10-K405 1 rfb12-01k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION -------------------------------------------------------------------------------- Washington, D.C. 20549 FORM 10-K -------------------------------------------------------------------------------- (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, 2001 ----------------- 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 REPUBLIC FIRST BANCORP, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Pennsylvania 23-2486815 -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1608 Walnut Street, Suite 1000, Philadelphia, PA 19103 -------------------------------------------------------------------------------- (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 (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 ------ ----- 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 $28,777,857 was based on the average of the bid and asked prices on the National Association of Securities Dealers Automated Quotation System on January 31, 2002. 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 6,358,126 ---------------------------- --------- Title of Class Number of Shares Outstanding as of January 31, 2002 Documents incorporated by reference: Part III incorporates certain information by reference from the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders. 1
REPUBLIC FIRST BANCORP, INC. Form 10-K INDEX PART I Page Item 1 Description of Business.............................................................................. 3 Item 2 Description of Properties............................................................................ 6 Item 3 Legal Proceedings.................................................................................... 6 Item 4 Submission of Matters to a Vote of Security Holders ................................................. 10 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters .............................. 11 Item 6 Selected Financial Data............................................................................. 12 Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition................ 13 Item 8 Financial Statements and Supplementary Data.......................................................... 38 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 38 PART III Item 10 Directors, Executive Officers, Promoters and Control Persons of the Registrant ...................... 38 Item 11 Executive Compensation .............................................................................. 38 Item 12 Security Ownership of Certain Beneficial Owners and Management ...................................... 38 Item 13 Certain Relationships and Related Transactions ...................................................... 38 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................................... 39 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, First Republic Bank (the "Bank"), and First Bank of Delaware (the "Delaware Bank"), (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 in New Castle County, Delaware. As of December 31, 2001, the Company had total assets of approximately $652.3 million, total shareholders' equity of approximately $46.8 million, total deposits of approximately $447.2 million and net loans receivable outstanding of approximately $463.9 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 139 full time equivalent employees. First Republic 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, 2001, the Bank had total assets of approximately $617.4 million, total shareholders' equity of approximately $46.0 million, total deposits of approximately $421.1 million and net loans receivable of approximately $439.3 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. The Delaware Bank opened for business on June 1, 1999. The Delaware Bank offers many of the same services and financial products as First Republic 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, 2001, the Delaware Bank had total assets of approximately $37.8 million, total shareholders' equity of approximately $5.0 million, total deposits of approximately $29.9 million and net loans receivable of approximately $24.6 million. The majority of such loans were made for commercial purposes. The Delaware Bank also offers short-term consumer loans and other loan products not offered by First Republic 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 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 others. 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. 3 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, 2001, and 2000, approximately 93% and 91%, 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 $8.5 million at December 31, 2001. 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. 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 4 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 $2,000,000 but customers may borrow significantly larger amounts up to the Banks combined legal lending limit of $8.5 million. Individual customers may have several loans often secured by different collateral. Such relationships in excess of $5,000,000 at December 31, 2001, amounted to $56.5 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 MAC(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 81.4% of total loans outstanding at December 31, 2001. 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. The Company had a contractual relationship with Jackson Hewitt, Inc. ("Jackson Hewitt"), one of the Nation's largest tax preparation services, to provide tax refund products to consumer taxpayers for whom Jackson Hewitt prepares and electronically files federal income tax returns ("Tax Refund Products"). Tax Refund Products consist of accelerated check refunds ("ACRs"), and refund anticipation loans ("RALs"). The Bank generated significant revenue from Tax Refund Products in 1999 and previous years. The Bank did not participate with Jackson Hewitt beyond the 1999 tax preparation season. In 1999, the Bank was paid $2.7 million under its contractual obligation with Jackson Hewitt. Tax Refund Product earnings are realized primarily in the first quarter of the year. These pretax earnings constituted approximately 84% of the Company's first quarter 1999 and 39% of the Company's pretax earnings for the year ended December 31, 1999. Revenue generated by the Tax Refund Products accounted for 6% of total revenues in the year ended December 31, 1999. The Company re-entered the tax refund loan and refund line of business with another partner in 2001 and generated $283,000 in net revenue in that year. While the company 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 2002. Short-Term Consumer Loans. In continuing efforts to expand and diversify is sources of fee income, the Company 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 $600 or less. At December 31, 2001 the Company had approximately $6.9 million of short term consumer loans outstanding, which were originated in Indiana and North Carolina through a small number of marketers. Branch Expansion Plans and Growth Strategy The Company has no current plans to add branch locations, but may do so if opportunities arise. 5 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. The annual rent for such location is $84,084, 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 785 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 had an initial five year term and one five year renewal option which expires June 2002. The annual rental at such location is $21,546, 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 $46,392, 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 $69,564, 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. The Delaware Bank 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 $70,224, payable in monthly installments. The Delaware Bank 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 $69,408, payable in monthly installments. 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. The Bank was sued in 2000 alleging a breach of a prior settlement agreement and subsequent infringement of the alleged trademark "First Republic" as well as unfair competition, dilution and unjust enrichment. The Bank negotiated a settlement to the suit in the first quarter of 2002 and agreed to make a change in its name, from First Republic Bank to Republic First Bank in that quarter. 6 The Delaware Bank was sued in 2001 alleging violation of the Truth In Lending Act, Federal Reserve Board Regulation Z and Indiana state law governing maximum interest rates relating to short-term consumer loans. Because Delaware state law permits rates to be determined by the open market and has been previously upheld to preempt laws of states which regulate interest rates, legal counsel has opined that the Delaware Bank is acting in accordance with applicable law. The Delaware Bank's marketer, also named in the suit, is required to pay all legal costs of defense, and indemnify the Bank against resulting legal liability. (see "Products and Services"-Short Term Consumer Loans") 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. First Republic Bank is also a Pennsylvania-chartered bank subject to supervision and regulation by the Pennsylvania Department of Banking. The Delaware Bank 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 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. (c) The GLB Act permits subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. 7 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. 8 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 FDIC. Under current banking laws, the Bank would be limited to $5.5 million of dividends plus an additional amount equal to the Banks' net profit for 2002, 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 2002. 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. As a de novo bank, the Delaware Bank is subject to certain capital requirements and guidelines imposed by the FRB and Delaware State Department of Banking. These guidelines provide for a minimum leverage ratio of 9.00% and total shareholders' equity of at least $3.0 million during the period in which the Delaware Bank is considered a de novo bank. Management expects that the Delaware Bank will be considered a de novo bank through June 30, 2002. After that date, the Delaware Bank would be subject to the same risk-based capital and leveraged capital guidelines as the Company and the Bank. At December 31, 2001, the Delaware Bank had a Tier 1 leveraged ratio of 12.74% and shareholders equity of $5.0 million. 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 9 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 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. 10 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. All price information in the following table has been adjusted retroactively to reflect the recent 10% stock dividend for distribution on March 18, 1999. As of December 31, 2001, there were approximately 243 holders of record of the Common Stock. On January 31, 2002, the closing price of a share of Common Stock on Nasdaq was $5.60. Year Quarter High Low 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 1999............... 4th $ 7.75 $ 5.06 3rd 8.88 6.25 2nd 9.13 7.06 1st 11.94 8.19 Stock Repurchase Program Effective June 21, 1999, the Company's stock repurchase program, originally announced on August 24, 1998 and established for the period through and including June 30, 1999, was extended to December 31, 1999. The aggregate amount of stock to be repurchased did not exceed 4.9% of the Company's issued and outstanding stock, or approximately 297,000 shares. As of December 31, 1999, there were 54,916 shares repurchased pursuant to rule 10b-18 of the Securities and Exchange Commission. There were also an additional 279,088 shares purchased in block transaction purchases, that are not included as part of the stock repurchase program specified under rule 10b-18. The exercise of 158,832 options during 1999 was funded from such block transaction purchases. The stock repurchase program was not extended beyond December 31, 1999. 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. The Company paid a 10% Stock Dividend on March 18, 1999, as well as 20% stock dividends on March 27, 1998 and April 15, 1997. 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". 11 Item 6: Selected Financial Data
As of or for the Years Ended December 31, (Dollars in thousands, except per share data) 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- INCOME STATEMENT DATA: Total interest income $ 49,014 $ 46,887 $ 39,448 $ 34,404 $ 23,533 Total interest expense 28,659 29,792 24,512 20,845 12,912 -------------------------------------------------------------------------------------------------------------------------------- Net interest income 20,355 17,095 14,936 13,559 10,621 Provision for loan losses 3,964 666 880 370 320 Non-interest income 2,944 1,724 3,805 3,773 2,625 Non-interest expenses 16,180 13,132 10,956 11,302 7,792 Federal income taxes 1,041 1,657 2,271 1,862 1,583 -------------------------------------------------------------------------------------------------------------------------------- Net income $ 2,114 $ 3,364 $ 4,634 $ 3,798 $ 3,551 -------------------------------------------------------------------------------------------------------------------------------- PER SHARE DATA (1) Basic earnings per share $ 0.34 $ 0.54 $ 0.77 $ 0.63 $ 0.75 Diluted earnings per share 0.33 0.54 0.74 0.59 0.69 Book value per share 7.58 6.96 5.68 6.22 5.71 BALANCE SHEET DATA Total assets $652,329 $655,637 $586,330 $516,361 $375,462 Total loans, net (2) 463,888 418,313 359,606 306,768 209,999 Total securities 125,442 169,841 187,308 177,552 147,980 Total deposits 447,217 425,551 305,793 283,084 248,401 Other borrowings 142,500 176,442 236,640 188,009 85,912 Trust preferred securities 6,000 - - - - Total shareholders' equity 46,843 43,030 35,040 36,622 34,622 PERFORMANCE RATIOS Return on average assets 0.33% 0.55% 0.85% 0.81% 1.21% Return on average shareholders' equity 4.59 7.73 10.94 10.21 16.84 Net interest margin 3.25 2.91 2.85 3.09 3.76 Total other expenses as a percentage of average assets 2.49 2.16 2.02 2.42 2.65 ASSET QUALITY RATIOS Allowance for loan losses as a percentage of loans, net (2) 1.16% 0.96% 0.88% 0.79% 0.96% Allowance for loan losses as a % of non-performing loans 124.89 118.96 151.97 213.27 106.01 Non-performing loans as a percentage of total loans, net (2) 0.93 0.81 0.58 0.36 0.90 Non-performing assets as a percentage of total assets 0.95 0.52 0.47 0.36 1.03 Net charge-offs as a percentage of average loans, net (2) 0.58 (0.05) 0.02 0.00 0.21 LIQUIDITY AND CAPITAL RATIOS Average equity to average assets 7.02% 6.12% 6.70% 7.97% 7.17% Leverage ratio 8.07 6.91 7.23 7.50 10.53 Tier 1 capital to risk-weighted assets 12.73 11.99 12.37 11.76 15.42 Total capital to risk-weighted assets 13.98 13.08 13.33 12.54 16.33 12 (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 and April 15, 1997. (2) Includes loans held for sale.
Item 7: Management's Discussion and Analysis of and 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, 2000, Quarterly Reports on Form 10-Q filed by the Company in 2001, and any Current Reports on Form 8-K filed by the Company, as well as similar filings in 2001. Results of Operations for the years ended December 31, 2001 and 2000 Overview In 2001, average core deposits (excluding higher rate time deposits) grew 44.5% over the prior year average to $180.8 million. Average commercial and construction loans increased 19.3% to $360.1 million over the same period. Notwithstanding these significant increases in the Company's core business, net income reflected charges related to a single borrower and the net interest income impact of reductions in interest rates. The Company's net income decreased $1.3 million, or 37.2%, to $2.1 million for the year ended December 31, 2001, from $3.4 million for the year ended December 31, 2000. Diluted earnings per share for the year ended December 31, 2001, were $0.33 compared to $0.54, for the year ended December 31, 2000, due to lower net income during 2001 compared to 2000. This resulted in returns on average assets and equity of 0.33% and 4.59%, respectively, in 2001, compared to 0.55% and 7.73%, respectively, for the year ended 2000. The earnings decrease resulted primarily from an increased provision for loan losses, a rapid decline in the prime rate of interest and increased operating expenses. Net income for 2001 reflected a total of $1.9 million of loan loss provision ($1.2 million, or $0.20 per diluted share, after tax) related to one borrower. Net interest income increased $3.3 million over the year 2000, reflecting the 19.3% increase in combined average commercial and construction loans in 2001, the addition of higher yielding short-term consumer loans and the 44.5% increase in average lower cost core deposits. However, the effect of these positive changes were partially offset by the impact of the 475 basis point drop in the prime rate of interest during the year, resulting from Federal Reserve Board rate reductions. Specifically, loans tied to the prime rate of interest were adjusted lower immediately, while reductions in interest expense were significantly dependent upon the maturity and repricing of certificates of deposit. The Company also realized a $1.2 million, or 70.8% improvement in non-interest income reflecting increased loan advisory fees and higher service charges on deposit accounts. Operating expenses increased $3.1 million or 23.2%, as a result of continued expansion of the commercial loan department, and other business development efforts and operational support. 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 presented on a tax equivalent basis. 13
Interest Interest Interest Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1) Balance Expense Rate (1) Balance Expense Rate (1) ------- ------- -------- ------- ------- -------- ------- ------- -------- For the Year For the Year For the Year Ended Ended Ended (Dollars in thousands) December 31, 2001 December 31, 2000 December 31, 1999 ----------------- ----------------- ----------------- Interest-earning assets: Federal funds sold and other interest-earning assets $ 30,540 $ 1,304 4.27% $ 11,652 $ 754 6.47% $ 640 $ 33 5.16% Securities 147,971 9,124 6.17% 186,804 12,121 6.49% 197,026 12,518 6.35% Loans receivable (3) 448,397 38,586 8.61% 389,156 34,012 8.74% 325,544 26,897 8.26% ------- ------ ----- ------- ------ ----- ------- ------ ----- Total interest-earning assets 626,908 49,014 7.82% 587,612 46,887 7.98% 523,210 39,448 7.54% Other assets 22,302 21,169 19,740 ------ ------ ------ Total assets $ 649,210 $608,781 $542,950 ========= ======== ======== Interest-bearing liabilities: Demand - non-interest bearing $ 50,179 $ - N/A $ 37,445 $ - N/A $ 30,507 $ - N/A Demand - interest-bearing 37,214 636 1.71% 24,437 586 2.40% 13,752 186 1.35% Money market & savings 93,447 2,948 3.15% 63,226 2,823 4.46% 45,547 1,714 3.76% Time deposits 261,281 15,767 6.03% 241,738 14,985 6.20% 193,430 11,296 5.84% ------- ------ ----- ------- ------ ----- ------- ------ ----- Total deposits 442,121 19,351 4.38% 366,846 18,394 5.01% 283,236 13,196 4.66% ------- ------ ------- ------ ------- ------ Total interest-bearing deposits 391,942 19,351 4.94% 329,401 18,394 5.58% 252,729 13,196 5.22% ------- ------ ------- ------- ------- ------ Other borrowings 151,610 9,308 6.14% 196,091 11,398 5.81% 214,975 11,316 5.26% ------- ----- ------- ------ ------- ------ Total interest-bearing liabilities 543,552 28,659 5.27% 525,492 29,792 5.67% 467,704 24,512 5.24% ------- ------ ----- ------- ------ ----- ------- ------ ----- Total deposits and other borrowings 593,731 28,659 4.83% 562,937 29,792 5.29% 498,211 24,512 4.92% ------- ------ ----- ------- ------ ----- ------- ------ ----- Non-interest-bearing liabilities 9,907 8,591 8,380 Shareholders' equity 45,572 37,253 36,359 ------ ------ ------ Total liabilities and shareholders' equity $649,210 $608,781 $542,950 ======== ======== ======== Net interest income $20,355 $17,095 $14,936 ======= ======= ======= Net interest spread 2.99% 2.69% 2.62% ===== ===== ===== Net interest margin (2) 3.25% 2.91% 2.85% ===== ===== ===== (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.
