229 24,870
---------- ---------- ----------
TOTAL............................................ $83,886 $97,687 $99,142
========== ========== ==========
The following is a breakdown, by contractual maturities of the Company's
time certificates of deposit for the years 2003 through 2007 and beyond (dollars
in thousands).
2007 and
2003 2004 2005 2006 beyond Totals
---------- ------------ ----------- ----------- ----------- -----------
(Dollars in thousands)
Time certificates of deposit... $159,667 $51,365 $9,645 $1,178 $1,387 $223,242
========== ============ =========== =========== =========== ===========
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No 9, which removes acquisitions of
financial institutions from the scope of SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. The provisions of the SFAS No.
147 related to unidentifiable intangible assets and the acquisition of a
less-than-whole financial institution are effective for acquisitions for which
the date of acquisition is on or after October 1, 2002. The adoption of SFAS No.
147 did not have a material impact on the Company's financial position or
results of operations.
SFAS No. 148, Accounting for Stock Based Compensation Transition and Disclosure,
amends the disclosure and certain transition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. For entities that use the intrinsic value
method under APB No. 25, Accounting for Stock Issued to Employees, to account
for employee stock compensation for any period presented, their accounting
policies note should include certain disclosures. The expanded annual disclosure
requirements and the transition provisions are effective for fiscal years ending
after December 15, 2002. The new interim period disclosures are required in
financial statements for interim periods beginning after December 15, 2002. The
annual disclosures are provided in the 2002 financial statements.
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.
The following tables are summary unaudited income statement information for
each of the quarters ended during 2002 and 2001.
REPUBLIC FIRST BANCORP | 34
Summary of Selected Quarterly Consolidated Financial Data
For the Quarter Ended, 2002
---------------------------------------------------
(Dollars in thousands, except per share data) Fourth Third Second First
----------- ---------- ---------- ----------
Income Statement Data:
Total interest income......................................... $10,505 $10,934 $11,236 $11,448
Total interest expense........................................ 4,694 4,925 5,094 5,449
----------- ---------- ---------- ----------
Net interest income........................................... 5,811 6,009 6,142 5,999
Provision for loan losses (1)................................. 1,810 965 1,248 1,280
Non-interest expense, net of non-interest income (2).......... 3,517 4,929 3,488 3,370
Federal income tax expense.................................... 159 49 485 461
----------- ---------- ---------- ----------
Net income ................................................... $325 $66 $921 $888
=========== =========== ========== ==========
Per Share Data:
Basic:
Net income................................................ $0.05 $0.01 $0.15 $0.14
=========== =========== ========== ==========
Diluted:
Net income................................................ $0.05 $0.01 $0.14 $0.14
=========== =========== ========== ==========
For the Quarter Ended, 2001
---------------------------------------------------
Fourth Third Second First
----------- ---------- ---------- ----------
Income Statement Data:
Total interest income......................................... $12,411 $11,995 $12,206 $12,402
Total interest expense........................................ 6,231 6,950 7,450 8,028
----------- ---------- ---------- ----------
Net interest income........................................... 6,180 5,045 4,756 4,374
Provision for loan losses (3)................................. 2,617 570 620 157
Non-interest expense, net of non-interest income.............. 3,473 3,499 3,183 3,081
Federal income tax expense.................................... 30 322 314 375
----------- ---------- ---------- ----------
Net income.................................................... $ 60 $ 654 $ 639 $ 761
=========== =========== ========== ==========
Per Share Data:
Basic:
Net income................................................ $ 0.01 $ 0.10 $ 0.10 $ 0.12
=========== =========== ========== ==========
Diluted:
Net income................................................ $ 0.01 $ 0.10 $ 0.10 $ 0.12
=========== =========== ========== ==========
- ----------
(1) The Company reserved $900,000 in the fourth quarter of 2002 due to a change
resulting from loan loss methodology.
(2) The Company wrote down the value of a single other real estate owned
property by $1.4 million during the third quarter of 2002.
(3) The Company increased its reserves against a single borrower by $1.3
million in the fourth quarter of 2001, and charged off $1.9 million related
to that borrower.
Item 8: Financial Statements and Supplementary Data
The financial statements of the Company begin on Page 41.
REPUBLIC FIRST BANCORP | 35
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
KPMG LLP was previously the principal accountants for Republic First
Bancorp, Inc. and subsidiaries. On April 5, 2002, that firm was dismissed and
Grant Thornton, LLP was engaged as principal accountants. The decision to change
accountants was approved by the board of directors.
In connection with the audits of the two fiscal years ended December 31,
2001, and the subsequent interim period through April 5, 2002, there were no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.
The audit reports of KPMG LLP on the consolidated financial statements
ofRepublic First Bancorp, Inc. and subsidiaries as of and for the years ended
December 31, 2001 and 2000 did not contain any adverse opinion or disclaimer of
opinion, nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
PART III
Item 10: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 2003 annual meeting of shareholders scheduled for
April 22, 2003.
Item 11: Executive Compensation
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Commission in
connection with the Company's 2003 annual meeting of shareholders scheduled for
April 22, 2003.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
(a) (b) (c)
- ---------------------------------------------------------------------------------------------------------------------
Plan category Number of securities to be Weighted-average Number of securities remaining
issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensation plans
warrants and rights warrants and rights (excluding securities reflected in
column (a))
- ---------------------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 898,314 $4.42 0
Equity compensation
plans not approved
by security holders 11,000 $6.13 0
------- -----
Total 909,314 $4.44 0
------- -----
Item 13: Certain Relationships and Related Transactions
Certain of the directors of the Company and/or their affiliates have loans
outstanding from the Bank. All such loans were made in the ordinary course of
the Banks' business; were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons; and, in the opinion of management, do not
involve more than the normal risk of collectibility or present other unfavorable
features.
Harry D. Madonna is of counsel to Spector Gadon & Rosen effective January
1, 2002. In 2002, the Company paid $1,338,000 in legal fees to that firm, which
were primarily for loan workout and collection matters.
Item 14. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
The management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, have conducted an evaluation of the effectiveness of
the Company's disclosure controls and procedures pursuant to Rule 13a-14 under
the Securities Exchange Act of 1934 as of a date (the "Evaluation Date") within
90 days prior to the filing date of this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
effective in ensuring that all material information relating to the Company,
including our consolidated subsidiaries, required to be filed in this quarterly
report has been made known to them in a timely manner.
(b) Changes in internal controls.
REPUBLIC FIRST BANCORP | 36
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.
Item 15: Exhibits, Financial Statements and Reports on Form 8-K
A. Financial Statements Page 41
(1) Independent Auditors Report-Grant Thornton LLP
(2) Independent Auditors Report-KPMG LLP
(3) Consolidated Balance Sheets as of December 31, 2002 and 2001.
(4) Consolidated Statements of Income for the years ended December 31, 2002,
2001, and 2000.
(5) Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001, and 2000.
(6) Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2002, 2001, and 2000.
(7) Notes to Consolidated Financial Statements.
B. Exhibits
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.
-----------
21 Subsidiaries of the Company.
Republic First Bank (the "Bank"), a wholly-owned subsidiary, commenced
operations on November 3, 1988. The Bank is a commercial bank
chartered pursuant to the laws of the Commonwealth of Pennsylvania.
First Bank of Delaware ("FBD") is also a wholly-owned subsidiary of
the Company, and commenced operations June 1, 1999. RFB is a
commercial bank chartered pursuant to the laws of the State of
Delaware. The Bank and FBD are both members of the Federal Reserve
System and their primary federal regulators are the Federal Reserve
Board of Governors.
23.1 Consent of Grant Thornton LLP
(a) Consent of KPMG LLP
99 Certifications under Section 906 of the Sarbanes Oxley-Act
99.1 Harry D. Madonna
99.2 Paul Frienkel
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 thereto.
Reports on Form 8-K
Filed 2/14/02.
Filed 4/25/02.
REPUBLIC FIRST BANCORP | 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania.
REPUBLIC FIRST BANCORP, INC. [registrant]
Date: March 13, 2003 By:/s/ Harry D. Madonna
----------------------------------
Harry D. Madonna
President and
Chief Executive Officer
Date: March 13, 2003 By:/s/ Paul Frenkiel
----------------------------------
Paul Frenkiel,
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Date: March 13, 2003 /s/ Harris Wildstein, Esq.
