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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%