14 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, 2001 vs. 2000 2000 vs. 1999 Change due to Change due to ----------------------- ----------------------- (Dollars in thousands) Average Average Average Average Volume Rate Total Volume Rate Total ------- ------ ------- ------- ------ ------- Interest earned on: Federal funds sold and other Interest-earning assets $ 806 $ (256) $ 550 $ 710 $ 11 $ 721 Securities (2,394) (603) (2,997) (659) 262 (397) Loans 5,099 (525) 4,574 5,490 1,625 7,115 ------- ------ ------- ------- ------ ------- Total interest earning assets $3,511 $(1,384) $ 2,127 $5,541 $1,898 $7,439 ------- ------ ------- ------- ------ ------- Interest expense of Deposits Interest-bearing demand deposits $ (218) $ 168 $ (50) $ (200) $ (200) $ (400) Money market and Savings (962) 837 (125) (749) (360) (1,109) Time Deposits (1,179) 397 (782) (2,960) (729) (3,689) ------- ------ ------- ------- ------ ------- Total deposit interest expense (2,359) 1,402 (957) (3,909) (1,289) (5,198) ------- ------ ------- ------- ------ ------- Other borrowings 2,730 (640) 2,090 1,041 (1,123) (82) ------- ------ ------- ------- ------ ------- Total interest expense 371 762 1,133 (2,868) (2,412) (5,280) ------- ------ ------- ------- ------ ------- Net interest income $ 3,882 $ (622) $ 3,260 $ 2,673 $ (514) $ 2,159 ======= ====== ======= ======= ====== =======
Net Interest Income 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, 15 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 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. The Company's 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, 16 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 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. Professional fees increased $408,000, or 40.8% to $1.4 million for the year ended December 31, 2001, from $1.0 million for the year ended December 31, 2000. This increase reflected legal expenses related to loan collections and the addition 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 $909,000 to $3.5 million for the year ended December 31, 2001, from $2.6 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. Results of Operations for the years ended December 31, 2000 and 1999 Net Interest Income The Company's net interest margin increased 6 basis points to 2.91% for the year ended December 31, 2000, from 2.85% for the year ended December 31, 1999. The improvement in net interest margin reflected an increase in the average yield on interest-earning assets of 44 basis points to 7.98% for the year ended December 31, 2000, from 7.54% for the year ended December 31, 1999. The average rate on interest-bearing liabilities increased 43 basis points from 5.24% from the year ended December 31, 1999 to 5.67% for the year ended December 31, 2000. While the 44 basis point increase in the yield on interest earning assets in 2000 compared to 1999 approximated the 43 basis point increase in the rate on interest bearing liabilities , the increase in the net interest margin of 6 basis points reflected an increase in the proportion of non-interest bearing demand in 2000 as compared to 1999. Non-interest bearing demand grew 22.7% in 2000 as compared to the prior year. The Company's net interest income increased $2.2 million, or 14.5%, to $17.1 million for the year ended December 31, 2000, from $14.9 million for the year ended December 31, 1999. 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 $2.7 million, partially offset by the effect of higher interest rates which 17 totaled $514,000. The positive impact of volume changes was attributable to a significant increase in average interest earning assets which increased $64.4 million, or 12.3%, to $587.6 million for the year ended December 31, 2000, from $523.2 million for the year ended December 31, 1999. The Company's total interest income increased $7.4 million, or 18.9%, to $46.9 million for the year ended December 31, 2000, from $39.4 million for the year ended December 31, 1999. Approximately $5.5 million of the increase was the result of a $64.4 million increase in average volume of interest-earning assets while the remaining $1.9 million of the increase was related to the 44 basis point increase in the yield earned on interest-earning assets to 7.98%. Interest and fees on loans increased $7.1 million, or 26.5%, to $34.0 million for the year ended December 31, 2000, from $26.9 million for the year ended December 31, 1999. Approximately $5.5 million of the increase in loans was due to a $63.6 million, or 19.5% increase in average loans outstanding to $389.2 million at December 31, 2000, from $325.5 million at December 31, 1999. The remaining $1.6 million of the increase in interest income on loans was due to an increase in the average rate earned on these loans of 48 basis points to 8.74%. The growth was primarily realized in the commercial loan area. The Company changed its focus to emphasize commercial banking and accordingly offered several new commercial loan products that drove growth in that area including commercial construction lending, residential construction lending and commercial and industrial lending. The full-year effect of the Delaware Bank also contributed to the loan growth. Interest and dividend income on securities decreased $397,000 to $12.1 million for the year ended December 31, 2000, from $12.5 million for the year ended December 31, 1999. This decline was due principally to the $10.2 million decrease in average securities outstanding to $186.8 million at December 31, 2000. This volume decrease more than offset the revenue effect of an increase in rate earned on these securities of 14 basis points. The Company's total interest expense increased $5.3 million, or 21.5%, to $29.8 million for the year ended December 31, 2000, from $24.5 million for the year ended December 31, 1999. Interest-bearing liabilities averaged $525.5 million for the year ended December 31, 2000, an increase of $57.8 million, or 12.4%, from $467.7 million for the year ended December 31, 1999. The growth in interest-bearing liabilities contributed $2.9 million to the increase in interest expense while the increase in rates paid on interest-bearing liabilities contributed the remaining $2.4 million of the increase. The increase in volume reflects the impact of deposit generating strategies which allowed the Banks' to fund loan growth with deposits and also reduce the reliance on other borrowed funds. The average rate paid on interest-bearing liabilities increased 43 basis points to 5.67% for the year ended December 31, 2000, from 5.24% for the year ended December 31, 1999, due to the increase in average rates paid across all the deposit products and other borrowed funds in response to the higher interest rate environment. Interest expense on time deposits increased $3.7 million or 32.7% to $15.0 million at December 31, 2000, from $11.3 million at December 31, 1999. This increase was primarily due to an increase in the average volume of certificates of deposit of $48.3 million, or 25.0%, to $241.7 million for the year ended December 31, 2000, from $193.4 million for the year ended December 31, 1999. The increase in volume was due in part to the Company's strategy of increasing deposits to reduce the reliance on borrowed funds. The average rate of interest paid on time deposits increased to 6.20% at December 31, 2000, versus 5.84% at December 31, 1999, due to the higher interest rate environment during the year 2000, compared to 1999. Interest expense on FHLB advances and overnight federal funds purchased was $11.4 million for the year ended December 31, 2000, compared to $11.3 million for the year ended December 31, 1999. This increase was due to an increase in the average rate of interest paid on other borrowed funds of 55 basis points from 5.26% at December 31, 1999, to 5.81% at December 31, 2000, due to the rising-rate environment during the latter part of 1999 and all of 2000. However, most of the increase in expense resulting from higher rates was offset by a decrease in balances. The average volume of other borrowed funds decreased by $18.9 million to $196.1 million for the year ended December 31, 2000, from $215.0 million for the year ended December 31, 1999. Provision for Loan Losses The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects the known and estimated inherent losses in the portfolio. The provision for loan losses decreased $214,000 to $666,000 for the year ended December 31, 2000, from $880,000 for the year ended December 31, 1999 due primarily to a large recovery during the year of $250,000. Non-performing assets were 0.52% of total assets or $3.4 million at December 31, 2000, compared to 0.47% of total assets or $2.8 million at December 31, 1999. Loans past due 30 to 89 days were 0.45% of total loans or $1.9 million at December 31, 2000, compared to 0.98% of total loans or $3.6 million at December 31, 1999. (See "Allowance for Loan Losses"). 18 Non-Interest Income Total non-interest income decreased $2.1 million, or 54.7%, to $1.7 million for the year ended December 31, 2000, from $3.8 million for the year ended December 31, 1999. This was mainly attributable to a $2.5 million decrease in Tax Refund Product revenues. This decrease resulted from the termination of the Bank's participation with Jackson Hewitt in the Tax Refund Products after the 1999 tax preparation season. Partially offsetting the tax refund amounts was an increase in non-interest income from service fees on deposit accounts and pre-payment penalty and forfeited commitment fees on loans as well as fees earned on participated loans. These items increased $451,000 to $1.4 million at December 31, 2000, from $1.0 million for the year ended December 31, 1999. The increase in service fees on deposits was the result of increased business development in transaction-based accounts. Non-Interest Expenses Total non-interest expenses increased $2.2 million to $13.1 million for the year ended December 31, 2000, from $10.9 million at December 31, 1999. Salaries and benefits increased $1.3 million or 23.9%, to $6.9 million for the year ended December 31, 2000 from $5.5 million for the year ended December 31, 1999. The increase was due primarily to an increase in staff associated with business development efforts and expansion of the commercial loan department. In addition, the full year effect of the Delaware Bank, bonus payments related to the commercial loan incentive program, higher health insurance costs and normal merit increases contributed to the rise in salary and benefits from year to year. Occupancy and equipment expense increased $256,000, or 14.9%, to $2.0 million for the year ended December 31, 2000, from $1.7 million for the year ended December 31, 1999. This was principally the result of increased rent and repairs and maintenance expense. In addition, depreciation expense increased due to costs associated with the Company's implementation of an internal e-mail system, the launching of the Company's website, www.rfbkonline.com and other technological projects. Other non-interest expenses increased $690,000 to $4.3 million for the year ended December 31, 2000, from $3.6 million for the same period in 1999. This was attributable to increases in advertising, business development expense, professional fees as well as the overall growth of the Company. Advertising expense increased approximately $400,000 as the Company embarked on an advertising and branding campaign during the latter half of 2000. The purpose of the campaign was to target customers displaced by continuing bank mergers. The increase in professional fees reflected increased legal fees on a variety of matters. Provision for Income Taxes The provision for income taxes decreased $645,000, or 28.0%, to $1.7 million for the year ended December 31, 2000, from $2.3 million for the year ended December 31, 1999. This decrease was mainly the result of the decrease in pre-tax income from 1999 to 2000. The effective tax rate was 33.0% for 2000 and 32.9% for 1999. 19 Financial Condition December 31, 2001 Compared to December 31, 2000 Total assets decreased $3.3 million, approximately 0.5%, to $652.3 million at December 31, 2001, from $655.6 million at December 31, 2000. The decline reflected security maturities which were utilized to reduce other borrowings and fund loan growth. Loans: The loan portfolio, which represents the Company's largest asset, is its most significant source of interest income. The Company's lending strategy is to focus on small and medium sized businesses and professionals that seek highly personalized banking services. Total loans increased $46.9 million, or 11.1% to $469.3 million at December 31, 2001, versus $422.4 million at December 31, 2000. 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 overdaft lines of credit. During the year 2000, the Company began to offer commercial construction and residential construction loans. Commercial construction loans are made to developers for commercial properties or for housing developments. These loans generally have a loan to value no greater than 80% and are generally secured by the property and in some cases the guarantee of the owner. Residential construction loans are made to individual residents to build primary residences. Upon the completion of these homes, the related loans are repaid by the borrower when they obtain a first mortgage from another institution. The average total commercial and construction loan portfolio increased 19.3%, or $58.2 million to $360.1 million in 2001 compared to the prior year. The Banks' commercial loans typically range between $250,000 and $2,000,000 but customers may borrow significantly larger amounts up to the Banks' combined legal lending limit of $8.5 million at December 31, 2001. Individual customers may have several loans often secured by different collateral. Such relationships in excess of $5,000,000 at December 31, 2001, amounted to $56.5 million. At December 31, 2001, the Company had $6.9 million in short-term consumer loans outstanding. These loans were first offered in the second quarter of 2001 and represent a new business segment. These loans have principal amounts of less than $600, and terms of approximately two weeks and were originated in North Carolina and Indiana through a small number of marketers. Securities: 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 securities available-for-sale consist primarily of U.S Government debt securities, U.S. Government agency issued mortgage-backed securities and collateralized mortgage obligations. Collateralized mortgage obligations consist of securities issued by the Federal Home Loan Mortgage Corporation. Available-for-sale securities totaled $113.9 million at December 31, 2001, a decrease of $38.3 million or 25.2%, from year-end 2000. This decrease reflected the sale of an $8.0 million security on which a gain of $13,000 was realized and principal repayments on mortgage-backed securities. Instead of reinvesting these proceeds, they were used to reduce borrowings and fund loan growth. Additionally, the Company experienced a $2.6 million improvement in the market value of available-for-sale securities which is reflected on the balance sheet. At December 31, 2001, the portfolio had net unrealized losses of $540,000, compared to unrealized losses of $3.1 million at the end of the prior year. Securities held-to-maturity are investments for which there is the positive intent and ability to hold to maturity. These investments are carried at amortized cost. The held-to-maturity portfolio consists primarily of Federal Home Loan Bank ("FHLB") securities. In addition, the Bank holds treasury securities, other debt securities and a small amount of CMO securities. At December 31, 2001, securities held to maturity totaled $11.6 million, a decrease of $6.1 million from $17.7 million at year-end 2000. This decline was due primarily to repayments of FHLB securities. The market value of the held-to-maturity portfolio was $11.6 million at December 31, 2001, versus $17.8 million at December 31, 2000. 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 decreased by $9.2 million, to $41.4 million at December 31, 2001, from $50.7 million at December 31, 2000, reflecting decreases in federal funds outstanding, which fluctuate on a daily basis. 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 30, 2001, the balance was $4.9 million versus $0 at December 31, 2000. 20 Fixed Assets: Bank premises and equipment, net of accumulated depreciation, increased $58,000 million to $5.2 million at December 31, 2001, from $5.1 million at December 31, 2000. The increase was mainly attributable to the purchase of new equipment related to the development of certain lines of business and other technological upgrades partially offset by depreciation. Other Real Estate Owned: The $1.9 million balance of other real estate owned represents one hotel property acquired in the fourth quarter of 2001. The appraisal for the property (commercial real estate) supports its carrying value 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 $21.7 million, or 5.1% to $447.2 million at December 31, 2001, from $425.6 million at December 31, 2000. Core deposits, which include demand, money market and savings accounts, increased by $46.4 million, or 30.8% to $196.9 million at December 31, 2001, versus $150.6 million at the prior year-end. Average core deposits increased 44.5%, or $55.7 million to $180.8 million in 2001 compared to the prior year. Deposit growth has benefited from the Company's business development efforts and bank consolidations in the Philadelphia market which has left some customers underserved. Time deposits decreased $24.7 million, or 9.0% to $250.3 million at December 31, 2001, versus $275.0 million at prior year-end as the Company replaced higher rate certificates of deposit with core deposits. Other Borrowings: Other borrowings are comprised primarily of FHLB borrowings. These borrowings are used primarily to fund asset growth not supported by deposit generation. Other borrowings declined by $33.9 million to $142.5 million at December 31, 2001, from $176.4 million at December 31, 2000, and were replaced by deposits and repaid with securities repayments. Corporation Obligated Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior Obligations of the Corporation: On November 28, 2001, Republic First Bancorp, Inc., through a pooled offering with Sandler O' Neill & Partners, issued $6.0 million of corporation-obligated mandatorily redeemable capital securities of the subsidiary trust holding solely junior subordinated debentures of the corporation, more commonly known as Trust Preferred Securities. The purpose of the issuance was to increase capital as a result of the Company's continued loan and core deposit growth. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital. The Company may call the securities on any interest payment date after five years, without a prepayment penalty, notwithstanding their final 30 year maturity. The interest rate is variable and adjustable semi -annually at 3.75% over the 6 month London Interbank Offered Rate ("Libor") with an initial rate of 6.007%. The interest rate cap of 11% is effective through the initial 5-year call date. Shareholders' Equity: Total shareholders' equity increased $3.8 million, or 8.9% to $46.8 million at December 31, 2001, versus $43.0 million at December 31, 2000. This increase was the result of 2001 net income of $2.1 million and the improvement in the unrealized loss on available for sale securities of $1.7 million. 21 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. Additionally, during 1999 the Company derived fee income from the Tax Refund Products, which indirectly funded consumer loans collateralized by federal income tax refunds, and provided accelerated check refunds through a contractual arrangement with Jackson Hewitt. Approximately $2.7 million in gross revenues were recognized from the Tax Refund Products in 1999. As a result of its contract termination with Jackson Hewitt Tax Services Inc., the Company did not offer these products through Jackson-Hewitt beyond 1999. During 2000, the Company earned revenue of $181,000 from the program representing recoveries of delinquent tax refund loans from prior years. In 2001, however, the Company re-entered this line of business with a new partner, and realized revenue of $283,000 in that year. While the company 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 2002. The Company began to offer short-term consumer loans through the Delaware Bank in 2001. At December 31, 2001 the Company had approximately $6.9 million of short-term consumer loans outstanding, which were originated in Indiana and North Carolina through a small number of marketers. These loans generally have principal amounts of $600 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, the Company 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. 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. 22 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 $57.7 million and $60.3 million and standby letters of credit of approximately $5.3 million and $3.8 million at December 31, 2001 and 2000, respectively. The $57.7 million of commitments to extend credit at December 31, 2001, 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. As of December 31, 2001, the Company had entered into non-cancelable lease agreements for its operations center, seven First Republic Bank 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 under these leases are $4.4 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 $1.1 million through 2005. (See Note 6 "Premises and Equipment"). The Company has entered into employment agreements with the President of the Company, the President of the Bank, the Chief Financial Officer and the Chief Lending Officer of the subsidiary Banks, which provide for the payment of base salary and certain benefits through the year 2004. The aggregate commitment for future salaries and benefits under these employment agreements at December 31, 2001 is approximately $2.0 million. The Company participated in a partially self-insured health plan (the "Plan"), for which employees of the Company received medical, dental, vision and pharmaceutical insurance coverage and reimbursements. During 2001, 2000 and 1999, the Company paid claims under the plan of $172,000, $438,000 and $426,000. Effective March 1, 2001, this plan was terminated. The Banks currently utilize an outside insurer. 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. The Bank was sued in 2000 alleging a breach of a prior settlement agreement and subsequent infringement of the alleged trademark "First Republic" as well as unfair competition, dilution and unjust enrichment. The Bank negotiated a settlement to the suit in the first quarter of 2002 and agreed to make a change in its name, from First Republic Bank to Republic First Bank in that quarter. The Delaware Bank was sued alleging violations of the Truth In Lending Act, Federal Reserve Board Regulation Z and Indiana state law governing maximum interest rates relating to short-term consumer loans. Because Delaware state law permits rates to be determined by the open market and has been previously upheld to preempt laws of states which regulate interest rates, legal counsel has opined that the Delaware Bank is acting in accordance with applicable law. The Delaware Bank's marketer, also named in the suit, is required to pay all legal costs of defense, and indemnify the Bank against resulting legal liability. At December 31, 2001, 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 $136.2 million, which represented 29.1% of gross loans receivable at December 31, 2001. Various types of real estate are included in this category, including industrial, retail shopping centers, 23 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 accounts, including passbook, statement 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. Management presently believes that the effect on the Bank of any future fall in interest rates, reflected in lower yielding assets, would be detrimental since the Bank does 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 Bank, 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. 24 The following tables present a summary of the Company's interest rate sensitivity GAP at December 31, 2001. 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. Interest Sensitivy Gap At December 31, 2001