-----------------------------------
Harris Wildstein, Esq., Director
/s/ Neal I. Rodin
-----------------------------------
Neal I. Rodin, Director
/s/ Steven J. Shotz
-----------------------------------
Steven J. Shotz, Director
/s/ Harry D. Madonna
-----------------------------------
Harry D. Madonna, Director and
Chairman of the Board
/s/ Kenneth Adelberg
-----------------------------------
Kenneth Adelberg, Director
/s/ William Batoff
-----------------------------------
William Batoff, Director
REPUBLIC FIRST BANCORP | 38
CERTIFICATIONS*
- ---------------
I, Harry D. Madonna, certify that:
1. I have reviewed this annual report on Form 10-K of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/Harry D. Madonna
--------------------
[Executive Officer and President]
REPUBLIC FIRST BANCORP | 39
CERTIFICATIONS*
- ---------------
I, Paul Frenkiel, certify that:
1. I have reviewed this annual report on Form 10-K of Republic First Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 13, 2003
/s/Paul Frenkiel
-----------------
[EVP and Chief Financial Officer]
REPUBLIC FIRST BANCORP | 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
REPUBLIC FIRST BANCORP, INC.
Page
----
Independent Auditors Reports 42
Consolidated Balance Sheets as of December 31, 2002 and 2001 44
Consolidated Statements of Income
for the years ended December 31, 2002, 2001, and 2000 45
Consolidated Statements of Cash Flows
for the years ended December 31, 2002, 2001, and 2000 46
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2002, 2001, and 2000 47
Notes to Consolidated Financial Statements 48
REPUBLIC FIRST BANCORP | 41
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Republic First Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of Republic
First Bancorp, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Republic First
Bancorp, Inc. and Subsidiaries as of December 31, 2002, and the consolidated
results of their operations and their consolidated cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 22, 2003
REPUBLIC FIRST BANCORP | 42
Independent Auditors' Report
The Board of Directors
Republic First Bancorp, Inc.:
We have audited the accompanying consolidated balance sheet of Republic
First Bancorp, Inc. and subsidiaries as of December 31, 2001 and the related
consolidated statements of income, changes in shareholders' equity and
comprehensive income/(loss), and cash flows for each of the years in the
two-year period ended December 31, 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Republic
First Bancorp, Inc. and subsidiaries as of December 31, 2001, and the results of
their operations and their cash flows for each of the years in the two-year
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
/s/KPMG LLP
January 22, 2002
REPUBLIC FIRST BANCORP | 43
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(dollars in thousands, except per share data)
2002 2001
----------- ------------
ASSETS:
Cash and due from banks........................................................... $ 18,114 $ 19,647
Interest bearing deposits with banks.............................................. 3,570 510
Federal funds sold................................................................ 51,126 21,263
----------- ------------
Total cash and cash equivalents.............................................. 72,810 41,420
Other interest-earning restricted cash............................................ 4,228 4,913
Investment securities available for sale, at fair value........................... 87,291 113,868
Investment securities held to maturity, at amortized cost
(fair value of $9,297 and $11,601 respectively).............................. 9,270 11,574
Loans receivable, (net of allowance for loan losses of $6,642 and
$5,431, respectively)........................................................ 457,047 463,888
Premises and equipment, net....................................................... 5,000 5,211
Other real estate owned, net...................................................... 1,015 1,858
Accrued interest receivable....................................................... 3,777 3,751
Other assets...................................................................... 7,254 5,846
----------- ------------
Total Assets................................................................. $647,692 $652,329
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand-- non-interest-bearing..................................................... $59,194 $ 62,384
Demand-- interest-bearing......................................................... 54,653 39,789
Money market and savings.......................................................... 119,213 94,774
Time less than $100,000........................................................... 139,356 152,583
Time over $100,000................................................................ 83,886 97,687
----------- ------------
Total Deposits............................................................... 456,302 447,217
FHLB Advances..................................................................... 125,000 142,500
Accrued interest payable.......................................................... 3,596 4,348
Other liabilities................................................................. 5,518 5,421
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior obligations of the corporation ........................ 6,000 6,000
----------- ------------
Total Liabilities............................................................ $596,416 $605,486
----------- ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, par value $0.01 per share; 20,000,000 shares authorized;
shares issued 6,405,592 as of December 31, 2002 and
6,358,126 as of December 31, 2001............................................ 64 63
Additional paid in capital........................................................ 32,305 32,117
Retained earnings................................................................. 18,760 16,560
Treasury stock at cost (175,172 shares)........................................... (1,541) (1,541)
Accumulated other comprehensive (loss) income..................................... 1,688 (356)
----------- ------------
Total Shareholders' Equity................................................... 51,276 46,843
----------- ------------
Total Liabilities and Shareholders' Equity................................... $647,692 $652,329
=========== ============
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 44
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 2002, 2001 and 2000
(dollars in thousands, except per share data)
2002 2001 2000
----------- ----------- -----------
Interest income:
Interest and fees on loans................................................. $37,080 $38,586 $34,012
Interest on federal funds sold and other interest-earning assets........... 759 1,304 754
Interest and dividends on investment securities............................ 6,284 9,124 12,121
----------- ----------- -----------
44,123 49,014 46,887
----------- ----------- -----------
Interest expense:
Demand - interest bearing.................................................. 497 636 586
Money market and savings................................................... 1,907 2,948 2,823
Time less than $100,000.................................................... 5,963 10,245 10,086
Time over $100,000......................................................... 3,327 5,522 4,899
Other borrowings........................................................... 8,468 9,308 11,398
----------- ----------- -----------
20,162 28,659 29,792
----------- ----------- -----------
Net interest income............................................................. 23,961 20,355 17,095
Provision for loan losses....................................................... 5,303 3,964 666
----------- ----------- -----------
Net interest income after provision for loan losses............................. 18,658 16,391 16,429
----------- ----------- ----------
Non-interest income:
Loan advisory and servicing fees........................................... 1,218 1,358 468
Service fees on deposit accounts........................................... 1,227 1,188 967
Gain on investment securities sold......................................... - 13 -
Tax refund products........................................................ 761 283 181
Other income............................................................... 76 102 108
----------- ----------- -----------
3,282 2,944 1,724
----------- ----------- -----------
Non-interest expenses:
Salaries and employee benefits............................................. 8,483 8,396 6,867
Occupancy ................................................................. 1,429 1,367 1,267
Depreciation............................................................... 1,045 954 712
Legal...................................................................... 1,721 826 526
Other real estate ......................................................... 1,452 19 -
Advertising ............................................................... 413 561 701
Other operating expenses................................................... 4,043 4,057 3,059
----------- ----------- -----------
18,586 16,180 13,132
----------- ----------- -----------
Income before income taxes...................................................... 3,354 3,155 5,021
----------- ----------- -----------
Provision for income taxes...................................................... 1,154 1,041 1,657
----------- ----------- -----------
Net Income...................................................................... $ 2,200 $ 2,114 $ 3,364
=========== =========== ===========
Net income per share:
Basic .......................................................................... $0.35 $0.34 $0.54
----------- ----------- -----------
Diluted......................................................................... $0.34 $0.33 $0.54
=========== =========== ===========
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 45
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
2002 2001 2000
---------- ---------- -----------
Cash flows from operating activities:
Net income............................................................. $ 2,200 $ 2,114 $ 3,364
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.......................................... 5,303 3,964 666
Write down of other real estate owned.............................. 1,358 - -
Loss on sale of other real estate owned............................ - - 46
Depreciation ...................................................... 1,045 954 712
Gain on sale of securities sold.................................... - 13 -
Amortization of securities......................................... 317 348 87
Sales of loans held for sale....................................... - - 4,857
Increase (decrease) in accrued income and other assets............. (2,487) 1,199 (1,387)
Increase (decrease) in accrued expenses and other liabilities...... (655) (845) 1,757
---------- ---------- -----------
Net cash provided by operating activities.......................... 7,081 7,747 10,102
---------- ---------- -----------
Cash flows from investing activities:
Purchase of securities:
Available for sale................................................. (17,507) - -