(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: Securities and other interest -bearing balances............ $ 43,670 $ 5,676 $ 11,033 $ 19,602 $ 16,008 $ 12,458 $ 9,493 $ 34,188 $152,128 $152,155 Average interest rate......... 3.39% 6.15% 6.19% 6.31% 6.31% 6.32% 6.30% 6.33% Loans receivable ................ 192,386 21,663 29,555 54,135 57,733 34,911 31,745 41,760 463,888 473,973 Average interest rate......... 5.51% 8.12% 8.01% 8.07% 7.98% 8.15% 7.54% 6.92% ------------------------------------------------------------------------------------------------ Total............................ 236,056 27,339 40,588 73,737 73,741 47,369 41,238 75,948 616,016 626,128 ------------------------------------------------------------------------------------------------ Cumulative Totals $236,056 $263,395 $303,983 $377,720 $451,461 $498,830 $540,068 $616,016 ------------------------------------------------------------------------------------------------ Interest Sensitive Liabilities: Demand Interest Bearing.......... $ 22,867 $ 774 $ 561 $ 1,122 $ 1,122 $ 1,122 $ 12,221 $ - $39,789 $39,789 Average interest rate......... 1.11% .70% .70% .70% .70% .70% .70% -% Savings Accounts................. 3,576 121 88 175 175 175 1,912 - 6,222 6,222 Average interest rate......... 0.87% .87% .87% .87% .87% .87% .87% -% Money Market Accounts............ 50,892 1,723 1,248 2,496 2,496 2,496 27,201 - 88,552 88,552 Average interest rate......... 1.73% .50% .50% .50% .50% .50% .50% 0.50% Time Deposits.................... 76,801 74,598 47,102 40,596 1,160 8,925 1,068 20 250,270 252,071 Average interest rate......... 4.70% 4.90% 4.01% 4.23% 6.04% 6.87% 4.08% 4.58% FHLB Borrowings.................. 12,500 5,000 - - 100,000(1) 25,000(1) - - 142,500 149,051 Average interest rate......... 5.39% 6.05% -% -% 6.06% 6.71% -% -% Trust Preferred Securities - 6,000 - - - - - - 6,000 6,005 Average interest rate - 6.01% - - - - - - ------------------------------------------------------------------------------------------------ Total............................ 166,636 88,216 48,999 44,389 104,953 37,718 42,402 20 533,333 541,690 ------------------------------------------------------------------------------------------------ Cumulative Totals................ $166,636 $254,852 $303,851 $348,240 $453,193 $490,911 $533,313 $533,333 ------------------------------------------------------------------------------------------------ Interest Rate Sensitivity GAP............... $ 69,420 $(60,877) $(8,411) $29,348 $(31,212) $9,651 $(1,164) $75,928 Cumulative GAP................... $ 69,420 $8,543 $ 132 $29,480 $ (1,732) $7,919 $ 6,755 $82,683 Interest Sensitive Assets/ Interest Sensitive Liabilities................... 142% 31% 83% 166% 70% 126% 97% N/A% Cumulative GAP/ Total Earning Assets.......... 11% 1% 0% 5% 0% 1% 1% 13% Off balance sheet items notional value: Commitments to extend credit............... $ 631 $62,427 ------------------- Average interest rate......... 5.5% 5.5% (1) The Federal Home Loan Bank 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 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. 25 Through the use of income simulation modeling the Company has estimated net interest income for the year ending December 31, 2002, based upon the assets, liabilities and off-balance sheet financial instruments at December 31, 2001. 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 2002 2001 ----------------------------- ---- ---- +2% 0.2% (0.3%) +1% (0.2) 0.4 -1% (1.8) (2.9) -2% (6.1) (9.8) The Company's management believes that the assumptions utilized in evaluating the Company's estimated net interest income are reasonable; however, the interest rate sensitivity of the Company's assets, liabilities and off-balance sheet financial instruments as well as the estimated effect of changes in interest rates on estimated net interest income could vary substantially if different assumptions are used or actual experience differs from the experience on which the assumptions were based. Capital Resources The Company is required to comply with certain "risk-based" capital adequacy guidelines issued by the FRB and the FDIC. The risk-based capital guidelines assign varying risk weights to the individual assets held by a bank. The guidelines also assign weights to the "credit-equivalent" amounts of certain off-balance sheet items, such as letters of credit and interest rate and currency swap contracts. Under these guidelines, banks are expected to meet a minimum target ratio for "qualifying total capital" to weighted risk assets of 8%, at least one-half of which is to be in the form of "Tier 1 capital". Qualifying total capital is divided into two separate categories or "tiers". "Tier 1 capital" includes common stockholders' equity, certain qualifying perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited in the aggregate to one-half of total qualifying capital) includes allowances for credit losses (within limits), certain excess levels of perpetual preferred stock and certain types of "hybrid" capital instruments, subordinated debt and other preferred stock. Applying the federal guidelines, the ratio of qualifying total capital to weighted-risk assets, was 13.98% and 13.08% at December 31, 2001, and 2000, respectively, and as required by the guidelines, at least one-half of the qualifying total capital consisted of Tier l capital elements. Tier l risk-based capital ratios on December 31, 2001 and 2000 were 12.73% and 11.99%, respectively. At December 31, 2001, and 2000, the Company exceeded the requirements for risk-based capital adequacy under both federal and Pennsylvania state guidelines. The increase in capital was primarily the result of the addition of the $6.0 million of trust preferred securities as discussed below, which qualify as Tier 1 Capital. Under FRB and FDIC regulations, a bank is deemed to be "well capitalized" when it has a "leverage ratio" ("Tier l capital to total assets") of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%, and a total capital to weighted-risk assets ratio of at least 10%. At December 31, 2001, and 2000, the Company's leverage ratio was 8.07% and 6.91%, respectively. Accordingly, at December 31, 2000 and 1999, the Company was considered "well capitalized" under FRB and FDIC regulations. . The increase in the leverage ratio was primarily the result of the addition of the $6.0 million in trust preferred securities, which qualify as Tier 1 Capital. 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") with an initial rate of 6.007%. The interest rate cap of 11% is effective through the initial 5-year call date. The shareholders' equity of the Company as of December 31, 2001, totaled approximately $46.8 million compared to approximately $43.0 million as of December 31, 2000. This increase of $3.8 million was mainly attributable to net income for the year of approximately $2.1 million and an improvement in the unrealized loss on securities of $1.7 million. These factors also increased the book value per share of the Company's common stock, which increased from $6.96 as of December 31, 2000, to $7.58 as of December 31, 2001, based upon 6,182,954 shares outstanding at the end of both periods. The increase was primarily attributable to net income for the year and the improvement in market value of available for sale securities. 26 Regulatory Capital Requirements Federal banking agencies impose three minimum capital requirements on the Company's risk-based capital ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit, quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks.
The following table presents the Company's regulatory capital ratios at December 31, 2001, and 2000: To be well For Capital capitalized under Actual Adequacy Purposes FRB capital guidelines (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- At December 31, 2001 Total risk based capital First Republic Bank.............. $ 51,000 12.96% $ 31,493 8.00% $ 39,366 10.00% First Bank of DE............... 5,288 23.13% 1,829 8.00% 2,286 10.00% Republic First Bancorp, Inc.... 58,151 13.98% 33,275 8.00% 41,594 10.00% Tier one risk based capital First Republic Bank.............. 46,078 11.70% 15,747 4.00% 23,620 6.00% First Bank of DE................. 5,001 21.87% 915 4.00% 1,372 6.00% Republic First Bancorp, Inc...... 52,949 12.73% 16,638 4.00% 24,957 6.00% Tier one leveraged capital First Republic Bank.............. 46,078 7.46% 30,884 5.00% 30,884 5.00% First Bank of DE................. 5,001 12.74% 1,963 5.00% 1,963 5.00% Republic First Bancorp, Inc...... 52,949 8.07% 32,793 5.00% 32,793 5.00% At December 31, 2000 Total risk based capital First Republic Bank.............. $ 42,281 11.92% $ 28,369 8.00% $ 35,461 10.00% First Bank of DE............... 3,648 19.34% 1,509 8.00% 1,886 10.00% Republic First Bancorp, Inc.... 48,907 13.08% 29,917 8.00% 37,396 10.00% Tier one risk based capital First Republic Bank.............. 38,471 10.85% 14,184 4.00% 21,277 6.00% First Bank of DE................. 3,387 17.96% 754 4.00% 1,132 6.00% Republic First Bancorp, Inc...... 44,835 11.99% 14,958 4.00% 22,438 6.00% Tier one leveraged capital First Republic Bank.............. 38,471 6.19% 31,060 5.00% 31,060 5.00% First Bank of DE................. 3,387 12.15% 1,394 5.00% 1,394 5.00% Republic First Bancorp, Inc...... 44,835 6.91% 32,446 5.00% 32,446 5.00%
Management believes that the Company and Banks meet as of December 31, 2001, and 2000, all capital adequacy requirements to which they are subject. As of December 31, 2001, and 2000, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification, that management believes would have changed the Banks' category. The Company and the Banks' ability to maintain the required levels of capital is substantially dependent upon the success of their capital and business plans, the impact of future economic events on the Banks' loan customers and the Banks' ability to manage their interest rate risk, growth and other operating expenses. 27 In addition to the above minimum capital requirements, the Federal Reserve Bank approved a rule that became effective on December 19, 1992, implementing a statutory requirement that federal banking regulators take specified "prompt corrective action" when an insured institution's capital level falls below certain levels. The rule defines five capital categories based on several of the above capital ratios. The Banks currently exceed the levels required for a bank to be classified as "well capitalized". However, the Federal Reserve Bank may consider other criteria when determining such classifications, which criteria could result in a downgrading in such classifications. As a de novo bank, the Delaware Bank is subject to certain capital requirements and guidelines imposed by the FRB and Delaware State Department of Banking. These guidelines provide for a minimum leverage ratio of 9.00% and total shareholders' equity of at least $3.0 million during the period in which the Delaware Bank is considered a de novo bank. Management expects that the Delaware Bank will be considered a de novo bank through June 30, 2002. After that date, the Delaware Bank would be subject to the same risk-based capital and leverage capital guidelines as the Company and the Bank. At December 31, 2001, the Delaware Bank had a Tier 1 leveraged ratio of 12.74% and shareholders' equity of $5.0 million. The Company's equity to assets ratio increased from 6.56% as of December 31, 2000, to 7.18% as of December 31, 2001. The increase at year-end 2001 was a result of the improvement in the market value of available-for sale securities and net income. The Company's average equity to assets ratio for 2001 was 7.02% compared to 6.12% for 2000. Management anticipates that its equity-to-assets ratio will be maintained at approximately the current level. The Company's average return on equity for 2001, 2000 and 1999 was 4.59%, 7.73% and 10.94%, respectively; and its average return on assets for 2001, 2000, and 1999 was 0.33%, 0.55% and 0.85%, respectively. The decline in both ratios is a result of lower net income for the year. Liquidity Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. The most liquid assets consist of cash, amounts due from banks and federal funds sold. The Banks regulatory authorities require the Bank to maintain certain liquidity ratios such that the Banks maintain available funds, or can obtain available funds at reasonable rates, in order to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, the Bank has formed an Asset/Liability Committee (ALCO), comprised of certain members of the Banks board of directors and senior management, which monitors such ratios. The purpose of the committee is, in part, to monitor the Banks liquidity and adherence to the ratios in addition to managing the relative interest rate risk to the Bank. The ALCO meets at least quarterly. The Company's most liquid assets totaled $41.4 million at December 31, 2001, compared to $50.7 million at December 31, 2000 due to a decrease in federal funds sold. Loan maturities and repayments are another source of asset liquidity. At December 31, 2001, the Bank estimated that in excess of $50.0 million of loans would mature or repay in the six-month period ended June 30, 2002. Additionally, the majority of its securities are available to satisfy liquidity requirements through pledges to the FHLB to access the Banks' line of credit. Funding requirements have historically been satisfied by generating core deposits and certificates of deposit with competitive rates, buying federal funds or utilizing the facilities of the Federal Home Loan Bank System. At December 31, 2001, the Bank had $162.5 million in unused lines of credit available under arrangements with correspondent banks compared to $149.6 million at December 31, 2000. These lines of credit enable the Bank to purchase funds for short to long-term needs at rates often lower than other sources and require pledging of securities or loan collateral. At December 31, 2001, the Company had outstanding commitments (including unused lines of credit and letters of credit) of $63.1 million. Certificates of deposit scheduled to mature in one year totaled $198.5 million at December 31, 2001, and borrowings scheduled to mature within that period amounted to $17.5 million. The Company anticipates that it will have sufficient funds available to meet its current commitments. The bank has an additional $125.0 million in other borrowings that are callable by the FHLB, whereupon they would be replaced by borrowings at then current rates. If these borrowings are in fact called, net interest income could be affected. In addition, the Company can use overnight borrowings or other term borrowings to replace these borrowed funds. The Banks target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of the Banks interest-earning assets with projected future outflows of deposits and other liabilities. The Bank has established a line of credit from a correspondent to assist in managing the Banks' liquidity position. That line of credit totaled $10.0 million at December 31, 2001. Additionally, the Bank has established a line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $295.0 million. As of December 31, 2001, and 2000, the Company had borrowed $142.5 million and $176.4 million, respectively, under its lines of credit. Securities represent a primary source of liquidity for the Bank. Accordingly, investment decisions generally reflect liquidity over other considerations. Operating cash flows are primarily derived from cash provided from net income during the year and are another source of liquidity. Cash used in investment activities for the years ended December 31, 2001, 2000, and 1999 was mainly used to fund loan growth. Cash was used in financing activities as the Company repaid other borrowings and grew its deposit base in those periods. 28 The Company's primary short-term funding sources are certificates of deposit and its securities portfolio. The circumstances that are reasonably likely to affect those sources are as follows. The Bank has historically been able to generate certificates of deposit by matching Philadelphia market rates or paying a premium rate of 25 to 50 basis points over those market rates. It is anticipated that this source of liquidity will continue to be available; however, the incremental cost may vary depending on market conditions. The Company's securities portfolio is also available for liquidity, most likely as collateral for FHLB advances. Because of the FHLB's AAA rating, it is unlikely those advances would not be available. But even if they are not, numerous investment companies would likely provide repurchase agreements up to the amount of the market value of the securities. The Banks' ALCO is responsible for managing the liquidity position and interest sensitivity of the Bank. That committee's primary objective is to maximize net interest income while configuring the Banks' interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity for projected needs. Securities Portfolio The Banks securities portfolio is intended to provide liquidity, reduce interest rate risk and contribute to earnings while diversifying credit risk. The decline in securities in 2001 was a result of the Company's strategy to reduce the amount of the securities portfolio and redeploy these assets into higher-yielding commercial loans. A summary of securities available-for-sale and securities held-to-maturity at December 31, 2001, 2000, and 1999 follows.
Securities Available for Sale at December 31, (Dollars in thousands) 2001 2000 1999 ---- ---- ---- U.S. Government Agencies........................... $ 897 $ 2,246 $ 2,662 Mortgage Back Securities/CMOs (1).................. 113,511 153,002 176,694 ------------------------------------------ Total amortized cost of securities................. $114,408 $155,248 $179,356 ------------------------------------------- Total fair value of securities..................... $113,868 $152,134 $169,285 ------------------------------------------- Securities Held to Maturity at December 31, (Dollars in thousands) 2001 2000 1999 ---- ---- ---- U.S. Government Agencies........................... $ 997 $ 1,650 $ 1,621 Mortgage Back Securities/CMOs (1).................. 1,399 1,732 1,747 Other securities (2)............................... 9,178 14,325 14,655 ---------------------------------------- Total amortized cost of securities................. $ 11,574 $ 17,707 $ 18,023 ------------------------------------------- Total fair value of securities..................... $ 11,601 $ 17,750 $ 18,038 ------------------------------------------- (1) All of these obligations consist of U.S. Government Agency issued securities. (2) Comprised mostly of FHLB and Federal Reserve Bank stock.
The following table presents the contractual maturity distribution and weighted average yield of the securities portfolio of the Company at December 31, 2001. Mortgage backed securities are presented without consideration of amortization or prepayments. 29
Securities Available for Sale at December 31, 2001 Within One Year One to Five Years Five to Ten Years Past 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Fair value Cost Yield (Dollars in thousands) U.S. Government Agencies $ - -% $ 567 8.02% $ 344 7.63% $ - -% $ 911 $897 7.87% CMOs / Mortgage-backed securities................. - -% 623 6.98% - -% 112,334 6.33% 112,957 113,511 6.33% ------------------------------------------------------------------------------------------------------ Total AFS securities.......... $ - -% $1,190 7.48% $ 344 7.63% $112,334 6.33% $113,868 $114,408 6.35% ====================================================================================================
Securities Held to Maturity at December 31, 2001 Within One Year One to Five Years Five to Ten Years Past 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield (Dollars in thousands) U.S. Government Agencies...... $ 798 3.40% $ 185 8.48% $ - -% $ 14 6.38% $ 997 4.39% CMOs / Mortgage-backed securities................. - -% - -% - -% 1,399 6.72% 1,399 6.72% Other securities.............. 170 6.92% 225 6.38% 80 7.03% 8,703 5.66% 9,178 5.71% ---------------------------------------------------------------------------------------------- Total HTM securities.......... $ 968 4.04% $ 410 7.33% $ 80 7.03% $ 10,116 5.82% $ 11,574 5.75% ==============================================================================================
Loan Portfolio The Company's loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, loans secured by one-to-four family residential property, commercial construction and residential construction loans as well as residential mortgages, home equity loans, short-term consumer and other consumer loans. Commercial loans are primarily term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. The Banks commercial loans typically range between $250,000 and $2,000,000 but customers may borrow significantly larger amounts up to the Banks combined legal lending limit of $8.5 million at December 31, 2001. Individual customers may have several loans often secured by different collateral. Such relationships in excess of $5,000,000 at December 31, 2001, amounted to $56.5 million. The Company's net loans increased $45.6 million, or 10.9%, to $463.9 million at December 31, 2001, from $418.3 million at December 31, 2000, and were primarily funded by deposit growth and securities repayments. The following table sets forth the Company's gross loans by major categories for the periods indicated:
At December 31, (Dollars in thousands) 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Commercial: Real estate secured (1).......................... $321,579 $284,082 $233,702 $187,098 $153,386 Non real-estate secured.......................... 53,388 39,016 36,600 35,294 36,400 Non-real estate unsecured........................ 7,229 10,543 4,467 6,686 6,119 ----------------------------------------------------------------------- Total commercial........................... 382,196 333,641 274,769 229,078 195,905 Residential real estate (2)...................... 67,821 74,825 76,975 71,020 7,536 Consumer and other............................... 19,302 13,919 11,069 9,065 8,586 ----------------------------------------------------------------------- Total loans, net of unearned income........ $469,319 $422,385 $362,813 $309,163 $212,027 ======================================================================= (1) Includes loans held for sale. (2) Residential real estate secured is comprised of jumbo residential first mortgage loans at December 31, 2001.
30 Loan Maturity and Interest Rate Sensitivity The amount of loans outstanding by category as of the dates indicated, which are due in (i) one year or less, (ii) more than one year through five years and (iii) over five years, is shown in the following table. Loan balances are also categorized according to their sensitivity to changes in interest rates: (dollars in thousands).
At December 31, 2001 (Dollars in thousands) One Year More Than One Year Over Total or Less Through Five Years Five Years Loans Total Commercial and Commercial Real Estate...... $142,701 $205,578 $ 33,917 $382,196 Total Residential Real Estate.................... 942 1,700 65,179 67,821 Total Consumer and Other......................... 8,974 5,375 4,953 19,302 ----------------------------------------------------------------------- Total (1).............................. $152,617 $212,653 $104,049 $469,319 ======================================================================= Loans with Fixed Rates........................... 38,206 155,740 93,800 287,746 Loans with Floating Rates........................ 114,411 56,913 10,249 181,573 ----------------------------------------------------------------------- Total (1)............................. $152,617 $212,653 $104,049 $469,319 ======================================================================= Percent Composition by Maturity.................. 32.52% 45.31% 22.17% 100.00% Fixed Loans as Percent of Total.................. 25.03 73.23 90.15 61.31 Float Loans as Percent of Total.................. 74.97 26.77 9.85 38.69 (1) Includes loans held for sale
In the ordinary course of business, loans maturing within one year may be renewed, in whole or in part, as to principal amount, at interest rates prevailing at the date of renewal. At December 31, 2001, 61.3% of total loans were fixed rate compared to 65.2% at December 31, 2000. Credit Quality The Banks' written lending policies require underwriting, loan documentation and credit analysis standards to be met prior to funding, with a senior loan officer review of all loan applications. A committee of the Board of Directors oversees the loan approval process to monitor that proper standards are maintained, while approving the majority of commercial loans. Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of interest or principal for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms. While a loan is classified as non-accrual or as an impaired loan and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. 31 The following summary shows information concerning loan delinquency and other non-performing assets at the dates indicated.
At December 31, 2001 2000 1999 1998 1997 --------------------------------------------------------- (Dollars in thousands) Loans accruing, but past due 90 days or more........... $518 $ 91 $ 333 $ 121 $ 113 Restructured loans..................................... - 1,982 - - - Non-accrual loans...................................... 3,830 1,350 1,778 1,002 1,800 ----- ----- ----- ----- ----- Total non-performing loans............................. 4,348 3,423 2,111 1,123 1,913 Other real estate owned................................ 1,858 - 643 718 1,944 --------------------------------------------------------------- Total non-performing assets(1)......................... $6,206 $3,423 $2,754 $1,841 $3,857 =============================================================== Non-performing loans as a percentage of total loans, net of unearned income (1)(2)................ 0.93% 0.81% 0.58% 0.36% 0.90% Non-performing assets as a percentage of total assets.. 0.95% 0.52% 0.47% 0.36% 1.03% (1) Non-performing loans are comprised of (i) loans that are on a non-accrual basis, (ii) accruing loans that are 90 days or more past due and (iii) restructured loans. Non-performing assets are composed of non-performing loans and other real estate owned. (2) Includes loans held for sale.
Problem loans consist of loans that are included in performing loans, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At December 31, 2001, all identified problem loans are included in the preceding table or are classified as substandard or doubtful, with a specific reserve allocation in the allowance for loan losses (see "Allowance For Loan Losses"). The restructured loan of $2.0 million outstanding at December 31, 2000 has been repaid. The $2.5 million increase in non-accrual loans to $3.8 million at December 31, 2001, from the prior year reflects a $1.7 million loan to the single borrower discussed under "Other Real Estate Owned" below. Management believes that the appraisals and other estimates of the value of the collateral pledged against the non-accrual loans generally exceed the amount of its outstanding balances. The following summary shows the impact on interest income of non-performing loans for the periods indicated:
For the Year Ended December 31, ------------------------------- 2001 2000 1999 1998 1997 ------------------------------------------------------------------ Interest income that would have been recorded had the loans been in accordance with their original terms $203,000 $125,000 $189,000 $79,000 $279,000 Interest income included in net income $- $171,000 $- $ 55,000 $-
At December 31, 2001, 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 $136.2 million, which represented 29.1% of gross loans receivable at December 31, 2001. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others. Loan concentrations are considered to exist when multiple number of borrowers are engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. Other Real Estate Owned: In the third quarter of 2001, $5.4 million of loans to a single borrower were classified as non-accrual after being classified as substandard in the second quarter of 2001. The $5.4 million reflected loans which were secured by a hotel property and which were made between August 1999 and May 2000. The loans were made to a developer who was adversely impacted by economic conditions. In the fourth quarter, the borrower declared bankruptcy and the Bank increased its reserves against the loans by approximately $1.3 million in addition to existing reserves of $600,000. In that quarter, the Company took control of the property collateralizing $3.7 million of the $5.4 million total. Of the $5.4 million, $1.9 million was transferred to other real estate owned, while $1.9 million was charged off against the allowance. The remaining $1.7 million of the $5.4 million total was classified as non-accrual at December 31, 2001. The Bank had no credit exposure to "highly leveraged transactions" at December 31, 2001, as defined by the FRB. 32 Allowance for Loan Losses A detailed analysis of the Company's allowance for loan losses for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 is as follows: (dollars in thousands)
For the Year Ended December 31, ------------------------------- 2001 2000 1999 1998 1997 -------------------------------------------------------------- Balance at beginning of period $ 4,072 $ 3,208 $ 2,395 $ 2,028 $2,092 Charge-offs: Commercial and construction 2,074 66 91 76 383 Real estate - - - - 67 Consumer and short-term 805 90 117 34 31 --------------------------------------------------------------------- Total charge-offs 2,879 156 208 110 481 --------------------------------------------------------------------- Recoveries: Commercial and construction 257 340 124 13 18 Real estate - - - - 67 Consumer and short-term 17 14 17 94 12 --------------------------------------------------------------------- Total recoveries 274 354 141 107 97 ---------------------------------------------------------------------- Net charge-offs 2,605 (198) 67 3 384 ---------------------------------------------------------------------- Provision for loan losses 3,964 666 880 370 320 ---------------------------------------------------------------------- Balance at end of period $ 5,431 $ 4,072 $ 3,208 $ 2,395 $ 2,028 ====================================================================== Average loans outstanding (1) $448,397 $389,156 $325,544 $248,479 $183,246 As a percent of average loans (1): Net charge-offs 0.58% (0.05)% 0.02% 0.00% 0.21% Provision for loan losses 0.88 0.17 0.27 0.15 0.17 Allowance for loan losses 1.21 1.05 0.99 0.96 1.11 Allowance for loan losses to: Total loans, net of unearned income 1.16% 0.96% 0.88% 0.79% 0.96% Total non-performing loans 124.89% 118.96% 151.97% 213.27% 106.01% (1) Includes non-accruing loans.
The increase in commercial loan charge-offs related primarily to charge-offs for one borrower in the amount of $1.9 million. The remainder of this loan was subsequently transferred to other real estate owned as discussed previously. The increase in consumer and short-term loan charge-offs relate to the addition of the short-term consumer loan product. Charge-offs related to these loans were approximately $800,000 versus $0 in all prior years. Management makes at least a quarterly determination as to an appropriate provision from earnings to maintain an allowance for loan losses that is management's best estimate of known and inherent losses. The Company's Board of Directors periodically reviews the status of all non-accrual and impaired loans and loans classified by the Banks' regulators or internal loan review officer, who reviews both the loan portfolio and overall adequacy of the allowance for loan losses. The Board of Directors also considers specific loans, pools of similar loans, historical charge-off activity, economic conditions and other relevant factors in reviewing the adequacy of the loan loss reserve. Any additions deemed necessary to the allowance for loan losses are charged to operating expenses. The Company has an existing loan review program, which monitors the loan portfolio on an ongoing basis. Loan review is conducted by a loan review officer and is reported quarterly to the Board of Directors. 33 Estimating the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In Management's opinion, the allowance for loan losses was appropriate at December 31, 2001. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required. The Banks' management is unable to determine in what loan category future charge-offs and recoveries may occur. The following schedule sets forth the allocation of the allowance for loan losses among various categories. The allocation is based upon historical experience. The entire allowance for loan losses is available to absorb loan losses in any loan category:
At December 31, (dollars in thousands) 2001 2000 1999 1998 1997 -------------------------------------------------------------------------------------------- Amount(1) Amount(1) Amount(1) Amount(1) Amount(1) -------------------------------------------------------------------------------------------- Allocation of allowance for loan losses: Commercial (2) $4,814 $3,144 $2,119 $1,638 $1,595 Residential real estate 203 224 423 391 41 Consumer and other 182 157 84 71 58 Unallocated 232 547 582 295 334 --------------------------------------------------------------------------------------------- Total $5,431 $4,072 $3,208 $2,395 $2,028 ============================================================================================= (1) Gross loans net of unearned income. (2) Includes loans held for sale.
The methodology utilized to estimate the amount of the allowance for loan losses is as follows: The Company first applies an estimated loss percentage against all loan categories outstanding. Net charge-offs to average loans in 2001 were 0.58%, with substantially all of such charge-offs related to one borrower and the addition of the short-term consumer loan program. In the previous four years, that ratio did not exceed .21%. In the absence of sustained charge-off history, management estimates loss percentages based upon the purpose and/or collateral of various commercial loan categories. While such loss percentages exceed the percentages suggested by historical experience, the Company maintained those percentages in 2001, primarily in view of economic conditions. The Company applied historical loss percentages for consumer loans including short-term consumer loans. The Company will continue to evaluate these percentages and may adjust these estimates on the basis of charge-off history, economic conditions or other relevant factors. The Company also provides specific reserves for impaired loans to the extent the estimated realizable value of the underlying collateral is less than the loan balance, when the collateral is the only source of repayment. Further, the Company attempts to classify any applicable loans according to regulatory definitions, for loans which may have characteristics which may decrease the probability of full compliance with original loan terms. Consistent with regulatory reserve allocations the classifications and percentage of principal which are allocated to the allowance for loan losses are as follows: special mention-3%, substandard-15%, doubtful-50% and loss-100%. Also, the Company may estimate and recognize reserve allocations above these regulatory reserve percentages based upon any factor which might impact the loss estimates. Those factors include but are not limited to the impact of economic conditions on the borrower and management's potential alternative strategies for loan or collateral disposition. Those factors and resulting additional allocations were the primary reason that the unallocated component of the allowance decreased $315,000 to $232,000 at December 31, 2001 from $547,000 at December 31, 2000. The unallocated allowance is established for losses which have not been identified through the formula and specific portions of the allowance described above. The unallocated portion is more subjective and requires a high degree of management judgment and experience. Management has identified several factors that impact credit losses that are not considered in either the formula or the specific allowance segments. These factors consist of industry and geographic loan concentrations, changes in the composition of the loan portfolio, changes in underwriting processes and trends in problem loan and loss recovery rates. The impact of the above is considered in light of management's conclusions as to the overall adequacy of underlying collateral and other factors. The majority of the Company's loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. The Company attempts to evaluate larger loans individually, on the basis of its loan review process, which scrutinizes loans on a selective basis; and other available information. Even if all commercial purpose loans could be reviewed, there is no assurance that information on potential problems would be available. The Company's portfolios of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. At December 31, 2001, loans made for commercial and construction, residential mortgage and consumer purposes, respectively, amounted to $382.2 million, $67.8 million and $19.3 million. The recorded investment in loans which are impaired in accordance with SFAS 114 totaled $4.3 million, $3.3 million and $1.8 million at December 31, 2001, and 2000 and 1999 respectively, of which $4.0 million, $3.1 million and $1.4 million respectively, related to loans with no valuation allowance because the loans have been partially written down through charge-offs. Loans with valuation allowances at December 31, 2001, 2000 and 1999 were $449,000, $175,000, $353,000 respectively, and the amounts of such valuation allowances were $288,000, $139,000 and $104,000, respectively. For the years ended December 31, 2001, 2000 and 1999, the average recorded investment in impaired loans was approximately $4.2 million, $3.6 million, and $1.4 million, respectively. During 2000, the Bank recognized interest income of $171,000 on impaired loans. The Bank did not recognize any interest income on impaired loans during 2001 or 1999. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein. At December 31, 2001, and 2000, substandard loans totaled approximately $8.7 million and $4.0 million respectively; and doubtful loans totaled approximately $62,000 and $113,000, respectively. There were no loans classified as loss at those dates. The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at December 31, 2001, and 2000, in the aggregate principal amount of $6.1 million and $1.5 million respectively; and (ii) 60 to 89 days past due, at December 31, 2001, and 2000 in the aggregate principal amount of $853,000 and $435,000 respectively. The following table is an analysis of the change in Other Real Estate Owned for the years ended December 31, 2001 and 2000. 2001 2000 ----------------------------------- Balance at January 1, $ - $ 643,000 Additions, net 1,858,000 - Sales - (597,000) Write downs/loss on sale - (46,000) ----------------------------------- Balance at December 31, $1,858,000 $ - =================================== Deposit Structure Of the total daily average deposits of approximately $442.1 million held by the Banks during the year ended December 31, 2001, approximately $50.2 million, or 11.3%, represented non-interest bearing deposits, compared to approximately $37.4 million, or 10.2%, of approximately $366.8 million total daily average deposits during 2000. Total deposits at December 31, 2001, consisted of $62.4 million in non-interest-bearing demand deposits, $39.8 million in interest-bearing demand deposits, $94.7 million in savings deposits and money market accounts, $152.6 million in time deposits under $100,000 and $97.7 million in time deposits greater than $100,000. In general, the Bank pays higher interest rates on time deposits. The Banks various deposit liabilities may fluctuate from period-to-period, reflecting strategies to optimize net interest income and customer behavior. The following table is a distribution of the average balances of the Banks' deposits and the average rates paid thereon, for the twelve month periods ended December 31, 2001, 2000 and 1999.