Held to maturity................................................... (1,273) (4,638) (2,495)
Proceeds from maturities and calls of securities:
Available for sale................................................. 4,500 1,000 380
Held to maturity................................................... 2,765 10,446 2,796
Proceeds from sale of securities:
Available for sale................................................. - 7,842 -
Principal collected on MBS's and CMO's:
Available for sale................................................. 42,364 31,631 23,641
Held to maturity................................................... 812 334 15
Net decrease (increase) in loans....................................... 1,023 (51,397) (64,231)
Net proceeds from sale of real estate owned............................ - - 597
Decrease (increase) in other interest-earning restricted cash.......... 685 (4,913) -
Premises and equipment expenditures.................................... (834) (1,012) (852)
---------- ---------- -----------
Net cash provided by (used in) investing activities.................... 32,535 (10,707) (40,149)
---------- ---------- -----------
Cash flows from financing activities:
Net proceeds from exercise of stock options............................ 189 - 34
Net increase in demand, money market and savings....................... 36,113 46,371 46,681
Net (decrease) increase in time deposits............................... (27,028) (24,706) 73,077
Proceeds from issuance of Trust Preferred Securities................... - 6,000 -
Net decrease in other borrowings less than 90 days..................... - (16,442) (10,198)
Repayment of other borrowings greater than 90 days..................... (17,500) (17,500) (50,000)
---------- ---------- -----------
Net cash provided by (used in) financing activities.................... (8,226) (6,277) 59,594
---------- ---------- -----------
Increase (decrease) in cash and cash equivalents........................... $31,390 $ (9,237) $29,547
Cash and cash equivalents, beginning of year............................... 41,420 50,657 21,110
---------- ---------- -----------
Cash and cash equivalents, end of year..................................... $72,810 $41,420 $50,657
---------- ---------- -----------
Supplemental disclosures:
Interest paid.......................................................... 20,913 31,403 29,456
Income taxes paid...................................................... 4,025 2,100 495
Non-monetary transfers from loans to other real estate owned........... $ 515 $ 1,858 $ -
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 46
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
Accumulated
Additional Other Total
Comprehensive Common Paid in Retained Treasury Comprehensive Shareholders'
Income/(loss) Stock Capital Earnings Stock Income (loss) Equity
------------- ------- ---------- --------- -------- ------------ -----------
Balance January 1, 2000................ $63 $32,083 $11,082 $(1,541) $(6,647) $35,040
------------- ------- -------- --------- --------- ---------- ---------
Other comprehensive income, net of
reclassification adjustments and taxes. 4,592 - - - - 4,592 4,592
Net income for the year................ 3,364 - - 3,364 - 3,364
------------
Total comprehensive income............. $ 7,956
============
Options exercised...................... - 34 - - - 34
----------------------------------------------------------------------
Balance December 31, 2000.............. 63 32,117 14,446 (1,541) (2,055) 43,030
------- -------- --------- --------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
------------
Total other comprehensive income, net
of reclassification adjustments and 1,699 - - - - 1,699 1,699
taxes
Net income for the year................ 2,114 - - 2,114 - 2,114
------------
Total comprehensive income............. $ 3,813
============ ----------------------------------------------------------------------
Balance December 31, 2001.............. 63 32,117 16,560 (1,541) (356) 46,843
------- -------- --------- --------- ---------- ----------
- ---------------------------------------------------------------------------------------------------------------------------
------------
Total other comprehensive income, net
of reclassification adjustments and 2,044 - - - - 2,044 2,044
taxes
Net income for the year................ 2,200 - - 2,200 - - 2,200
------------
Total comprehensive income............. $ 4,244 - - - - - -
============
Options exercised...................... 1 188 - - - 189
----------------------------------------------------------------------
Balance December 31, 2002................. $64 $32,305 $18,760 $(1,541) $ 1,688 $51,276
======= ========= ======= ========= ============ ==========
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 47
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
Republic First Bancorp, Inc. is a two-bank holding company organized and
incorporated under the laws of the Commonwealth of Pennsylvania. Its
wholly-owned subsidiary, Republic First Bank (the "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.
During 1999, the Company opened First Bank of Delaware ("FBD") ,a Delaware
State chartered Bank, located at Brandywine Commons II, Concord Pike and Rocky
Run Parkway in Brandywine, New Castle County Delaware. FBD opened for business
on June 1, 1999 and offers many of the same services and financial products as
Republic First Bank, but additionally offers short-term consumer loans and other
loan products not offered by Republic First Bank.
The Company and the Banks encounter vigorous competition for market share
in the companies 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 Company and the Banks are subject to regulations of 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 my be affected.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements of the Company include the accounts
of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, Republic
First Bank and First Bank of Delaware, (together, the "Banks"). Such statements
have been presented in accordance with accounting principles generally accepted
in the United States of America or applicable to the banking industry. All
significant inter-company accounts and transactions have been eliminated in the
consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the 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.
FBD began to offer short-term consumer loans in 2001. At December 31, 2002,
and 2001, there were approximately $5.0 million and $6.9 million, respectively,
of short-term consumer loans outstanding, which were originated in Georgia,
Texas, California and North Carolina through a small number of marketers. These
loans generally have principal amounts of $1,000 or less and terms of
approximately two weeks. Legislation eliminating, or limiting interest rates
upon short-term consumer loans has from time to time been proposed, primarily as
a result of fee levels which approximate 17% per $100 borrowed, for two week
terms. If such proposals cease, a larger number of competitors may begin
offering the product, and increased competition could result in lower fees.
Further, FBD uses a small number of marketers under contracts which can be
terminated upon short notice, under various circumstances. The impact of
negative conditions influencing the above factors, if any, is not possible to
predict.
In 2001, FBD began offering two tax refund products with Liberty Tax
Service. Liberty Tax Service is a nationwide tax service provider which prepares
and electronically files federal and state income tax returns ("Tax Refund
Products"). Tax Refund Products consist of accelerated check refunds ("ACRs"),
and refund anticipation loans ("RALs"). The Company realized revenues of
$761,000 and $283,000 in the years ended December 2002 and 2001 respectively for
the program. Management has no assurances that revenues will continue to grow or
be maintained at current levels in future periods.
REPUBLIC FIRST BANCORP | 48
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America require 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.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
cash and due from banks, interest-bearing deposits with an original maturity of
ninety days or less and federal funds sold to be cash and cash equivalents.
Restrictions on Cash and Due From Banks:
The Banks are required to maintain certain average reserve balances as
established by the Federal Reserve Board. The amounts of those balances for the
reserve computation periods which include December 31, 2002, and 2001, were $6.6
million and $5.5 million, respectively. These requirements were satisfied
through the restriction of vault cash and a balance at the Federal Reserve Bank
of Philadelphia.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. These funds are not
considered cash equivalents because the Company is contractually obligated to
provide these funds and are not immediately able to withdraw the funds.
Investment Securities:
Debt and equity investment securities are classified in one of three
categories, as applicable, and accounted for as follows: debt securities which
the Company has the positive intent and ability to hold to maturity are
classified as "securities held to maturity" and are reported at amortized cost;
debt and equity securities that are bought and sold in the near term are
classified as "trading" and are reported at fair market value with unrealized
gains and losses included in earnings; and debt and equity securities not
classified as either held to maturity and/or trading securities are classified
as "investment securities available for sale" and are reported at fair market
value with net unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. Gains or losses on disposition are based on
the net proceeds and cost of securities sold, adjusted for amortization of
premiums and accretion of discounts, using the specific identification method.
The Company does not have any investment securities designated as trading as of
December 31, 2002 and 2001.
Loans and Allowance for Loan Losses:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned income and an allowance for loan losses.
Interest on loans is calculated based upon the principal amounts outstanding.
The Company defers and amortizes certain origination and commitment fees, and
certain direct loan origination costs over the contractual life of the related
loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of
discounts related to loans purchased and investment securities based upon the
effective interest method. If a loan prepays in full before the contractual
maturity date, any unamortized premiums, discounts or fees are recognized
immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to
maturity or payment of principal or interest 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
REPUBLIC FIRST BANCORP | 49
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 of interest and principal by the borrower, in accordance
with the contractual terms. Generally, in the case of non-accrual loans, cash
received is applied to reduce the principal outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loans are charged against the allowance when
management believes that the collectibility of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the allowance.