For the Years Ended December 31, (Dollars in thousands) 2001 2000 1999 ------------------------------------------------------------------------------- Average Average Average Balance Rate Balance Rate Balance Rate Money market & savings deposits $ 93,447 3.15% $ 63,226 4.46% $ 45,547 3.76% Time deposits 261,281 6.03% 241,738 6.20% 193,430 5.84% Demand deposits, interest-bearing 37,214 1.71% 24,437 2.40% 13,752 1.35% ------------------------------------------------------------------------------- Total interest-bearing deposits $ 391,942 4.94% $ 329,401 5.58% $252,729 5.22% ===============================================================================
The following is a breakdown by contractual maturity, of the Company's time certificates of deposit issued in denominations of $100,000 or more as of December 31, 2001, 2000 and 1999. Certificates of Deposit (Dollars in thousands) 2001 2000 1999 ------------------------------------ Maturing in: Three months or less $ 40,285 $30,614 $11,575 Over three months through six months 34,463 15,440 10,695 Over six months through twelve months 10,710 28,218 24,135 Over twelve months 12,229 24,870 14,049 ------------------------------------ TOTAL $97,687 $99,142 $60,454 ===================================== The following is a breakdown, by contractual maturities of the Company's time certificates of deposit for the years 2002 through 2006 and beyond (dollars in thousands). 35
2002 2003 2004 2005 2006 and beyond Totals ----------------------------------------------------------------------------------- (Dollars in thousands) Time certificates of deposit $198,501 $40,596 $1,160 $8,925 $1,088 $250,270
Recent Accounting Pronouncements Business Combinations In June 2001, the FASB issued Statement No. 141, "Business Combinations." The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. There was no material impact on earnings, financial condition, or equity upon adoption of Statement No. 141. Goodwill and Other Intangible Assets In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the Statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. There was no material impact on earnings, financial condition, or equity upon adoption of Statement No. 142 at January 1, 2002. Impairment or Disposal of Long-Lived Assets In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The provisions of this Statement generally are to be applied prospectively. The adoption of the Statement on January 1, 2002, did not have a material impact on earnings, financial condition, or equity. 36 Effects of Inflation The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is the Company's need and ability to react to changes in interest rates. As discussed previously, Management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations. The following tables are summary unaudited income statement information for each of the quarters ended during 2001 and 2000.
Summary of Selected Quarterly Consolidated Financial Data (Dollars in thousands, except per share data) For the Quarter Ended, 2001 Fourth Third Second First Income Statement Data: Total interest income $12,411 $11,995 $ 12,206 $ 12,402 Total interest expense 6,231 6,950 7,450 8,028 --------------------------------------------------------- Net interest income 6,180 5,045 4,756 4,374 Provision for loan losses (1) 2,617 570 620 157 Non-interest expense, net of non-interest income 3,473 3,499 3,183 3,081 Federal income tax expense 30 322 314 375 --------------------------------------------------------- Net income (1) $ 60 $ 654 $ 639 $ 761 ========================================================= Per Share Data: Basic: Net income $0.01 $0.10 $0.10 $0.12 ========================================================= Diluted: Net income $0.01 $0.10 $0.10 $0.12 ========================================================= For the Quarter Ended, 2000 Fourth Third Second First Income Statement Data: Total interest income $12,625 $12,300 $ 11,249 $ 10,713 Total interest expense 8,204 7,762 7,122 6,704 --------------------------------------------------------- Net interest income 4,421 4,538 4,127 4,009 Provision for loan losses 66 200 200 200 Non-interest expense, net of non-interest income 3,265 3,223 2,609 2,311 Federal income tax expense 360 368 435 494 --------------------------------------------------------- Net income $ 730 $ 747 $ 883 $ 1,004 ========================================================= Per Share Data: Basic: Net income $0.12 $0.12 $0.14 $0.16 ========================================================= Diluted: Net income $0.12 $0.12 $0.14 $0.16 ========================================================= (1) As previously discussed under "Other Real Estate Owned", the Company increased its reserves against a single borrower by $1.3 million in the fourth quarter of 2001, and charged off $1.9 million related to that borrower.
37 Item 8: Financial Statements and Supplementary Data The financial statements of the Company begin on Page 41. Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. PART III Item 10: Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Commission in connection with the Company's 2002 annual meeting of shareholders scheduled for April 23, 2002. Item 11: Executive Compensation The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Commission in connection with the Company's 2002 annual meeting of shareholders scheduled for April 23, 2002. Item 12: Security Ownership of Certain Beneficial Owners and Management The information required by this Item is incorporated by reference from the definitive proxy materials of the Company to be filed with the Commission in connection with the Company's 2002 annual meeting of shareholders scheduled for April 23, 2002. Item 13: Certain Relationships and Related Transactions Certain of the directors of the Company and/or their affiliates have loans outstanding from the Bank. All such loans were made in the ordinary course of the Banks' business; were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons; and, in the opinion of management, do not involve more than the normal risk of collectibility or present other unfavorable features. 38 Item 14: Exhibits, Financial Statements and Reports on Form 8-K A. Financial Statements Page 41 (1) Independent Auditors Report. (2) Consolidated Balance Sheets as of December 31, 2001 and 2000. (3) Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999. (4) Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999. (5) Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income/(Loss) for the years ended December 31, 2001, 2000 and 1999. (6) Notes to Consolidated Financial Statements. B. Exhibits The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an annual report on Form 10-K) Exhibit No. 11 Computation of Per Share Earnings See footnote No. 2 to Notes to Consolidated Financial Statements under Earnings per Share. 21 Subsidiaries of the Company. First Republic Bank (the "Bank"), a wholly-owned subsidiary, commenced operations on November 3, 1988. The Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania. First Bank of Delaware (the "Delaware Bank") is also a wholly-owned subsidiary of the Company, and commenced operations June 1, 1999. The Delaware Bank is a commercial bank chartered pursuant to the laws of the State of Delaware. The Bank and the Delaware Bank are both members of the Federal Reserve System and their primary federal regulators are the Federal Reserve Board of Governors. 23.1 Consent of Independent Certified Public Accountants. (a) Consent of KPMG LLP All other schedules and exhibits are omitted because they are not applicable or because the required information is set out in the financial statements or the notes thereto. Reports on Form 8-K Filed December 3, 2001. Filed December 20, 2001. Filed February 14, 2002. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania. REPUBLIC FIRST BANCORP, INC. [registrant] Date: February 28, 2002 By: /s/ Harry D. Madonna ------------------------ Harry D. Madonna President and Chief Executive Officer Date: February 28, 2002 By: /s/ Paul Frenkiel --------------------- Paul Frenkiel, Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Date: February 28, 2002 /s/ Harris Wildstein, Esq. ------------------------------------------------------ Harris Wildstein, Esq., Director /s/ Neal I. Rodin ------------------------------------------------------- Neal I. Rodin, Director /s/ James E. Schleif ------------------------------------------------------- James E. Schleif, Director /s/ Steven J. Shotz ------------------------------------------------------- Steven J. Shotz, Director /s/ Harry D. Madonna ------------------------------------------------------- Harry D. Madonna, Director and Chairman of the Board /s/ Kenneth Adelberg ------------------------------------------------------- Kenneth Adelberg, Director /s/ William Batoff ------------------------------------------------------- William Batoff, Director /s/ Daniel S. Berman ------------------------------------------------------- Daniel S. Berman, Director /s/ Michael Bradley ------------------------------------------------------- Michael Bradley, Director 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF REPUBLIC FIRST BANCORP, INC. Page Independent Auditors Report 42 Consolidated Balance Sheets as of December 31, 2001 and 2000 43 Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 44 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 45 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income/(Loss) for the years ended December 31, 2001, 2000 and 1999 46 Notes to Consolidated Financial Statements 48
41 KPMG 1600 Market Street Philadelphia, PA 19103-7212 Independent Auditors' Report The Board of Directors Republic First Bancorp, Inc.: We have audited the accompanying consolidated balance sheets of Republic First Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders' equity and comprehensive income/(loss), and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Republic First Bancorp, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP January 22, 2002 42
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 (dollars in thousands, except per share data) 2001 2000 ---- ---- ASSETS: Cash and due from banks........................................................... $ 19,647 $ 20,990 Federal funds sold and interest-bearing deposits with banks....................... 21,773 29,667 ------------------------------------ Total cash and cash equivalents............................................. 41,420 50,657 Other interest-earning restricted cash................................ 4,913 - Securities available for sale, at fair value...................................... 113,868 152,134 Securities held to maturity, at amortized cost (fair value of $11,601 and $17,750 respectively)............................... 11,574 17,707 Loans receivable, (net of allowance for loan losses of $5,431 and $4,072, respectively).......................................................... 463,888 418,313 Premises and equipment, net....................................................... 5,211 5,153 Other real estate owned, net...................................................... 1,858 - Accrued income and other assets................................................... 9,597 11,673 ------------------------------------ Total Assets................................................................ $652,329 $655,637 ==================================== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Deposits: Demand-- non-interest-bearing..................................................... $ 62,384 $ 44,281 Demand-- interest-bearing......................................................... 39,789 29,784 Money market and savings.......................................................... 94,774 76,510 Time less than $100,000......................................................... 152,583 175,834 Time over $100,000................................................................ 97,687 99,142 ------------------------------------ Total Deposits.............................................................. 447,217 425,551 Other borrowings.................................................................. 142,500 176,442 Accrued expenses and other liabilities............................................ 9,769 10,614 Corporation-obligated-mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation (See Note 13)................ 6,000 - ------------------------------------ Total Liabilities........................................................... 605,486 612,607 ------------------------------------ Commitments and contingencies (See Note 11) Shareholders' Equity: Common stock, par value $0.01 per share; 20,000,000 shares authorized; shares issued and outstanding 6,358,126 as of December 31, 2001 and............ December 31, 2000.............................................................. 63 63 Additional paid in capital........................................................ 32,117 32,117 Retained earnings................................................................. 16,560 14,446 Treasury stock at cost (175,172 shares)........................................... (1,541) (1,541) Accumulated other comprehensive loss.............................................. (356) (2,055) ------------------------------------- Total Shareholders' Equity.................................................. 46,843 43,030 ------------------------------------ Total Liabilities and Shareholders' Equity.................................. $652,329 $655,637 ====================================
(See notes to consolidated financial statements) 43
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands, except per share data) 2001 2000 1999 ---- ---- ---- Interest income: Interest and fees on loans............................................ $38,586 $34,012 $26,897 Interest on federal funds sold and other interest-earning assets...... 1,304 754 33 Interest and dividends on investments................................. 9,124 12,121 12,518 --------------------------------------------- 49,014 46,887 39,448 Interest expense: Demand - interest bearing............................................. 636 586 186 Money market and savings.............................................. 2,948 2,823 1,714 Time less than $100,000............................................... 10,245 10,086 9,177 Time over $100,000.................................................... 5,522 4,899 2,119 Other borrowings...................................................... 9,308 11,398 11,316 --------------------------------------------- 28,659 29,792 24,512 Net interest income........................................................ 20,355 17,095 14,936 Provision for loan losses.................................................. 3,964 666 880 --------------------------------------------- Net interest income after provision for loan losses........................ 16,391 16,429 14,056 --------------------------------------------- Non-interest income: Loan advisory and servicing fees...................................... 1,358 468 273 Service fees on deposit accounts............................... 1,188 967 711 Gain on securities sold............................................... 13 - - Tax Refund Products................................................... 283 181 2,715 Other income.......................................................... 102 108 106 --------------------------------------------- 2,944 1,724 3,805 Non-interest expenses: Salaries and employee benefits........................................ 8,396 6,867 5,543 Occupancy ............................................................ 1,367 1,267 1,085 Equipment............................................................. 954 712 638 Professional fees..................................................... 1,408 1,000 531 Advertising ............................................... 561 701 309 Other operating expenses.............................................. 3,494 2,585 2,756 --------------------------------------------- 16,180 13,132 10,862 Income before income taxes................................................. 3,155 5,021 6,999 Provision for income taxes................................................. 1,041 1,657 2,302 --------------------------------------------- Income before cumulative effect of a change in accounting principle........ 2,114 3,364 4,697 Cumulative effect of a change in accounting principle (Note 2)............. - - (63) ---------------------------------------------- Net Income................................................................. $ 2,114 $ 3,364 $ 4,634 ============================================= Net income per share: Basic: Income before cumulative effect of a change in accounting principle... $0.34 $0.54 $0.78 Cumulative effect of a change in accounting principle (Note 2)........ - - (0.01) ----------------------------------------------- Net Income................................................................. $0.34 $0.54 $0.77 ============================================== Diluted: Income before cumulative effect of a change in accounting principle... $0.33 $0.54 $0.75 Cumulative effect of a change in accounting principle (Note 2)........ - - (0.01) ----------------------------------------------- Net income................................................................. $0.33 $0.54 $0.74 ==============================================
(See notes to consolidated financial statements) 44
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS For the years ended December 31, 2001, 2000 and 1999 (dollars in thousands) 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income................................................................ $2,114 $3,364 $ 4,634 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.............................................. 3,964 666 880 Write down of other real estate owned.................................. - - 75 Loss on sale of other real estate owned................................ - 46 - Depreciation .......................................................... 954 712 584 Gain on sale of securities sold........................................ 13 - - Amortization of securities............................................. 348 87 206 Increase in loans held for sale......................................... - - (4,857) Sales of loans held for sale........................................... - 4,857 7,204 Increase (decrease) in accrued income and other assets................. 1,199 (1,387) (197) Increase (decrease) in accrued expenses and other liabilities.......... (845) 1,757 492 --------------------------------------------- Net cash provided by operating activities.............................. 7,747 10,102 9,021 --------------------------------------------- Cash flows from investing activities: Purchase of securities: Available for sale..................................................... - - (44,978) Held to maturity....................................................... (4,638) (2,495) (7,476) Proceeds from maturities and calls of securities: Available for sale..................................................... 1,000 380 2,000 Held to maturity....................................................... 10,446 2,796 2,500 Proceeds from sale of securities: Available for sale..................................................... 7,842 - - Principal collected on MBS's and CMO's: Available for sale..................................................... 31,631 23,641 23,995 Held to maturity....................................................... 334 15 3,951 Net increase in loans..................................................... (51,255) (63,980) (56,069) Net increase (decrease) in deferred fees.................................. (142) (251) 4 Net proceeds from sale of real estate owned............................... - 597 - Increase in other interest-earning restricted cash ....................... (4,913) - - Premises and equipment expenditures....................................... (1,012) (852) (1,607) ---------------------------------------------- Net cash used in investing activities..................................... (10,707) (40,149) (77,680) ---------------------------------------------- Cash flows from financing activities: Net proceeds from exercise of stock options............................... - 34 1,162 Purchases of treasury stock............................................... - - (1,028) Net increase in demand, money market and savings.......................... 46,371 46,681 15,952 Net increase (decrease) in time deposits.................................. (24,706) 73,077 6,757 Proceeds from issuance of Trust Preferred Securities...................... 6,000 - - Net decrease in other borrowings less than 90 days........................ (16,442) (10,198) (13,969) Increase in other borrowings greater than 90 days......................... - - 62,600 Repayment of other borrowings greater than 90 days........................ (17,500) (50,000) - --------------------------------------------- Net cash provided by (used in) financing activities....................... (6,277) 59,594 71,474 --------------------------------------------- 45 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS of CASH FLOWS (Continued) For the years ended December 31, 2001, 2000 and 1999 (dollars in thousands) 2001 2000 1999 Increase (decrease) in cash and cash equivalents............................. $(9,237) $29,547 $ 2,815 --------------------------------------- Cash and cash equivalents, beginning of year................................. 50,657 21,110 18,295 Cash and cash equivalents, end of year....................................... 41,420 50,657 21,110 -------------------------------------- Supplemental disclosures: Interest paid............................................................. 31,403 29,456 23,417 Income taxes paid......................................................... 2,100 495 2,475 Change in income tax payable due to exercise of stock options............. - (6) (281) Change in unrealized gain/(loss) on securities available for sale......... 2,574 6,957 (10,046) Change in deferred taxes due to change in unrealized gain/(loss) on securities available for sale....................................... (875) (2,365) 3,415 Non-monetary transfers from loans to other real estate owned.............. $ 1,858 $ - $ -
(See notes to consolidated financial statements) 46
REPUBLIC FIRST BANCORP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME/(LOSS) For the years ended December 31, 2001, 2000 and 1999 (dollars in thousands) Accumulated Additional Other Total Comprehensive Common Paid in Retained Treasury Comprehensive Shareholders' Income/(loss) Stock Capital Earnings Stock Income (loss) Equity Balance December 31, 1998................ $61 $26,510 $11,996 $(1,929) $ (16) $ 36,622 Comprehensive income: Other comprehensive loss, net of tax: Unrealized losses on securities.... $(6,631) Less: Reclassification adjustment for losses included in net income....... - --------- Total other comprehensive loss........... (6,631) - - - - (6,631) (6,631) Net income for the year.................. 4,634 - - 4,634 - - 4,634 --------- Total comprehensive loss................. $(1,997) ========= Stock dividend........................... - 5,548 (5,548) - - - Treasury stock purchases................. - - - (1,028) - (1,028) Options exercised........................ 2 25 - 1,416 - 1,443 --------------------------------------------------------------------- Balance December 31, 1999................ 63 32,083 11,082 (1,541) (6,647) 35,040 --------------------------------------------------------------------- Comprehensive income: Other comprehensive income, net of tax: Unrealized gains on securities........ $4,592 Less: Reclassification adjustment for losses included in net income......... - --------- Total other comprehensive income......... 4,592 - - - - 4,592 4,592 Net income for the year.................. 3,364 - - 3,364 - 3,364 --------- Total comprehensive income............... $ 7,956 ========= Options exercised........................ - 34 - - - 34 --------------------------------------------------------------------- Balance December 31, 2000................ 63 32,117 14,446 (1,541) (2,055) 43,030 --------------------------------------------------------------------- Comprehensive income: Other comprehensive income, net of tax: Unrealized gains on securities........ $1,708 Less: Reclassification adjustment for gains included in net income.......... (9) --------- Total other comprehensive income......... 1,699 - - - - 1,699 1,699 Net income for the year.................. 2,114 - - 2,114 - 2,114 --------- --------------------------------------------------------------------- Total comprehensive income............... $ 3,813 ========= Balance December 31, 2001................ $ 63 $32,117 $16,560 $(1,541) $(356) $46,843 =====================================================================
(See notes to consolidated financial statements) 47 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization: Republic First Bancorp, Inc. (formerly known as "Republic Bancorporation") is a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiary, First Republic Bank (the "Bank"), offers a variety of banking services to individuals and businesses throughout the Greater Philadelphia and South Jersey area through its offices and branches in Philadelphia and Montgomery Counties. During 1999, the Company opened a second wholly-owned banking subsidiary in the State of Delaware. The newly formed Bank, First Bank of Delaware (the "Delaware Bank") is a Delaware State chartered Bank, located at Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County Delaware. The Delaware Bank opened for business on June 1, 1999 and offers many of the same services and financial products as First Republic Bank, but additionally offers short-term consumer loans and other loan products not offered by First Republic Bank. 2. Summary of Significant Accounting Policies: Principles of Consolidation: The consolidated financial statements of the Company include the accounts of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, First Republic Bank and First Bank of Delaware, (together, the "Banks"). Such statements have been presented in accordance with accounting principles generally accepted in the United States of America or applicable to the banking industry. All significant inter-company accounts and transactions have been eliminated in the consolidated financial statements. Risks and Uncertainties and Certain Significant Estimates: The earnings of the Company depend on the earnings of the Banks. The Banks are dependent primarily upon the level of net interest income, which is the difference between interest earned on its interest-earning assets, such as loans and investments, and the interest paid on its interest-bearing liabilities, such as deposits and borrowings. Accordingly, the operations of the Banks are subject to risks and uncertainties surrounding their exposure to change in the interest rate environment. Additionally, during 1999 the Company derived fee income from the Tax Refund Products, which indirectly funded consumer loans collateralized by federal income tax refunds, and provided accelerated check refunds through a contractual arrangement with Jackson Hewitt. Approximately $2.7 million in gross revenues were recognized from the Tax Refund Products in 1999. As a result of its contract termination with Jackson Hewitt Tax Services Inc., the Company did not offer these products through Jackson-Hewitt beyond 1999. During 2000, the Company earned revenue of $181,000 from the program representing recoveries of delinquent tax refund loans from prior years. In 2001, however, the Company re-entered this line of business with a new partner, and realized revenue of $283,000 in that year. While the company 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 2002. The Company began to offer short-term consumer loans through the Delaware Bank in 2001. At December 31, 2001 the Company had approximately $6.9 million of short-term consumer loans outstanding, which were originated in Indiana and North Carolina through a small number of marketers. These loans generally have principal amounts of $600 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, the Company 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. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America require management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned and income taxes. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Banks' control, it is at least 48 reasonably possible that the estimates of the allowance for loan losses and the carrying values of other real estate owned could differ materially in the near term. The Company 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. Cash and Cash Equivalents: For purposes of the statements of cash flows, the Company considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold to be cash and cash equivalents. The Banks are required to maintain certain average reserve balances as established by the Federal Reserve Board. The amounts of those balances for the reserve computation periods which include December 31, 2001 and 2000, were $5.5 million and $3.1 million, respectively. These requirements were satisfied through the restriction of vault cash and a balance at the Federal Reserve Bank of Philadelphia. Other Interest-Earning Restricted Cash: Other interest-earning restricted cash represents funds provided to fund an offsite ATM network for which the Company is compensated. These funds are not considered cash equivalent because the Company is contractually obligated to provide these funds and are not immediately able to withdraw the funds. Investment Securities: Debt and equity securities are classified in one of three categories, as applicable, and accounted for as follows: debt securities which the Company has the positive intent and ability to hold to maturity are classified as "securities held to maturity" and are reported at amortized cost; debt and equity securities that are bought and sold in the near term are classified as "trading" and are reported at fair market value with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held to maturity and/or trading securities are classified as "securities available for sale" and are reported at fair market value with net unrealized gains and losses, net of tax, reported as a separate component of shareholders' equity. Loans: Loans are stated at the principal amount outstanding, net of deferred loan fees and costs. The amortization of deferred loan fees and costs are accounted for by a method which approximates level yield. Any unamortized fees or costs associated with loans which pay down in full, are immediately recognized in the Company's operations. Income is accrued on the principal amount outstanding. Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans that are on a current payment status or past due less than 90 days may also be classified as non-accrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance of interest and principal by the borrower, in accordance with the contractual terms. Generally, in the case of non-accrual loans, cash received is applied to reduce the principal outstanding. Loans Held for Sale: Loans held for sale are carried at the lower of aggregate cost or market value. The Company currently services all loans classified as held for sale and servicing is released when such loans are sold. Market values were estimated using the present value of the estimated cash flows, using interest rates currently offered for loans with similar terms to borrowers of similar credit quality. Gains and losses on the sale of loans held for sale are included in non-interest income. The Company did not realize any gains or losses during any period reported herein. At December 31, 2001 and 2000, the Company had no loans held for sale. Allowance for Loan Losses: The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance when management believes that the collectibility of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance. The allowance is an amount that represents management's best estimate of known and inherent loan losses. Management's evaluations of the allowance for loan losses consider such factors as an examination of the portfolio, past loss experience, the results of the most recent regulatory examination, current economic conditions and other relevant factors. 49 The Company considers residential mortgage loans with balances less than $250,000 and consumer loans, including home equity lines of credit, to be small balance homogeneous loans. These loan categories are collectively evaluated for impairment. Jumbo mortgage loans, those with balances greater than $250,000, commercial business loans and commercial real estate loans are individually measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral dependent loans are measured for impairment based on the fair market value of the collateral. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, using the straight-line method. Repairs and maintenance are charged to current operations as incurred, and renewals and betterments are capitalized. Other Real Estate Owned: Other real estate owned consists of foreclosed assets and is stated at the lower of cost or estimated fair market value less estimated costs to sell the property. Costs to maintain other real estate owned, or deterioration in value of the properties are recognized as period expenses. There is no valuation allowance associated with the Company's other real estate portfolio for the periods presented. At December 31, 2001, the Company had one hotel property classified as other real estate owned with a value of $1.9 million. Income Taxes: Deferred income taxes are established for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at the tax rates expected to be in effect when the temporary differences are realized or settled. In addition, a deferred tax asset is recorded to reflect the future benefit of net operating loss carryforwards. The deferred tax assets may be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. Earnings Per Share: Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSE"). Common stock equivalents consist of dilutive stock options granted through the Company's stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. Common stock equivalents which are antidilutive are not included for purposes of this calculation. For the years 2001, 2000 and 1999, there was an average of 108,790, 293,548 and 132,109 of CSEs which were antidilutive respectively. At December 31, 2001, 2000 and 1999, there were 114,840, 419,981 and 243,964 CSEs which were antidilutive, respectively. These shares may be dilutive in the future. The Company paid a 10% Stock Dividend on March 18, 1999 as well as two six-for-five stock splits effected in the form of a 20% stock dividend on March 27, 1998 and April 15, 1997. All relevant financial data contained herein has been restated as if the dividend and splits had occurred at the beginning of each period presented.
(In thousands, except per share data) 2001 2000 1999 ----------------------------------------------- Income before cumulative effect of a change in accounting principle (numerator for basic and diluted earnings per share) $2,114 $3,364 $4,697 ===============================================
Per Per Per Shares Share Shares Share Shares Share Weighted average shares outstanding for the period (denominator for basic earnings per share) 6,182,954 6,175,873 6,017,053 Earnings per share-- basic $0.34 $0.54 $0.78 Add common stock equivalents (CSE) representing dilutive stock options 180,398 97,424 243,964 ------- ------ ------- Effect on basic earnings per share of CSE (0.01) (0.00) (0.03) ------ ------- ------ Equals total weighted average shares and CSE (denominator for diluted earnings per share) 6,363,352 6,273,297 6,261,017 ========= ========= ========= Earnings per share-- diluted $0.33 $0.54 $0.75 ===== ===== =====
50 Reclassifications: Certain items in the 2000 and 1999 financial statements and accompanying notes have been reclassified to conform to the 2001 presentation format. There was no effect on net income for the periods presented herein as a result of reclassifications. Accounting for Assets with Premiums and Discounts: The Company accounts for amortization of premiums and accretion of discounts related to loans purchased and investment securities based upon the effective interest method. If a loan prepays in full before the contractual maturity date, any unamortized premiums, discounts or fees are recognized immediately as an adjustment to interest income. Reporting on the Costs of Start-Up Activities In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). This statement requires costs of start-up activities, including organization costs, to be expensed as incurred. SOP 98-5 is effective for the Company's financial statements for fiscal years beginning after December 15, 1998. As of December 31, 1998 the Company had deferred costs relating to start-up activities of $94,000, remaining in the balance of other assets in the Consolidated Balance Sheets. The Company adopted SOP 98-5 effective January 1, 1999, and accordingly, expensed $63,000, net of tax, of costs of start-up activities in the first quarter of 1999. Recent Accounting Pronouncements Business Combinations In June 2001, the FASB issued Statement No. 141, "Business Combinations." The Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All business combinations in the scope of the Statement are to be accounted for using the purchase method. The provisions of the Statement apply to all business combinations initiated after June 30, 2001. The Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. There was no material impact on earnings, financial condition, or equity upon adoption of Statement No. 141. Goodwill and Other Intangible Assets In June 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible Assets." The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. The Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of the Statement are required to be applied starting with fiscal years beginning after December 15, 2001, except that goodwill and intangible assets acquired after June 30, 2001, will be subject immediately to the non-amortization and amortization provisions of the Statement. Early application is permitted for entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued. The Statement is required to be applied at the beginning of an entity's fiscal year and to be applied to all goodwill and other intangible assets recognized in its financial statements at that date. There was no material impact on earnings, financial condition, or equity upon adoption of Statement No. 142 at January 1, 2002. Impairment or Disposal of Long-Lived Assets In August 2001, the FASB issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, the Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. 51 This Statement supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, this Statement retains the requirement of Opinion 30 to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of (by sale, by abandonment, or in distribution to owners) or is classified as held for sale. This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a temporarily controlled subsidiary. The provisions of this Statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with earlier application encouraged. The provisions of this Statement generally are to be applied prospectively. The adoption of the Statement on January 1, 2002, did not have a material impact on earnings, financial condition, or equity. 3. Investment Securities: Investment securities available for sale as of December 31, 2001, are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Fair (Dollars in thousands) Cost Gains Losses Value ------- ----------------------------------------------------------------------------------------------------- U.S. Government Agencies $897 $ 14 $ - $ 911 Mortgage Backed Securities and CMOs 113,511 251 (805) 112,957 ----------------------------------------------------------- Total $114,408 $ 265 $(805) $113,868 ============================================================
Investment securities held to maturity as of December 31, 2001, are as follows:
Gross Gross Estimated Unrealized Unrealized Fair (Dollars in thousands) Amortized Cost Gains Losses Value ------- ----------------------------------------------------------------------------------------------------- U.S. Government Agencies $ 997 $ 1 $ - $ 998 Mortgage Backed Securities and CMOs 1,399 17 - 1,416 Other Securities 9,178 9 - 9,187 --------------------------------------------------------- Total $ 11,574 $ 27 $ - $ 11,601 ============================================================
Investment securities available for sale as of December 31, 2000, are as follows:
Gross Gross Estimated Unrealized Unrealized Fair (Dollars in thousands) Amortized Cost Gains Losses Value -------------------------------------------------------------------------------------------------------- U.S. Government Agencies $ 2,246 $ 6 $ (7) $ 2,245 Mortgage Backed Securities and CMOs 153,002 44 (3,157) 149,889 ----------------------------------------------------------- Total $155,248 $ 50 $(3,164) $152,134 ============================================================
Investment securities held to maturity as of December 31, 2000, are as follows:
Gross Gross Estimated Unrealized Unrealized Fair (Dollars in thousands) Amortized Cost Gains Losses Value --------------------- --------------------------------------------------------------- U.S. Government Agencies $ 1,650 $ 3 $ - $ 1,653 Mortgage Backed Securities and CMOs 1,732 19 - 1,751 Other Securities 14,325 21 - 14,346 ---------------------------------------------------------- Total $ 17,707 $ 43 $ - $ 17,750 ============================================================
In accordance with regulatory requirements, the Company held an investment in stock of the Federal Reserve Bank with a carrying value of $691,000 and $292,000 as of December 31, 2001 and 2000, respectively, which is included in other securities. Also included in other investment securities are investments in the stock of the Federal Home Loan Bank of Pittsburgh of $7.6 million and $13.0 million at December 31, 2001 and 2000, respectively. Both the Federal Reserve Bank stock and the Federal Home Loan Bank Stock are recorded at cost, which approximates liquidation value. 52 The maturity distribution of the amortized cost and estimated market value of investment securities by contractual maturity at December 31, 2001, is as follows:
Available for Sale Held to Maturity Amortized Estimated Amortized Estimated (Dollars in thousands) Cost Fair Value Cost Fair Value --------------------- ------------------------------------------------------------- Due in 1 year or less $ - $ - $ 968 $ 969 After 1 year to 5 years 1,171 1,190 410 415 After 5 years to 10 years 339 344 80 81 After 10 years or no maturity 112,898 112,334 10,116 10,136 --------------------------------------------------------------------- Total...................................... $114,408 $113,868 $11,574 $11,601 =====================================================================
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties. Realized gains and losses on the sale of investment securities are recognized using the specific identification method. The Company realized a gain on the sale of a security of approximately of $13,000 in 2001. The Company did not realize any gains or losses on the sale of securities during 1999 or 2000. At December 31, 2001, investment securities in the amount of approximately $7.1 million were pledged as collateral for public deposits and certain other deposits as required by law. 4. Loans Receivable: Loans receivable consist of the following at December 31,: (Dollars in thousands) 2001 2000 --------------------------------------------------------------------- Commercial and Industrial $ 60,617 $ 49,559 Real Estate - commercial 321,579 284,082 Real Estate - residential (1) 67,821 74,825 Consumer and other 19,302 13,919 ------------------------------ Loans receivable 469,319 422,385 Less allowance for loan losses (5,431) (4,072) ------------------------------- Total loans receivable, net (2) $463,888 $418,313 ============================== (1) Residential real estate secured is comprised of $67.8 million in jumbo residential first mortgage loans at December 31, 2001. (2) Net of deferred loan fees of $744,000 and $886,000 at December 31, 2001 and 2000, respectively. The recorded investment in loans for which impairment has been recognized in accordance with SFAS 114 totaled $4.3 million, $3.3 million and $1.8 million at December 31, 2001, 2000 and 1999, respectively, of which $4.0 million, $3.1 million, and $1.4 million, respectively, related to loans with no valuation allowance because the loans have been partially written down through charge-offs. Loans with valuation allowances at December 31, 2001, 2000 and 1999 were $449,000, $175,000, and $353,000 respectively, and the amounts of such valuation allowances were $288,000, $139,000, and $104,000, respectively. For the years ended December 31, 2001, 2000 and 1999, the average recorded investment in impaired loans was approximately $4.2 million, $3.6 million, and $1.4 million, respectively. During 2000, the Bank recognized $171,000 of interest income on impaired loans. The Bank did not realize any interest on impaired loans during 2001 or 1999. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein. As of December 31, 2001, 2000 and 1999, there were loans of approximately $3.8 million, $1.4 million, and $1.8 million, respectively, which were classified as non-accrual. If these loans were performing under their original contractual rate, interest income on such loans would have increased approximately $203,000, $125,000, and $189,000 for 2001, 2000 and 1999, respectively. The majority of loans are with borrowers in the Company's marketplace, Philadelphia and surrounding suburbs, including southern New Jersey. In addition the Company has loans to customers whose assets and businesses are concentrated in real estate. Repayment of the Company's loans is in part dependent upon general economic conditions affecting the Company's market place and specific industries. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral varies but primarily includes residential and income-producing properties. At December 31, 2001, 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 $136.2 million, which represented 29.1% of gross loans receivable at December 31, 2001. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others. Loan concentrations are considered to exist when there are amounts loaned to a multiple number of 53 borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. Included in loans are loans due from directors and other related parties of $5.0 million and $4.5 million at December 31, 2001, and 2000, respectively. All loans made to directors have substantially the same terms and interest rates as other Bank borrowers. The Board of Directors approves loans to individual directors to confirm that collateral requirements, terms and rates are comparable to other borrowers and are in compliance with underwriting policies. The following presents the activity in amounts due from directors and other related parties for the year ended December 31, 2001. (Dollars in thousands) 2001 ---- Balance at beginning of year................... $4,540 Additions...................................... 971 Repayments..................................... (508) ---------------- Balance at end of year......................... $5,003 ================ 5. Allowance for Loan Losses: Changes in the allowance for loan losses for the years ended December 31, are as follows:
(Dollars in thousands) 2001 2000 1999 -------------------------------------------------------------------------------------------------------- Balance at beginning of year............................ $4,072 $3,208 $2,395 Charge-offs............................................. (2,879) (156) (208) Recoveries.............................................. 274 354 141 Provision for loan losses............................... 3,964 666 880 --------------------------------------------------- Balance at end of year.................................. $5,431 $4,072 $3,208 ===================================================
6. Premises and Equipment: A summary of premises and equipment is as follows:
(Dollars in thousands) 2001 2000 -------------------------------------------------------------------------------------- Furniture and equipment................................. $5,345 $4,489 Bank building........................................... 1,895 1,891 Leasehold improvements.................................. 1,753 1,601 --------------------------------- 8,993 7,981 Less accumulated depreciation........................... (3,782) (2,828) ---------------------------------- Net premises and equipment.............................. $5,211 $5,153 =================================
Depreciation expense on premises, equipment and leasehold improvements amounted to $954,000, $712,000 and $584,000 in 2001, 2000 and 1999, respectively. The range of depreciable lives for leasehold improvements is five to ten years. The depreciable lives of the Banks' building and furniture/equipment is twenty years and, three to seven years, respectively. As of December 31, 2001, the Company had entered into non-cancelable lease agreements for its operations center, seven First Republic Bank 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 under these leases are as follows: (Dollars in thousands) Year Ended Amount ---------- ------ 2002.................................. $ 913 2003.................................. 840 2004.................................. 807 2005.................................. 735 2006 and beyond....................... 1,114 ---------------- Total................................. $4,409 ================ The Company incurred rent expense of $899,000, $853,000, and $764,000 in 2001, 2000 and 1999, respectively. 54 Prior to 2001, the Company participated in a joint venture with the MBM/ATM Group Ltd. Although the Company's participation in the venture was terminated, the Company remains contingently liable on the following repayments: (Dollars in thousands) Year Ended Amount ---------- ------ 2002....................................... $ 556 2003....................................... 421 2004....................................... 130 2005....................................... 20 ---------------- Total...................................... $1,127 ================ The Company incurred rent expense on these leases of $0, $269,000 and $210,000 during 2001, 2000 and 1999, respectively. 7. Other Borrowings: The Company has lines of credit totaling $10.0 million available for the purchase of federal funds from correspondent bank relationships. In addition, the Company has a collateralized line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of $295.0 million as of December 31, 2001. This maximum borrowing capacity is subject to change on a monthly basis. As of December 31, 2001, and 2000, there were $142.5 million and $176.4 million, respectively outstanding on these lines of credit. The contractual maturity of the borrowings through the Federal Home Loan Bank range from three months to four years. With a portion of these borrowings, the Federal Home Loan Bank has the option to convert the borrowings from a fixed rate to a variable rate. The maximum outstanding during the year 2001 was $205.0 million versus $238.7 million in the year 2000. The average amount outstanding was $151.6 million at an average rate of 6.14% for the year 2001, versus an average amount of $196.1 million at an average rate of 5.81% during the year 2000. The contractual maturity of the Company's borrowings at December 31, 2001, is as follows: Weighted (Dollars in thousands) Amount Average Rate Maturing in: Three months or less........................ $ 12,500 5.39% Over three months to one year............... 5,000 6.05% 1 - 2 years................................. - - 2 - 3 years................................. 100,000 6.06% 3 - 4 years................................. 25,000 6.71% ----------------------- Totals......................................... $142,500 6.11% ======================= 8. Deposits The following is a breakdown, by contractual maturities of the Company's time certificate of deposits for the years 2002 through 2006 and beyond, which includes brokered certificates of deposit of approximately $23.0 million with original terms ranging from three to six months.