The allowance is an amount that represents management's best estimate of
known and inherent loan losses. Management's evaluations of the allowance for
loan losses consider such factors as an examination of the portfolio, past loss
experience, the results of the most recent regulatory examination, current
economic conditions and other relevant factors.
The Company accounts for its impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
The Company considers residential mortgage loans with balances less than
$250,000 and consumer loans, including home equity lines of credit, to be small
balance homogeneous loans. These loan categories are collectively evaluated for
impairment. Jumbo mortgage loans, those with balances greater than $250,000,
commercial business loans and commercial real estate loans are individually
measured for impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all collateral
dependent loans are measured for impairment based on the fair market value of
the collateral.
The Company accounts for the transfers and servicing financial assets in
accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS No. 140 revises the
standards for accounting for the securitizations and other transfers of
financial assets and collateral.
On July 6, 2001, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues. SAB No. 102 provides guidance on the development,
documentation and application of a systematic methodology for determining the
allowance for loans and leases in accordance with US GAAP and is effective upon
issuance. The adoption of SAB No. 102 did not have a material impact on the
Company's financial positions or results of operations.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of furniture and equipment is calculated over the
estimated useful life of the asset using the straight-line method. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
terms of their respective leases, using the straight-line method. Repairs and
maintenance are charged to current operations as incurred, and renewals and
betterments are capitalized.
The Company adopted SFAS No. 144, Accounting for the Impairment of or
Disposal of Long-Lived Assets on January 1, 2002. SFAS No. 144 retains the
existing requirements to recognize and measure the impairment of long-lived
assets to be held and used or to be disposed by sale. SFAS No. 144 changes the
requirements relating to reporting the effects of a disposal or discontinuation
of a business segment. The adoption of the statement did not have a material
impact on the financial condition or results of operations of the Company.
Other Real Estate Owned:
Other real estate owned consists of foreclosed assets and is stated at the
lower of cost or estimated fair market value less estimated costs to sell the
property. Costs to maintain other real estate owned, or deterioration in value
of the properties are recognized as period expenses. There is no valuation
allowance associated with the Company's other real estate portfolio for the
periods presented. At December 31, 2002, the Company had a hotel property
classified as other real estate owned with a value of $500,000 and a retail
commercial building with a value of $515,000.
REPUBLIC FIRST BANCORP | 50
Advertising Costs:
It is the Company's policy to expense advertising costs in the period in
which they are incurred.
Income Taxes:
The Company accounts for income taxes under the liability method of
accounting. Deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at the tax rates expected to be in effect
when the temporary differences are realized or settled. In addition, a deferred
tax asset is recorded to reflect the future benefit of net operating loss
carryforwards. The deferred tax assets may be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
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 ("CSE"). Common
stock equivalents 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. Common
stock equivalents, which are antidilutive are not included for purposes of this
calculation. At December 31, 2002, 2001, and 2000, there were 68,840 at $6.62 to
$9.09 per share of 114,840 at $5.00 to $9.09 per share and 419,981 at $5.00 to
$9.09 per share stock options to purchase common stock, which were not included
in the computation of earnings per share because the option price is greater
than the average market price, respectively.
(In thousands, except per share data) 2002 2001 2000
--------- --------- ---------
Income before cumulative effect of a change in accounting principle
(numerator for basic and diluted earnings per share).............. $2,200 $2,114 $3,364
========= ========= =========
Per Per Per
Shares Share Shares Share Shares Share
------------ ------------ ------------ ------------ ------------ ----------
Weighted average shares outstanding for the
period
(denominator for basic earnings per share).... 6,205,328 6,182,954 6,175,873
Earnings per share-- basic....................... $0.35 $0.34 $0.54
Effect of dilutive stock options................. 254,879 180,398 97,424
------------ ------------ ------------
Effect on basic earnings per share of CSE........ (0.01) (0.01) (0.00)
------------ ------------ ----------
Weighted average shares outstanding- diluted 6,460,207 6,363,352 6,273,297
============ ============ ============
Earnings per share-- diluted..................... $0.34 $0.33 $0.54
============ ============ ==========
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 December 31, 2002, the Company had a stock-based employee compensation
plan, which is more fully described in note 16. 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
REPUBLIC FIRST BANCORP | 51
applied the fair value recognition provisions of SFAS No. 123, to stock-based
employee compensation ( in thousands, except per share amounts).
Stock Based Compensation
-----------------------------------------
(Dollars in thousands)
2002 2001 2000
---------- ---------- ----------
Net income as reported.............................. $2,200 $2,114 $3,364
Less Stock based compensation costs determined under fair value
based method for all awards.......................... 418 294 296
---------- ---------- ----------
Net income, pro-forma............................... $1,782 $1,820 $3,068
========== ========== ==========
Earnings per common share- basis: As reported..... $0.35 $0.34 $0.54
---------- ---------- ----------
Pro-forma $0.28 $0.29 $0.50
---------- ---------- ----------
Earnings per common share- diluted: As reported $0.34 $0.33 $0.54
---------- ---------- ----------
Pro-forma $0.28 $0.29 $0.49
========== ========== ==========
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 2002, 2001 and 2000, respectively;
dividend yields of 0% for all three periods, expected volatility of 31% for 2002
and 35% for 2001 and 2000, risk-free interest rates of 4.0%, 4.7% and 6.3%,
respectively and an expected life of 5.0 years for 2002 and 6.3 for the years
2001 and 2000.
Reclassifications:
Certain items in the 2001 and 2000 financial statements and accompanying
notes have been reclassified to conform to the 2002 presentation format. There
was no effect on net income for the periods presented herein as a result of
reclassifications.
REPUBLIC FIRST BANCORP | 52
Comprehensive Income
The tax effects allocated to each component of "Comprehensive Income" are
as follows:
For the year ended December 31, 2002
(Dollars in thousands)
Before Tax Net of
Tax Amount Expense Tax Amount
------------- ----------- --------------
Unrealized gains on securities:
Unrealized holding gains arising during
the period............................................ $3,097 $(1,053) $2,044
Less: Reclassification adjustment for gains
included in net income................................ - - -
----------- ----------- ----------
Other comprehensive income..................................... $3,097 $(1,053) $2,044
=========== =========== ==========
For the year ended December 31, 2001
(Dollars in thousands)
Before Tax Net of
Tax Amount Expense Tax Amount
------------- ----------- --------------
Unrealized gains on securities:
Unrealized holding gains arising during
the period............................................ $ 2,587 $ (879) $ 1,708
Less: Reclassification adjustment for gains
included in net income................................ (13) 4 (9)
----------- ----------- ----------
Other comprehensive income..................................... $ 2,574 $ (875) $ 1,699
=========== =========== ==========
For the year ended December 31, 2000
(Dollars in thousands)
Before Tax Net of
Tax Amount Benefit Tax Amount
------------- ----------- --------------
Unrealized gains on securities:
Unrealized holding gains arising during
the period............................................ $ 6,957 $ (2,365) $ 4,592
Less: Reclassification adjustment for gains
included in net income................................ - - -
----------- ----------- ----------
Other comprehensive income..................................... $ 6,957 $ (2,365) $ 4,592
----------- ----------- ----------
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued SFAS No. 147,
Acquisitions of Certain Financial Institutions: An amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9, which removes acquisitions of
financial institutions from the scope of SFAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions. The provisions of the SFAS No.
147 related to unidentifiable intangible assets and the acquisition of a
less-than-whole financial institution are effective for acquisitions for which
the date of acquisition is on or after October 1, 2002. The adoption of SFAS No.
147 did not have a material impact on the Company's financial position or
results of operations.