2002 2003 2004 2005 2006 and beyond Totals ------------------------------------------------------------------------------- (Dollars in thousands) Time Certificates of Deposit $198,501 $40,596 $1,160 $8,925 $1,088 $250,270 ==================================================================================
55 9. Income Taxes: The following table accounts for the difference between the actual tax provision and the amount obtained by applying the statutory federal income tax rate of 34.0% to income before income taxes for the years ended December 31, 2001, 2000 and 1999.
(Dollars in thousands) 2001 2000 1999 ------------------------------------------------ Tax provision computed at statutory rate................... $1,073 $1,707 $2,380 Amortization of negative goodwill.......................... (103) (103) (103) State tax, net of federal benefit.... 29 - - Other...................................................... 42 53 25 ----------------------------------------------- Total provision for income taxes............... $1,041 $1,657 $2,302 ===============================================
The approximate tax effect of each type of temporary difference and carry-forward that gives rise to net deferred tax assets included in the accrued income and other assets in the accompanying consolidated balance sheets at December 31, 2001 and 2000 are as follows:
2001 2000 ---------------------------------- Allowance for loan losses.................................. $1,715 $ 1,154 Deferred compensation...................................... 559 480 Depreciation............................................... (68) (50) Unrealized loss on securities available for sale........... 184 1,059 --------------------------------- Deferred tax asset......................................... 2,390 2,643 --------------------------------- Negative goodwill allocated to deferred tax asset, net of amortization.................................... - (103) ---------------------------------- Adjusted deferred tax assets............................... 2,390 $2,540 --------------------------------- Deferred tax liabilities: Deferred loan costs..................................... (338) (350) Prepaid expenses........................................ (24) (30) ---------------------------------- Deferred tax liabilities................................... (362) (380) ---------------------------------- Net deferred tax asset..................................... $2,028 $2,160 =================================
The realizability of the deferred tax asset is dependent upon a variety of factors, including the generation of future taxable income, the existence of taxes paid and recoverable, the reversal of deferred tax liabilities and tax planning strategies. Based upon these and other factors, management believes that it is more likely than not that the Company will realize the benefits of these deferred tax assets. The reverse acquisition of ExecuFirst by Republic on June 7, 1996 generated negative goodwill of $1,045,000, of which $685,000 was applied against the deferred tax assets. During 2001, 2000, and 1999, the negative goodwill allocated to the deferred tax assets was amortized by $103,000 in each year, thereby resulting in a corresponding reduction to the provision for income taxes. The amortization of negative goodwill was recorded based upon the estimated reversal period of the underlying components of the deferred tax assets. The following represents the components of income tax expense (benefit) for the years ended December 31, 2001, 2000 and 1999, respectively.
(Dollars in thousands) 2001 2000 1999 --------------------------------------------- Current provision Federal: Current $1,740 $1,978 $2,167 Deferred provision - federal.................... (743) (321) 135 -------------------------------------------- Total federal provison............................. 997 1,657 2,302 State: Current......................................... 44 - - -------------------------------------------- Total provision for income taxes................... $1,041 $1,657 $2,302 ============================================
56 10. Directors and Officers' Annuity Plan: The Bank has an agreement with an insurance company to provide for an annuity payment upon the retirement or death of certain of the Banks' Directors and officers, ranging from $15,000 to $25,000 per year for ten years. The plan was modified for most participants in 2001, to establish a minimum age of 65 to qualify for the payments. All participants are fully vested. The accrued benefits under the plan at December 31, 2001, 2000, and 1999 totaled $786,000, $515,000, and $431,000, respectively. The expense for the years ended December 31, 2001, 2000, and 1999 was $271,000, $84,000, and $69,000, respectively. Of the $271,000 expense in 2001, approximately $200,000 reflected one-time changes to the plan made in that year. The Bank has elected to fund the plan through the purchase of certain life insurance contracts. The cash surrender value of these contracts (owned by the Bank) aggregated $1.6 million, $1.6 million, and $1.4 million at December 31, 2001, 2000, and 1999, respectively, which is included in other assets. 11. Commitments and Contingencies: 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 $57.7 million and $60.3 million and standby letters of credit of approximately $5.3 million and $3.8 million at December 31, 2001, and 2000, respectively. Of the $57.7 million of commitments to extend credit at December 31, 2001, substantially all were variable rate commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Standby letters of credit are conditional commitments issued that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. The Company has entered into employment agreements with the President of the Company, the President of the Bank, the Chief Financial Officer and the Chief Lending Officer of the subsidiary Banks, which provide for the payment of base salary and certain benefits through the year 2004. The aggregate commitment for future salaries and benefits under these employment agreements at December 31, 2001, is approximately $2.0 million. The Company participated in a partially self-insured health plan (the "Plan"), for which employees of the Company received medical, dental, vision and pharmaceutical insurance coverage and reimbursements. During 2001, 2000 and 1999, the Company paid claims under the plan of $172,000, $438,000 and $426,000. Effective March 1, 2001, this plan was terminated. The Banks currently utilize an outside insurer. 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. The Bank was sued in 2000 alleging a breach of a prior settlement agreement and subsequent infringement of the alleged trademark "First Republic" as well as unfair competition, dilution and unjust enrichment. The Bank negotiated a settlement to the suit in the first quarter of 2002 and agreed to make a change in its name, from First Republic Bank to Republic First Bank in that quarter. The Delaware Bank was sued alleging violations of the Truth In Lending Act, Federal Reserve Board Regulation Z and Indiana state law governing maximum interest rates relating to short-term consumer loans. Because Delaware state law permits rates to be determined by the open market and has been previously upheld to preempt laws of states which regulate interest rates, legal counsel has opined that 57 the Delaware Bank is acting in accordance with applicable law. The Delaware Bank's marketer, also named in the suit, is required to pay all legal costs of defense, and indemnify the Bank against resulting legal liability. 12. Shareholders' Equity/Regulatory Capital: Dividend payments by the Bank to the Company are subject to the Pennsylvania Banking Code of 1965 (the "Banking Code"), the Federal Reserve Act, and the Federal Deposit Insurance Act (the "FDIA"). Under the Banking code, no cash dividends may be paid except from "accumulated net earnings" (generally, undivided profits). Under FRB's regulations, the Bank cannot pay dividends that exceed its net income from the current year and the preceding two years. Under the FDIA, an insured Bank may pay no dividends if the Bank is in arrears in the payment of any insurance assessment due to the FDIC. Under current banking law, the Bank would be limited to $5.5 million of dividends in 2001, plus an additional amount equal to the Banks' net profit for 2002, up to the date of any such dividend declaration. At December 31, 2001, there were no cash dividends declared or paid. State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Federal banking agencies impose three minimum capital requirements on the Company's risk-based capital ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The risk-based capital ratios measure the adequacy of a bank's capital against the riskiness of its assets and off-balance sheet activities. Failure to maintain adequate capital is a basis for "prompt corrective action" or other regulatory enforcement action. In assessing a bank's capital adequacy, regulators also consider other factors such as interest rate risk exposure; liquidity, funding and market risks; quality and level or earnings; concentrations of credit; quality of loans and investments; risks of any nontraditional activities; effectiveness of bank policies; and management's overall ability to monitor and control risks. Management believes that the Bank meets, as of December 31, 2001, and 2000, all capital adequacy requirements to which it is subject. As of December 31, 2001, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action provisions of the Federal Deposit Insurance Act. There are no calculations or events since that notification that management believes have changed the Banks' category. The Federal Reserve Board's risk-based capital leverage ratio guidelines require all state-chartered member banks to maintain total capital equal to at least 8% of risk-weighted total assets, Tier 1 capital (adjusted for certain excludable regulatory items) equal to 4% of risk-weighted total assets, and a Tier 1 leverage ratio of 4%. As a de novo bank, the Delaware Bank is subject to certain capital requirements and guidelines imposed by the FRB and Delaware State Department of Banking. These guidelines provide for a minimum leverage ratio of 9.00% and total shareholders' equity of at least $3.0 million during the period in which the Delaware Bank is considered a de novo bank. Management expects that the Delaware Bank will be considered a de novo bank through June 30, 2002. After that date, the Delaware Bank would be subject to the same risk-based capital and leveraged capital guidelines as the Company and the Bank. At December 31, 2001, the Delaware Bank had a Tier 1 leveraged ratio of 12.74% and shareholders equity of $5.0 million. 58
The following table presents the Company's capital regulatory ratios at December 31, 2001, and 2000: To be well For Capital capitalized under Actual Adequacy Purposes FRB capital guidelines Amount Ratio Amount Ratio Amount Ratio At December 31, 2001 Total risk based capital First Republic Bank.............. $ 51,000 12.96% $ 31,493 8.00% $ 39,366 10.00% First Bank of DE............... 5,288 23.13% 1,829 8.00% 2,286 10.00% Republic First Bancorp, Inc.... 58,151 13.98% 33,275 8.00% 41,594 10.00% Tier one risk based capital First Republic Bank.............. 46,078 11.70% 15,747 4.00% 23,620 6.00% First Bank of DE................. 5,001 21.87% 915 4.00% 1,372 6.00% Republic First Bancorp, Inc...... 52,949 12.73% 16,638 4.00% 24,957 6.00% Tier one leveraged capital First Republic Bank.............. 46,078 7.46% 30,884 5.00% 30,884 5.00% First Bank of DE................. 5,001 12.74% 1,963 5.00% 1,963 5.00% Republic First Bancorp, Inc...... 52,949 8.07% 32,793 5.00% 32,793 5.00% At December 31, 2000 Total risk based capital First Republic Bank.............. $42,281 11.92% $28,369 8.00% $35,461 10.00% First Bank of DE................. 3,648 19.34% 1,509 8.00% 1,886 10.00% Republic First Bancorp, Inc...... 48,907 13.08% 29,917 8.00% 37,396 10.00% Tier one risk based capital First Republic Bank.............. 38,471 10.85% 14,184 4.00% 21,277 6.00% First Bank of DE................. 3,387 17.96% 754 4.00% 1,132 6.00% Republic First Bancorp, Inc...... 44,835 11.99% 14,958 4.00% 22,438 6.00% Tier one leveraged capital First Republic Bank.............. 38,471 6.19% 31,060 5.00% 31,060 5.00% First Bank of DE................. 3,387 12.15% 1,394 5.00% 1,394 5.00% Republic First Bancorp, Inc...... 44,835 6.91% 32,446 5.00% 32,446 5.00%
Note 13: Corporation-obligated-mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation On November 28, 2001, Republic First Bancorp, Inc., through a pooled offering with Sandler O' Neill & Partners, issued $6.0 million of corporation-obligated mandatorily redeemable capital securities of the subsidiary trust holding solely junior subordinated debentures of the corporation more commonly known as Trust Preferred Securities. The purpose of the issuance was to increase capital as a result of the Company's continued loan and core deposit growth. The trust preferred securities qualify as Tier 1 capital for regulatory purposes in amounts up to 25% of total Tier 1 capital. The Company may call the securities on any interest payment date after five years, without a prepayment penalty, notwithstanding their final 30 year maturity. The interest rate is variable and adjustable semi -annually at 3.75% over the 6 month London Interbank Offered Rate ("Libor") with an initial rate of 6.007%. The interest rate cap of 11% is effective through the initial 5-year call date. 59 14. Retirement Plans: The Company maintains a Supplemental Retirement Plan for its former Chief Executive Officer which provides for payments of approximately $100,000 a year, commencing for a ten-year period upon retirement or death. A life insurance contract has been purchased to insure against all of the payments which may be required prior to the originally anticipated retirement date of the officer. The Bank has a defined contribution plan pursuant to the provision of 401(k) of the Internal Revenue Code. The Plan covers all full-time employees who meet age and service requirements. The plan provides for elective employee contributions with a matching contribution from the Banks' limited to 3%. The total expense relating to the plan was $145,000, $149,000 and $117,000 in 2001, 2000 and 1999, respectively. 15. Fair Value of Financial Instruments: The disclosure of the fair value of all financial instruments is required, whether or not recognized on the balance sheet, for which it is practical to estimate fair value. In cases where quoted market prices are not available, fair values are based on assumptions including future cash flows and discount rates. Accordingly, the fair value estimates cannot be substantiated, may not be realized, and do not represent the underlying value of the Company. The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash, Cash Equivalents and Other Interest-Earning Restricted Cash: The carrying value is a reasonable estimate of fair value. Securities Held to Maturity and Securities Available for Sale: For investment securities with a quoted market price, fair value is equal to quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair value is the carrying value. For other categories of loans such as commercial and industrial loans, real estate mortgage and consumer loans, fair value is estimated based on the present value of the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar collateral and credit ratings and for similar remaining maturities. Deposit Liabilities: For checking, savings and money market accounts, fair value is the amount payable on demand at the reporting date. For time deposits, fair value is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowings: Fair values of borrowings are based on the present value of estimated cash flows, using current rates, at which similar borrowings could be obtained by the Bank with similar maturities. Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar arrangements. 60 At December 31, 2001, the carrying amount and the estimated fair value of the Company's financial instruments are as follows:
December 31, 2001 December 31, 2000 ----------------- ----------------- (Dollars in Thousands) Carrying Fair Carrying Fair Amount Value Amount Value Balance Sheet Data: Financial Assets: Cash and cash equivalents $ 41,420 $ 41,420 $ 50,657 $ 50,657 Other interest-earning restricted cash 4,913 4,913 - - Securities available for sale 113,868 113,868 152,134 152,134 Securities held to maturity 11,574 11,601 17,707 17,750 Loans receivable, net 463,888 473,973 418,313 427,767 Accrued interest receivable 3,751 3,751 4,632 4,632 Financial Liabilities: Deposits: Demand, savings and money market $196,947 $196,947 $150,575 $150,575 Time 250,270 252,071 274,976 277,245 Corporation-obligated-mandatorily redeemable capital securities of subsidiary trust company solely junior obligations of the corporation 6,000 6,005 - - Other Borrowings 142,500 149,051 176,442 179,090 Accrued interest payable 4,348 4,348 7,092 7,092 December 31, 2001 December 31, 2000 ----------------- ----------------- Notional Fair Notional Fair Amount Value Amount Value Off Balance Sheet Data: Commitments to extend credit $ 57,720 $ 577 $ 60,321 $ 603 Letters of credit 5,338 53 3,785 38
61 16. Parent Company Financial Information The following financial statements for Republic First Bancorp, Inc. should be read in conjunction with the consolidated financial statements and the other notes related to the consolidated financial statements.