REPUBLIC FIRST BANCORP | 53
3. Investment Securities:
Investment securities available for sale as of December 31, 2002, are as
follows:
Gross Gross Estimated
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
----------------- ------------ ------------- -----------
U.S. Government Agencies.................................. $5,759 $20 $- $5,779
Mortgage Backed Securities and CMOs....................... 71,623 2,438 - 74,061
Other Debt Securities.................................... 7,352 131 (32) 7,451
------------ ------------ ------------- -----------
Total................................................ $84,734 $2,589 $ (32) $87,291
=========== ============ ============= ===========
Investment securities held to maturity as of December 31, 2002, are as
follows:
Gross Gross Estimated
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
----------------- ------------ ------------- -----------
U.S. Government Agencies.................................. $122 $ 1 $ - $123
Mortgage Backed Securities and CMOs....................... 760 24 - 784
Other Securities.......................................... 8,388 2 - 8,390
------------ ------------ ------------- -----------
Total................................................ $9,270 $27 - $9,297
=========== ============ ============= ===========
Investment securities available for sale as of December 31, 2001, are as
follows:
Gross Gross Estimated
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
----------------- ------------ ------------- -----------
U.S. Government Agencies.................................. $ 897 $ 14 $ - $ 911
Mortgage Backed Securities and CMOs....................... 113,511 251 (805) 112,957
------------ ------------ ------------- -----------
Total................................................ $114,408 $265 $(805) $113,868
=========== ============ ============= ===========
Investment securities held to maturity as of December 31, 2001, are as
follows:
Gross Gross Estimated
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
----------------- ------------ ------------- -----------
U.S. Government Agencies.................................. $ 1,399 $ 17 $- 1,416
Mortgage Backed Securities and CMOs....................... 997 1 - $ 998
Other Securities.......................................... 9,178 9 - 9,187
------------ ------------ ------------- -----------
Total................................................ $11,574 $27 $- $11,601
============ ============ ============= ===========
In accordance with regulatory requirements, the Company held an investment
in stock of the Federal Reserve Bank with a carrying value of $860,000 and
$691,000 as of December 31, 2002 and 2001, respectively, which is included in
other securities held to maturity. Also included in that category are
investments in the stock of the Federal Home Loan Bank of Pittsburgh of $6.8
million and $7.6 million at December 31, 2002 and 2001, respectively. Both the
Federal Reserve Bank stock and the Federal Home Loan Bank Stock are recorded at
cost, which approximates liquidation value.
REPUBLIC FIRST BANCORP | 54
The maturity distribution of the amortized cost and estimated market value
of investment securities by contractual maturity at December 31, 2002, is as
follows:
Available for Sale Held to Maturity
---------------------------- --------------------------
Amortized Estimated Amortized Estimated
(Dollars in thousands) Cost Fair Value Cost Fair Value
------------ ------------ ------------- -----------
Due in 1 year or less..................................... $5,271 $5,287 $- $-
After 1 year to 5 years................................... 2,192 2,219 334 335
After 5 years to 10 years................................. 558 566 155 156
After 10 years or no maturity............................. 76,713 79,219 8,781 8,806
------------ ------------ ------------- -----------
Total................................................ $84,734 $87,291 $9,270 $9,297
============ ============ ============= ===========
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without
prepayment penalties.
Realized gains and losses on the sale of investment securities are
recognized using the specific identification method. The Company realized a gain
on the sale of a security of approximately of $13,000 in 2001. The Company did
not realize any gains or losses on the sale of securities during 2002 or 2000.
At December 31, 2002 and 2001, investment securities in the amount of
approximately $21.6 million and $7.1 million respectively, were pledged as
collateral for public deposits and certain other deposits as required by law.
4. Loans Receivable:
Loans receivable consist of the following at December 31,
(Dollars in thousands) 2002 2001
------------ -----------
Commercial and Industrial $62,676 $ 60,617
Real Estate - commercial 329,570 321,579
Real Estate - residential (1) 51,265 67,821
Consumer and other 20,178 19,302
------------ -----------
Loans receivable 463,689 469,319
Less allowance for loan losses (6,642) (5,431)
------------ -----------
Total loans receivable, net (2) $457,047 $463,888
============ ===========
- ----------
(1) Residential real estate secured is comprised of jumbo residential first
mortgage loans for both years presented.
(2) Net of deferred loan fees of $462,000 and $744,000 at December 31, 2002 and
2001, respectively.
The recorded investment in loans which are impaired in accordance with SFAS
114, totaled $3.0 million, $3.8 million and $1.4 million at December 31, 2002,
2001, and 2000 respectively. The amounts of related valuation allowances were
$665,000, $288,000, and $139,000 respectively at those dates. For the years
ended December 31, 2002, 2001, and 2000, the average recorded investment in
impaired loans was approximately $3.4 million, $2.6 million, and $1.6 million,
respectively. During 2000, the Bank recognized $171,000 of interest income on
impaired loans. The Bank did not realize any interest on impaired loans during
2002 or 2000. There were no commitments to extend credit to any borrowers with
impaired loans as of the end of the periods presented herein.
As of December 31, 2002, 2001 and 2000, there were loans of approximately
$3.0 million, $3.8 million, and $1.4 million respectively, which were classified
as non-accrual. If these loans were performing under their original contractual
rate, interest income on such loans would have increased approximately $241,000,
$203,000 and $125,000, for 2002, 2001, and 2000 respectively. Loans past due 90
days and accruing totaled $4.1 million and $518,000 respectively, at December
31, 2002 and December 31, 2001.
The majority of loans are with borrowers in the Company's marketplace,
Philadelphia and surrounding suburbs, including southern New Jersey. In addition
the Company has loans to customers whose assets and businesses are concentrated
in real estate. Repayment of the Company's loans is in part dependent upon
general economic conditions affecting the Company's market place and specific
industries. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The
REPUBLIC FIRST BANCORP | 55
amount of collateral obtained is based on management's credit evaluation of the
customer. Collateral varies but primarily includes residential and
income-producing properties. At December 31, 2002, the Company had no foreign
loans and no loan concentrations exceeding 10% of total loans except for credits
extended to real estate operators and lessors in the aggregate amount of $142.4
million, which represented 30.7% of gross loans receivable at December 31, 2002.
Various types of real estate are included in this category, including
industrial, retail shopping centers, office space, residential multi-family and
others. Loan concentrations are considered to exist when there are 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.
Included in loans are loans due from directors and other related parties of
$4.4 million and $5.0 million at December 31, 2002, and 2001, respectively. All
loans made to directors have substantially the same terms and interest rates as
other Bank borrowers. The Board of Directors approves loans to individual
directors to confirm that collateral requirements, terms and rates are
comparable to other borrowers and are in compliance with underwriting policies.
The following presents the activity in amounts due from directors and other
related parties for the year ended December 31, 2002.
(Dollars in thousands) 2002
---------
Balance at beginning of year.................................. $5,003
Additions..................................................... 628
Repayments.................................................... 1,236
---------
Balance at end of year........................................ $4,395
=========
Harry D. Madonna is of counsel to Spector Gadon & Rosen effective January
1, 2002. In 2002, the Company paid $1,338,000 in legal fees to that firm, which
were primarily for loan workout and collection matters.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
(Dollars in thousands) 2002 2001 2000
--------- --------- ---------
Balance at beginning of year...................................... $5,431 $4,072 $3,208
Charge-offs....................................................... (4,215) (2,879) (156)
Recoveries........................................................ 123 274 354
Provision for loan losses......................................... 5,303 3,964 666
--------- --------- ---------
Balance at end of year............................................ $6,642 $5,431 $4,072
========= ========= =========
6. Premises and Equipment:
A summary of premises and equipment is as follows:
(Dollars in thousands) Useful lives 2002 2001
------------ ---------- ----------
Furniture and equipment...........................................3 to 10 years $6,043 $5,345
Bank building.....................................................40 years 1,895 1,895
Leasehold improvements............................................20 years 1,889 1,753
---------- ----------
8,993
9,827
Less accumulated depreciation..................................... (4,827) (3,782)
---------- ----------
Net premises and equipment........................................ $5,000 $5,211
========== ==========
Depreciation expense on premises, equipment and leasehold improvements
amounted to $1.0 million, $954,000 and $712,000 in 2002, 2001 and 2000,
respectively.
REPUBLIC FIRST BANCORP | 56
7. Long-Term Borrowings:
The Company has lines of credit totaling $10.0 million available for the
purchase of federal funds from correspondent bank relationships. As of December
31, 2002, the Company had not drawn on this line. In addition, the Company has a
collateralized line of credit with the Federal Home Loan Bank of Pittsburgh with
a maximum borrowing capacity of $224.0 million as of December 31, 2002. This
maximum borrowing capacity is subject to change on a monthly basis. As of
December 31, 2002, and 2001, there were $125.0 million and $142.5 million,
respectively outstanding on these lines of credit. The contractual maturity of
the borrowings through the Federal Home Loan Bank range from two to three years.
The Federal Home Loan Bank has the option to convert the borrowings from a fixed
rate to a variable rate.
The contractual maturity of the Company's borrowings at December 31, 2002,
is as follows:
Weighted
(Dollars in thousands) Amount Average Rate
------------- ----------------
Maturing in:
2004......................................................... $100,000 6.06%
2005......................................................... 25,000 6.71%
------------- ------------
Totals............................................................ $125,000 6.19%
============= ============
Corporation-obligated-mandatorily redeemable capital securities of subsidiary
trust holding solely junior obligations of the corporation:
On November 28, 2001, Republic First Bancorp, Inc., through a pooled
offering with Sandler O' Neill & Partners, issued $6.0 million of
corporation-obligated mandatorily redeemable capital securities of the
subsidiary trust holding solely junior subordinated debentures of the
corporation more commonly known as Trust Preferred Securities. The purpose of
the issuance was to increase capital as a result of the Company's continued loan
and core deposit growth. The trust preferred securities qualify as Tier 1
capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
The Company may call the securities on any interest payment date after five
years, without a prepayment penalty, notwithstanding their final 30 year
maturity. The interest rate is variable and adjustable semi -annually at 3.75%
over the 6 month London Interbank Offered Rate ("Libor). The interest rate cap
of 11% is effective through the initial 5-year call date.
8. Deposits
The following is a breakdown, by contractual maturities of the Company's
time certificate of deposits for the years 2003 through 2007 and beyond, which
includes brokered certificates of deposit of approximately $23.1 million with
original terms ranging from three to six months.
2007 and
(Dollars in thousands) 2003 2004 2005 2006 beyond Totals
----------- ---------- ----------- ----------- ----------- -----------
Time Certificates of Deposit............ $159,667 $51,365 $9,645 $1,178 $1,387 $223,242
=========== ========== =========== =========== =========== ===========
REPUBLIC FIRST BANCORP | 57
9. Income Taxes:
The following represents the components of income tax expense (benefit) for
the years ended December 31, 2002, 2001 and 2000, respectively.
(Dollars in thousands) 2002 2001 2000
--------- --------- ---------
Current provision
Federal:
Current.................................................................... $1,675 $1,784 $1,978
Deferred provision - federal............................................... (521) (743) (321)
--------- --------- ---------
Total provision for income taxes................................................ $1,154 $1,041 $1,657
========= ========= =========
The following table accounts for the difference between the actual tax
provision and the amount obtained by applying the statutory federal income tax
rate of 34.0% to income before income taxes for the years ended December 31,
2002, 2001 and 2000.
(Dollars in thousands) 2002 2001 2000
--------- --------- ----------
Tax provision computed at statutory rate.......................... $1,143 $1,073 $1,707
Amortization of negative goodwill................................. - (103) (103)
State tax, net of federal benefit................................. - 29 -
Other............................................................. 11 42 53
--------- --------- ----------
Total provision for income taxes............................. $1,154 $1,041 $1,657
========= ========= ==========
The approximate tax effect of each type of temporary difference and
carry-forward that gives rise to net deferred tax assets included in the accrued
income and other assets in the accompanying consolidated balance sheets at
December 31, 2002 and 2001 are as follows:
2002 2001
--------- ---------
Allowance for loan losses......................................... $2,259 $1,715
Deferred compensation............................................. 580 559
Unrealized loss (gain)on securities available for sale ........... (869) 184
Depreciation...................................................... (68) (68)
Deferred loan costs............................................... (384) (338)
Prepaid expenses.................................................. (22) (24)
--------- ---------
Net deferred tax asset............................................ $1,496 $2,028
========= =========
The realizability of the deferred tax asset is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes
that it is more likely than not that the Company will realize the benefits of
these deferred tax assets.
The reverse acquisition of ExecuFirst by Republic on June 7, 1996 generated
negative goodwill of $1,045,000, of which $685,000 was applied against the
deferred tax assets. During 2001, and 2000, the negative goodwill allocated to
the deferred tax assets was amortized by $103,000 in each year, thereby
resulting in a corresponding reduction to the provision for income taxes. The
amortization of negative goodwill was recorded based upon the estimated reversal
period of the underlying components of the deferred tax assets. The negative
goodwill was fully amortized at December 31, 2001.
REPUBLIC FIRST BANCORP | 58
10. Financial Instruments with Off-Balance Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same underwriting
standards and policies in making credit commitments as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit
risk are commitments to extend credit of approximately $52.3 million and $57.7
million and standby letters of credit of approximately $7.2 million and $5.3
million at December 31, 2002, and 2001, respectively. Of the $52.3 million of
commitments to extend credit at December 31, 2002, substantially all were
variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee
the performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
11. Commitments:
Lease Arrangements
As of December 31, 2002, the Company had entered into non-cancelable lease
expiring through August 31, 2008. The leases are accounted for as operating
leases. The minimum annual rental payments required under these leases are as
follows:
(Dollars in thousands)
Year Ended Amount
------------ ---------
2003.............................................................. $953
2004.............................................................. 941
2005.............................................................. 862
2006.............................................................. 813
2007.............................................................. 472
2008 and beyond................................................... 148
---------
Total............................................................. $4,189
=========
The Company incurred rent expense of $936,000, $899,000, and $853,000 for
the years ended December 31, 2002, 2001, and 2000, respectively.
REPUBLIC FIRST BANCORP | 59
Prior to 2001, the Company participated in a joint venture with the MBM/ATM
Group Ltd. Although the Company's participation in the venture was terminated,
the Company remains contingently liable on the following repayments:
(Dollars in thousands)
Year Amount
Ended
------------ ---------
2003 $ 348
2004 107
2005 15
---------
Total $470
=========
The Company incurred rent expense on these leases of $0, $0 and $269,000
during 2002, 2001 and 2000, respectively.
Employment Agreements
The Company has entered into employment agreements with the President of
the Company and the President of the Bank, which provide for the payment of base
salary and certain benefits through the year 2004. The aggregate commitment for
future salaries and benefits under these employment agreements at December 31,
2002, is approximately $1.3 million.
Other
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and 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.
12. Regulatory Capital:
Dividend payments by the Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act,
and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking code, no
cash dividends may be paid except from "accumulated net earnings" (generally,
undivided profits). Under FRB's regulations, the Bank cannot pay dividends that
exceed its net income from the current year and the preceding two years. Under
the FDIA, an insured Bank may pay no dividends if the Bank is in arrears in the
payment of any insurance assessment due to the FDIC. Under current banking law,
the Bank would be limited to $4.3 million of dividends in 2002, plus an
additional amount equal to the Banks' net profit for 2003, up to the date of any
such dividend declaration. At December 31, 2002, there were no cash dividends
declared or paid. As a condition of participating in the issuance of its $6.0
million pooled trust preferred stock, no dividends would be paid in the event of
default on those trust preferred securities.
State and Federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Federal banking agencies
impose three minimum capital requirements on the Company's risk-based capital
ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The
risk-based capital ratios measure the adequacy of a bank's capital against the
riskiness of its assets and off-balance sheet activities. Failure to maintain
adequate capital is a basis for "prompt corrective action" or other regulatory
enforcement action. In assessing a bank's capital adequacy, regulators also
consider other factors such as interest rate risk exposure; liquidity, funding
and market risks; quality and level or earnings; concentrations of credit;
quality of loans and investments; risks of any nontraditional activities;
effectiveness of bank policies; and management's overall ability to monitor and
control risks.
Management believes that the Banks meet, as of December 31, 2002, all
capital adequacy requirements to which it is subject. As of December 31, 2002,
the most recent notification from the Federal Reserve Bank categorized the Banks
as well capitalized under the regulatory framework for prompt corrective action
provisions of the Federal Deposit Insurance Act. There are no calculations or
events since that notification that management believes have changed the Banks'
category.
The Federal Reserve Board's risk-based capital leverage ratio guidelines
require all state-chartered member banks to maintain total capital equal to at
least 8% of risk-weighted total assets, Tier 1 capital (adjusted for certain
excludable regulatory items) equal to 4% of risk-weighted total assets, and a
Tier 1 leverage ratio of 4%.