BALANCE SHEETS December 31, 2001 and 2000 (dollars in thousands) 2001 2000 ------------------------------ ASSETS: Cash.................................................... $ 876 $ 2,102 Investment in subsidiaries.............................. 51,198 40,320 Other assets............................................ 804 608 -------------------------------- Total Assets...................................... $52,878 $43,030 ================================ LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Accrued expenses.................................. $ 35 $ - Corporation-obligated mandatory redeemable securities of subsidiary trust holding solely junior subordinated debentures of the corporation........ 6,000 - -------------------------------- Total Liabilities................................. 6,035 - -------------------------------- Shareholders' Equity: Common stock......................................... 63 63 Additional paid in capital........................... 32,117 32,117 Retained earnings.................................... 16,560 14,446 Treasury stock at cost (175,172 shares).................................. (1,541) (1,541) Accumulated other comprehensive income/(loss)........ (356) (2,055) --------------------------------- Total Shareholders' Equity........................ 46,843 43,030 -------------------------------- Total Liabilities and Shareholders' Equity........ $52,878 $43,030 ================================
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 2001, 2000 and 2000 (dollars in thousands) 2001 2000 1999 ----------------------------------------------- Income..................................................... $21 $68 $ 106 Expenses................................................... 38 11 - Equity in undistributed income of subsidiary............... 2,131 3,307 4,528 ------------------------------------------------- Net income................................................. 2,114 3,364 4,634 ================================================= Shareholders' equity, beginning of year.................... $43,030 $35,040 $36,622 Exercise of stock options.................................. - 34 1,161 Purchase of treasury stock................................. - - (1,028) Tax effect of stock options exercised...................... - - 282 Net income 2,114 3,364 4,634 Change in unrealized gain on securities available for sale. 1,699 4,592 (6,631) -------------------------------------------------- Shareholders' equity, end of year.......................... $46,843 $43,030 $35,040 =================================================
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STATEMENTS OF CASH FLOWS For the years ended December 31, 2001, 2000 and 1999 (dollars in thousands) 2001 2000 1999 -------------------------------------------------- Cash flows from operating activities: Net income.............................................. $2,114 $ 3,364 $ 4,634 Adjustments to reconcile net income to net cash Provided by operating activities: Increase in other assets.......... (196) (297) - Increase in other liabilities........ 35 - - Equity in undistributed income of subsidiaries.... (2,131) (3,307) (4,528) -------------------------------------------------- Net cash provided by operating activities...... (178) (240) 106 ------------------------------------------------- Cash flows from investing activities: Purchase of subsidiary common stock..................... (7,048) (1,380) (3,432) -------------------------------------------------- Net cash provided by investing activities...... (7,048) (1,380) (3,432) -------------------------------------------------- Cash from Financing Activities: Exercise of stock options............................... - 34 1,162 Proceeds from issuance of trust preferred securities 6,000 - - Purchase of treasury stock.......................... - - (1,028) ---------------------------------------------------- Net cash provided by financing activities...... 6,000 34 134 ------------------------------------------------- Increase/(decrease) in cash................................ (1,226) (1,586) (3,192) Cash, beginning of period.................................. 2,102 3,688 6,880 ------------------------------------------------- Cash, end of period........................................ $ 876 $ 2,102 $ 3,688 =================================================
17. Stock Options The Company maintains a Stock Option Plan (the "Plan") under which the Company grants options to its employees and directors. Under the terms of the plan, 1.4 million shares of common stock are reserved for such options. The Plan provides that the exercise price of each option granted equals the market price of the Company's stock on the date of grant. Any option granted vests within one to five years and has a maximum term of ten years. All options are granted upon approval of the Stock Option Committee of the Board of Directors, consisting of three disinterested members (as defined under Rule 16b-3 of the Securities Exchange Act of 1934, as amended). Stock Options are issued to promote the interests of the Company by providing incentives to (i) designated officers and other employees of the Company or a Subsidiary Corporation (as defined herein), (ii) non-employee members of the Company's Board of Directors and (iii) independent contractors and consultants who may perform services for the Company. The Company believes that the Plan causes participants to contribute materially to the growth of the Company, thereby benefiting the Company's shareholders. Prior to the merger of Republic Bancorporation and ExecuFirst Bancorp, Inc., various grants of stock options were issued pursuant to the then existing plans of each Corporation. In addition to the shares reserved under the Plan, 134,669 options were granted outside of the Plan to a director of the Company, as a result of the merger between Republic Bancorporation and ExecuFirst Bancorp, Inc. These options have a grant date of June 7, 1996. These options are fully vested, and will expire on June 7, 2006. Shares outstanding under option and option price per share have been retroactively restated (a recapitalization) for the equivalent number of shares received in the merger after giving effect to any differences in par value of the issuer's and acquirer's stock. These options and option prices have also been restated as a result of the 10% stock dividend paid on March 18, 1999 as well as two separate six-for-five stock splits effected in the form of 20% stock dividends. These dividends were paid on April 15, 1998 and March 27, 1997. Changes in total shares are as follows: 63
December 31, 2001: Weighted Average Weighted Remaining Range of Average Contractual Shares Exercise Prices Exercise Price Life (Years) ----------------------------------------------------------------------- Outstanding at beginning of year............... 170,731 $1.95 to $3.00 $ 2.31 2.3 408,921 $3.56 to $4.25 $ 3.90 8.4 145,120 $4.85 to $6.62 $ 5.41 7.0 44,940 $7.00 to $9.09 $ 7.91 8.5 Granted during year............................ 8,000 $5.00 to $5.35 $ 5.13 Exercised during year.......................... - - - Forfeited during year.......................... 1,100 $9.09 $ 9.09 ------------- Outstanding at end of year..................... 170,731 $1.95 to $3.00 $ 2.31 1.3 408,921 $3.56 to $4.25 $ 3.87 7.3 153,120 $4.85 to $6.62 $ 5.40 6.1 43,840 $7.00 to $9.09 $ 7.88 7.5 ------------- 776,612 $ 4.05 5.8 ============= Options exercisable at end of year............. 170,731 $1.95 to $3.00 $ 2.31 1.3 372,421 $3.56 to $4.25 $ 4.04 6.0 147,870 $4.85 to $6.62 $ 5.17 5.4 43,840 $7.00 to $9.09 $ 7.98 7.4 ------------- 734,862 $ 3.93 4.4 ============= December 31, 2000: Weighted Average Weighted Remaining Range of Average Contractual Shares Exercise Prices Exercise Price Life (Years) ----------------------------------------------------------------------- Outstanding at beginning of year............... 184,227 $1.95 to $2.65 $ 2.31 3.3 135,463 $3.00 to $4.02 $ 4.01 6.4 135,040 $4.85 to $6.62 $ 5.38 7.6 139,930 $7.63 to $10.45 $ 8.81 8.9 Granted during year............................ 297,250 $3.56 to $5.38 $ 3.94 Exercised during year.......................... 14,288 $1.95 to $2.65 $ 2.33 Forfeited during year.......................... 107,910 $4.85 to $10.94 $ 8.81 ------------- Outstanding at end of year..................... 170,731 $1.95 to $3.00 $ 2.31 2.3 408,921 $3.56 to $4.25 $ 3.90 8.4 145,120 $4.85 to $6.62 $ 5.41 7.0 44,940 $7.00 to $9.09 $ 7.91 8.5 ------------- 769,712 $ 4.07 6.8 ============= Options exercisable at end of year............. 170,731 $1.95 to $3.00 $ 2.31 2.3 206,546 $3.56 to $4.25 $ 4.04 7.0 108,579 $4.85 to $6.62 $ 5.17 6.4 28,940 $7.00 to $9.09 $ 7.98 8.4 ------------- 514,796 $ 3.93 5.4 ============= 64 December 31, 1999: Weighted Average Weighted Remaining Range of Average Contractual Shares Exercise Prices Exercise Price Life (Years) Outstanding at beginning of year............... 425,649 $1.95 to $2.65 $ 2.50 4.3 236,958 $3.00 to $4.50 $ 3.77 5.1 153,648 $4.85 $ 4.85 7.8 63,030 $9.55 to $10.45 $10.26 9.4 Granted during year............................ 123,500 $6.62 to $8.18 $ 7.60 Exercised during year.......................... 399,941 $2.31 to $4.86 $ 2.91 Forfeited during year.......................... 8,404 $5.34 to $10.94 $ 9.18 ------------- Outstanding at end of year..................... 184,227 $1.95 to $2.65 $ 2.31 3.3 135,463 $3.00 to $4.02 $ 4.01 6.4 135,040 $4.85 to $6.62 $ 5.38 7.6 139,930 $7.63 to $10.45 $ 8.81 8.9 ------------- 594,660 $ 4.93 6.3 ============= Options exercisable at end of year............. 184,227 $1.95 to $2.65 $ 2.31 3.3 135,463 $3.00 to $4.02 $ 4.01 6.4 135,040 $4.85 to $6.62 $ 5.38 7.6 48,038 $8.29 to $10.45 $ 10.16 8.5 ------------- 502,768 $ 4.36 5.8 =============
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ("SFAS No. 123"), "Accounting for Stock Based Compensation", but applies APB Opinion No. 25, "Accounting for Stock Issued to Employees and related Interpretations in accounting for its Plan. Accordingly, no compensation has been recognized for options granted under the Plan. If the Company had elected to recognize compensation based on the fair value at the grant dates for awards under its Plan, consistent with the method prescribed by SFAS No. 123, net income and earnings per share would have been changed to the pro forma amounts indicated below:
(Dollars in thousands except per share data) Year ended Year ended Year ended December 31, 2001 December 31, 2000 December 31, 1999 As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma Net income................. $2,114 $1,820 $3,364 $3,068 $ 4,634 $ 4,176 Basic earnings per share... $ 0.34 $ 0.29 $ 0.54 $ 0.50 $ 0.77 $ 0.69 Diluted earnings per share. $ 0.33 $ 0.29 $ 0.54 $ 0.49 $ 0.74 $ 0.67
The proforma compensation expense is based upon the fair value of the option at grant date. The weighted average fair values of the options granted in 2001, 2000 and 1999 were $2.25, $1.81 and $3.60, respectively. The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grant in 2001, 2000 and 1999, respectively; dividend yield of 0% for all three periods, expected volatility 35% for all three periods, risk-free interest rate of 4.7%, 6.3% and 6.4%, respectively and an expected life of 6.3 years for all periods. 65 18. Comprehensive Income The tax effects allocated to each component of "Comprehensive Income" are as follows:
For the year ended December 31, 2001 (Dollars in thousands) Before Tax Net of Tax Amount Expense Tax Amount Unrealized gains on securities: Unrealized holding gains arising during the period..................................... $2,587 $ (879) $ 1,708 Less: Reclassification adjustment for gains included in net income......................... (13) 4 (9) ------------------------------------------------- Other comprehensive income $2,574 $ (875) $ 1,699 ================================================= For the year ended December 31, 2000 (Dollars in thousands) Before Tax Net of Tax Amount Benefit Tax Amount Unrealized gains on securities: Unrealized holding gains arising during the period..................................... $6,957 $ (2,365) $ 4,592 Less: Reclassification adjustment for gains included in net income......................... - - - ------------------------------------------------ Other comprehensive income........................... $6,957 $ (2,365) $ 4,592 ================================================ For the year ended December 31, 1999 (Dollars in thousands) Tax Before (Expense) Net of Tax Amount Benefit Tax Amount Unrealized gains on securities: Unrealized holding gains arising during the period..................................... $(10,046) $ 3,415 $ (6,631) Less: Reclassification adjustment for gains included in net income......................... - - - ------------------------------------------------ Other comprehensive income........................... $(10,046) $ 3,415 $ (6,631) =================================================
19. Segment Reporting The Company's reportable segments represent strategic businesses that offer different products and services. The segments are managed separately because each segment has unique operating characteristics, management requirements and marketing strategies. Republic First Bancorp has four reportable segments: two community banking segments, tax refund products and short-term consumer loans. The community banking segments are primarily comprised of the results of operations and financial condition of the Banks. Tax refund products are comprised of accelerated check refunds ("ACRs") and refund anticipation loan ("RALs") offered on a national basis to customers of Liberty Tax Services, a national tax preparation firm. Short-term consumer loans are loans made to customers offered through First Bank of Delaware, with principal amounts of $600 or less and terms of approximately two weeks. These loans typically are made in states outside of the Company's normal market area through a small number of marketers and involve rates and fees significantly different than other loan products offered by the Banks. The Company evaluates the performance of the community banking segments based upon income before the provision for income taxes, return on equity and return on average assets. Tax refund products and short-term consumer loans are evaluated based upon income before the provision for income taxes. Tax refund products and short-term consumer loans are provided to satisfy consumer demands while diversifying the Company's earnings stream. Segment information for the years ended December 31, 2001, 2000 and 1999 is as follows: 66
December 31, 2001 (Dollars in thousands) First Republic First Bank of Tax Refund Short-term Bank Delaware Products Consumer Loans Total Net interest income $16,642 $949 $- $2,764 $20,355 Provision for loan losses 2,800 132 -- 1,032 3,964 Non-interest income 2,137 524 283 -- 2,944 Non-interest expenses 13,182 1,707 234 1,057 16,180 Net income $1,874 $(245) $33 $452 $2,114 Selected Balance Sheet Amounts: Total assets $607,951 $35,311 $- $9,067 $652,329 Total loans, net... 432,847 24,209 -- 6,832 463,888 Total deposits 417,360 29,857 -- -- 447,217 December 31, 2000 (Dollars in thousands) First Republic First Bank of Tax Refund Short-term Bank Delaware Products Consumer Loans Total Net interest income $16,425 $670 $ -- $ -- $17,095 Provision for loan losses 429 237 -- -- 666 Non-interest income 1,253 290 181 -- 1,724 Non-interest expenses 11,905 1,227 -- -- 13,132 Net income $3,580 $(338) $122 $ -- $3,364 Selected Balance Sheet Amounts: Total assets $627,220 $28,417 $ -- $ -- $655,637 Total loans, net... 397,292 21,021 -- -- 418,313 Total deposits 400,962 24,589 -- -- 425,551 December 31, 1999 (Dollars in thousands) First Republic First Bank of Tax Refund Short-term Bank Delaware Products Consumer Loans Total Net interest income $14,833 $103 $ -- $ -- $14,936 Provision for loan losses 794 86 -- -- 880 Non-interest income 1,057 33 2,715 -- 3,805 Non-interest expenses 10,018 694 150 -- 10,862 Net income $3,346 $(431) $1,719 $ -- $4,634 Selected Balance Sheet Amounts: Total assets $575,373 $10,957 $ -- $ -- $586,330 Total loans, net... 351,044 8,561 -- -- 359,605 Total deposits 301,761 4,032 -- -- 305,793
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