REPUBLIC FIRST BANCORP | 60
The following table presents the Company's capital regulatory ratios at
December 31, 2002, and 2001:
To be well
For Capital capitalized under
Actual Adequacy Purposes FRB capital
guidelines
----------------------- -------------------- --------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- --------- ---------
At December 31, 2002
Total risk based capital
Republic First Bank $52,400 13.39% $31,308 8.00% $39,135 10.00%
First Bank of DE 6,144 22.59% 2,176 8.00% 2,720 10.00%
Republic First Bancorp, Inc. 60,581 14.49% 33,447 8.00% - -
Tier one risk based capital
Republic First Bank 47,493 12.14% $15,654 4.00% 23,481 6.00%
First Bank of DE 5,801 21.33% 1,088 4.00% 1,632 6.00%
Republic First Bancorp, Inc. 55,337 13.24% 16,724 4.00% - -
Tier one leverage capital
Republic First Bank 47,493 7.82% $30,377 5.00% 30,377 5.00%
First Bank of DE 5,801 13.94% 2,081 5.00% 2,081 5.00%
Republic First Bancorp, Inc. 55,337 8.56% 32,231 5.00% - -
At December 31, 2001
Total risk based capital
Republic First Bank $51,000 12.96% $31,493 8.00% $39,366 10.00%
First Bank of DE 5,288 23.13% 1,829 8.00% 2,286 10.00%
Republic First Bancorp, Inc. 58,151 13.98% 33,275 8.00% - -
Tier one risk based capital
Republic First Bank 46,078 11.70% 15,747 4.00% 23,620 6.00%
First Bank of DE 5,001 21.87% 915 4.00% 1,372 6.00%
Republic First Bancorp, Inc. 52,949 12.73% 16,638 4.00% - -
Tier one leverage capital
Republic First Bank 46,078 7.46% 30,884 5.00% 30,884 5.00%
First Bank of DE 5,001 12.74% 1,963 5.00% 1,963 5.00%
Republic First Bancorp, Inc. 52,949 8.07% 32,793 5.00% - -
13. Benefit Plans:
Supplemental Retirement Plan
----------------------------
The Company maintains a Supplemental Retirement Plan for its former Chief
Executive Officer which provides for payments of approximately $100,000 a year.
At December 31, 2002, approximately $600,000 remained to be paid. A life
insurance contract has been purchased to insure against all of the payments,
which may be required prior to the originally anticipated retirement date of the
officer.
Defined Contribution Plan
-------------------------
The Bank has a defined contribution plan pursuant to the provision of
401(k) of the Internal Revenue Code. The Plan covers all full-time employees who
meet age and service requirements. The plan provides for elective employee
contributions with a matching contribution from the Banks' limited to 3%. The
total expense relating to the plan was $169,000, $145,000 and $149,000 in 2002,
2001, and 2000, respectively.
REPUBLIC FIRST BANCORP | 61
Directors' and Officers' Plan
-----------------------------
The Bank has an agreement with an insurance company to provide for an
annuity payment upon the retirement or death of certain of the Banks' Directors
and officers, ranging from $15,000 to $25,000 per year for ten years. The plan
was modified for most participants in 2001, to establish a minimum age of 65 to
qualify for the payments. All participants are fully vested. The accrued
benefits under the plan at December 31, 2002, 2001, and 2000, totaled $834,000,
$786,000, and $515,000, respectively. The expense for the years ended December
31, 2002, 2001, and 2000, was $172,000, $271,000, and $84,000, respectively. The
Bank has elected to fund the plan through the purchase of certain life insurance
contracts. The cash surrender value of these contracts (owned by the Bank)
aggregated $1.7 million, $1.6 million, and $1.6 million at December 31, 2002,
2001, and 2000, respectively, which is included in other assets.
14. Fair Value of Financial Instruments:
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available, fair
values are based on assumptions including future cash flows and discount rates.
Accordingly, the fair value estimates cannot be substantiated, may not be
realized, and do not represent the underlying value of the Company.
The Company uses the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash, Cash Equivalents and Other Interest-Earning Restricted Cash:
The carrying value is a reasonable estimate of fair value.
Investment Securities Held to Maturity and Available for Sale:
For investment securities with a quoted market price, fair value is equal
to quoted market prices. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Loans:
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other categories of
loans such as commercial and industrial loans, real estate mortgage and consumer
loans, fair value is estimated based on the present value of the estimated
future cash flows using the current rates at which similar loans would be made
to borrowers with similar collateral and credit ratings and for similar
remaining maturities.
Deposit Liabilities:
For checking, savings and money market accounts, fair value is the amount
payable on demand at the reporting date. For time deposits, fair value is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Borrowings:
Fair values of borrowings are based on the present value of estimated cash
flows, using current rates, at which similar borrowings could be obtained by the
Bank with similar maturities.
Commitments to Extend Credit and Standby Letters of Credit:
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparts. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
arrangements.
REPUBLIC FIRST BANCORP | 62
At December 31, 2002 and December 31, 2001, the carrying amount and the
estimated fair value of the Company's financial instruments are as follows:
December 31, 2002 December 31, 2001
------------------------ -------------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
----------- ---------- ----------- -----------
Balance Sheet Data:
Financial Assets:
Cash and cash equivalents............................ $72,810 $72,810 $ 41,420 $ 41,420
Other interest-earning restricted cash............... 4,228 4,228 4,913 4,913
Investment securities available for sale............. 87,291 87,291 113,868 113,868
Investment securities held to maturity............... 9,270 9,297 11,574 11,601
Loans receivable, net................................ 457,047 464,126 463,888 473,973
Accrued interest receivable.......................... 3,777 3,777 3,751 3,751
Financial Liabilities:
Deposits:
Demand, savings and money market.................. $233,060 $233,060 $196,947 $196,947
Time.............................................. 223,242 225,646 250,270 252,071
Corporation-obligated mandatorily
Redeemable capital securities of
subsidiary trust company solely junior
Obligations of the corporation....................... 6,000 6,000 6,000 6,005
FHLB advances........................................ 125,000 135,183 142,500 149,051
Accrued interest payable............................. 3,596 3,596 4,348 4,348
December 31, 2002 December 31, 2001
------------------------ -------------------------
Notional Fair Notional Fair
(Dollars in Thousands) Amount Value Amount Value
----------- ---------- ----------- -----------
Off Balance Sheet Data:
Commitments to extend credit $52,251 $523 $ 57,720 $577
Letters of credit 7,217 72 5,338 53
REPUBLIC FIRST BANCORP | 63
15. Parent Company Financial Information
The following financial statements for Republic First Bancorp, Inc. should
be read in conjunction with the consolidated financial statements and the other
notes related to the consolidated financial statements.
BALANCE SHEETS
December 31, 2002 and 2001
(dollars in thousands)
2002 2001
----------- ----------
ASSETS:
Cash................................................................................ $1,081 $ 876
Investment in subsidiaries.......................................................... 55,457 51,198
Other assets........................................................................ 799 804
----------- ----------
Total Assets..................................................................... $57,337 $52,878
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accrued expenses................................................................. $61 $ 35
Corporation-obligated mandatory redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation..................................... 6,000 6,000
----------- ----------
Total Liabilities........................................................... 6,061 6,035
----------- ----------
Shareholders' Equity:
Common stock........................................................................ 64 63
Additional paid in capital.......................................................... 32,305 32,117
Retained earnings................................................................... 18,760 16,560
Treasury stock at cost (175,172 shares)............................................. (1,541) (1,541)
Accumulated other comprehensive income/(loss)....................................... 1,688 (356)
----------- ----------
Total Shareholders' Equity.................................................. 51,276 46,843
----------- ----------
Total Liabilities and Shareholders' Equity.................................. $57,337 $52,878
=========== ==========
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
2002 2001 2000
---------- ---------- ----------
Interest income.............................................................. $3 $ 21 $ 68
Dividend income from subsidiaries............................................ 392 - -
---------- ---------- ----------
Total income 395 21 68
Trust preferred interest expense............................................. 392 33 -
Expenses .................................................................... 220 5 11
---------- ---------- ----------
Total expenses .............................................................. 612 38 11
---------- ---------- ----------
Net income (loss) before taxes............................................... (217) (17) 57
---------- ---------- ----------
Federal income tax benefit................................................... (201) - -
---------- ---------- ----------
Net income (loss) before undistributed income of subsidiary.................. (16) (17) 57
---------- ---------- ----------
Equity in undistributed income of subsidiary................................. 2,216 2,131 3,307
---------- ---------- ----------
Net income................................................................... $2,200 $ 2,114 $ 3,364
========== ========== ==========
Shareholders' equity, beginning of year...................................... $46,843 $43,030 $35,040
Exercise of stock options.................................................... 189 - 34
Net income................................................................... 2,200 2,114 3,364
Change in unrealized gain on securities available for sale................... 2,044 1,699 4,592
---------- ---------- ----------
Shareholders' equity, end of year............................................ $51,276 $46,843 $43,030
========== ========== ==========
REPUBLIC FIRST BANCORP | 64
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(dollars in thousands)
2002 2001 2000
---------- ---------- ----------
Cash flows from operating activities:
Net income............................................................ $2,200 $2,114 $ 3,364
Adjustments to reconcile net income to net cash
Provided by (used in) operating activities:
Increase in other assets..................................... 6 (196) (297)
Increase in other liabilities................................ 26 35 -
Equity in undistributed income of subsidiaries............... (2,216) (2,131) (3,307)
---------- ---------- ----------
Net cash provided by (used in) operating activities...... 16 (178) (240)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of subsidiary common stock................................... - (7,048) (1,380)
---------- ---------- ----------
Net cash used in investing activities.................... - (7,048) (1,380)
---------- ---------- ----------
Cash from Financing Activities:
Exercise of stock options............................................. 189 - 34
Proceeds from issuance of trust preferred securities.................. - 6,000 -
---------- ---------- ----------
Net cash provided by financing activities................ 189 6,000 34
---------- ---------- ----------
Increase/(decrease) in cash................................................ 205 (1,226) (1,586)
Cash, beginning of period.................................................. 876 2,102 3,688
---------- ---------- ----------
Cash, end of period........................................................ $1,081 $ 876 $ 2,102
========== ========== ==========
16. Stock Based Compensation
The Company maintains a Stock Option Plan (the "Plan") under which the
Company grants options to its employees and directors. Under the terms of the
plan, 1.4 million shares of common stock are reserved for such options. The Plan
provides that the exercise price of each option granted equals the market price
of the Company's stock on the date of grant. Any option granted vests within one
to five years and has a maximum term of ten years. All options are granted upon
approval of the Stock Option Committee of the Board of Directors, consisting of
three disinterested members (as defined under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended). Stock Options are issued to promote the
interests of the Company by providing incentives to (i) designated officers and
other employees of the Company or a Subsidiary Corporation (as defined herein),
(ii) non-employee members of the Company's Board of Directors and (iii)
independent contractors and consultants who may perform services for the
Company. The Company believes that the Plan causes participants to contribute
materially to the growth of the Company, thereby benefiting the Company's
shareholders.
For the Years Ended December 31,
-------------------------------------------------------------------------------------
(Dollars in thousands)
2002 2001 2000
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------ ----------- ------------ ----------
Outstanding, beginning of year 776,612 $4.05 769,712 $4.07 594,660 $4.93
Granted 186,167 5.85 8,000 5.13 297,250 3.94
Exercised (46,965) 2.99 - - (14,288) 2.33
Forfeited (17,500) 7.37 (1,100) 9.09 (107,910) 8.81
------------ ----------- ------------ ----------- ------------ ----------
Outstanding, end of year 898,314 4.42 776,612 4.05 769,712 $4.07
------------ ----------- ------------ ----------- ------------ ----------
Options exercisable at year-end 864,772 4.38 734,862 3.93 514,796 3.93
----------- ----------- ----------
Weighted average fair value of
options granted during the year $2.03 $2.25 $1.81
----------- ----------- ----------
REPUBLIC FIRST BANCORP | 65
The following table summarizes information about options outstanding at
December 31, 2002.
-------------------------------------------------------------------------------
Options outstanding Options exercisable
--------------------------------------------------- -------------------------
Number Weighted Weighted
outstanding Average Weighted Average
Range of exercise Prices at remaining Average Exercise
December contractual exercise Shares Price
31, 2002 life (years) price
------------ --------------------------- ----------- -----------
$1.95 to $2.65 139,765 0.4 $2.38 139,765 $2.38
3.56 to 4.25 400,421 5.0 3.87 393,421 3.87
4.85 to 6.62 329,288 7.5 5.65 302,746 5.63
7.00 to 9.09 28,840 6.5 7.82 28,840 7.82
------------ ----------- -----------
898,314 864,772 $4.38
------------ ----------- -----------
REPUBLIC FIRST BANCORP | 66
17. Segment Reporting
The Company's reportable segments represent strategic businesses that offer
different products and services. The segments are managed separately because
each segment has unique operating characteristics, management requirements and
marketing strategies.
Republic First Bancorp has four reportable segments: two community banking
segments, tax refund products and short-term consumer loans. The community
banking segments are primarily comprised of the results of operations and
financial condition of the Banks. Tax refund products are comprised of
accelerated check refunds ("ACRs") and refund anticipation loan ("RALs") offered
on a national basis to customers of Liberty Tax Services, a national tax
preparation firm. Short-term consumer loans are loans made to customers offered
through First Bank of Delaware, with principal amounts of $1,000 or less and
terms of approximately two weeks. These loans typically are made in states
outside of the Company's normal market area through a small number of marketers
and involve rates and fees significantly different than other loan products
offered by the Banks. The Company evaluates the performance of the community
banking segments based upon income before the provision for income taxes, return
on equity and return on average assets. Tax refund products and short-term
consumer loans are evaluated based upon income before the provision for income
taxes. Tax refund products and short-term consumer loans are provided to satisfy
consumer demands while diversifying the Company's earnings stream.
Segment information for the years ended December 31, 2002, 2001 and 2000 is
as follows:
December 31, 2002
(Dollars in thousands)
Republic Short-term
First First Bank of Tax Refund Consumer
Bank Delaware Products Loans Total
------------ --------------- -------------------------- -----------
Net interest income (loss)....................... $ 17,972 $1,468 $(21) $4,542 $ 23,961
Provision for loan losses........................ 3,490 260 - 1,553 5,303
Non-interest income.............................. 2,009 512 761 - 3,282
Non-interest expenses............................ 15,528 1,536 545 977 18,586
------------ ------------ ------------ ----------- -----------
Net income....................................... $645 $120 $130 $1,305 $2,200
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $598,853 $42,260 $- $6,579 $647,692
Total loans, net................................. 424,010 28,169 - 4,868 457,047
Total deposits................................... 421,575 34,727 - - 456,302
December 31, 2001
(Dollars in thousands)
Republic Short-term
First First Bank of Tax Refund Consumer
Bank Delaware Products Loans Total
------------ --------------- -------------------------- -----------
Net interest income.............................. $ 16,642 $ 949 $ - $2,764 $ 20,355
Provision for loan losses........................ 2,800 132 - 1,032 3,964
Non-interest income.............................. 2,137 524 283 - 2,944
Non-interest expenses............................ 13,182 1,707 234 1,057 16,180
------------ ------------ ------------ ----------- -----------
Net income (loss)................................ $1,874 $ (245) $ 33 $ 452 $ 2,114
============ ============ ============ =========== ===========
REPUBLIC FIRST BANCORP | 67
Selected Balance Sheet Amounts:
Total assets..................................... $607,951 $35,311 $ - $9,067 $652,329
Total loans, net................................. 432,847 24,209 - 6,832 463,888
Total deposits................................... 417,360 29,857 - - 447,217
December 31, 2000
(Dollars in thousands)
Republic Short-term
First First Bank of Tax Refund Consumer
Bank Delaware Products Loans Total
------------ --------------- -------------------------- -----------
Net interest income.............................. $ 16,425 $670 $ - $ - $ 17,095
Provision for loan losses........................ 429 237 - - 666
Non-interest income.............................. 1,253 290 181 - 1,724
Non-interest expenses............................ 11,905 1,227 - - 13,132
------------ ------------ ------------ ----------- -----------
Net income (loss)................................ $ 3,580 $(338) $ 122 $ - $ 3,364
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $627,220 $28,417 $ - $ - $655,637
Total loans, net................................. 397,292 21,021 - - 418,313
Total deposits................................... 400,962 24,589 - - 425,551
REPUBLIC FIRST BANCORP | 68