10-Q 1 repfirst6-02q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: June 30, 2002 Commission File Number: 0-17007 Republic First Bancorp, Inc. -------------------------------------------------------------------------------- (Exact name of business issuer as specified in its charter) Pennsylvania 23-2486815 -------------------------------------------------------------------------------- (State or other jurisdiction of IRS Employer Identification incorporation or organization) Number 1608 Walnut Street, Philadelphia, Pennsylvania 19103 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) 215-735-4422 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. YES X NO ____ ------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. 6,391,008 shares of Issuer's Common Stock, par value $0.01 per share, issued and outstanding as of July 31, 2002 Page 1 of 36 Exhibit index appears on page 35 TABLE OF CONTENTS Page Part I: Financial Information Item 1: Financial Statements (unaudited) 3 Item 2: Management's Discussion and Analysis of Financial Condition and 12 Results of Operations Item 3: Quantitative and Qualitative Information about Market Risk 26 Part II: Other Information Item 1: Legal Proceedings 34 Item 2: Changes in Securities and Use of Proceeds 34 Item 3: Defaults Upon Senior Securities 34 Item 4: Submission of Matters to a Vote of Security Holders 34 Item 5: Other Information 34 Item 6: Exhibits and Reports on Form 8-K 35 2 PART I - FINANCIAL INFORMATION Item 1: Financial Statements
Page Number (1) Consolidated Balance Sheets as of June 30, 2002, (unaudited) and December 31, 2001...... 4 (2) Consolidated Statements of Income for the three and six months ended (unaudited) June 30, 2002, and 2001..................................................... 5 (3) Consolidated Statements of Cash Flows for the six months ended (unaudited) June 30, 2002, and 2001..................................................... 6 (4) Notes to Consolidated Financial Statements.............................................. 7
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Republic First Bancorp, Inc. and Subsidiaries Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 dollars in thousands, except share data ASSETS: June 30, 2002 December 31, 2001 --------------------- --------------------- (unaudited) Cash and due from banks $ 18,673 $ 19,647 Federal funds sold and interest-bearing deposits with banks 30,669 21,773 --------------------- --------------------- Total cash and cash equivalents 49,342 41,420 Other interest-earning restricted cash 4,908 4,913 Securities available for sale, at fair value 104,873 113,868 Securities held to maturity at amortized cost (Fair value of $9,461 and $11,601, respectively) 9,430 11,574 Loans receivable (net of allowance for loan losses of $6,807 and $5,431, respectively) 469,444 463,888 Premises and equipment, net 4,878 5,211 Other real estate owned 1,857 1,858 Other assets 11,676 9,597 --------------------- --------------------- Total Assets $ 656,408 $ 652,329 ===================== ===================== LIABILITIES AND SHAREHOLDERS' EQUITY: Liabilities: Deposits: Demand - non-interest-bearing $ 59,738 $ 62,384 Demand - interest-bearing 44,620 39,789 Money market and savings 118,765 94,774 Time under $100,000 153,855 152,583 Time $100,000 or more 88,945 97,687 --------------------- --------------------- Total Deposits 465,923 447,217 Other borrowings 125,000 142,500 Accrued expenses and other liabilities 9,426 9,769 Corporation-obligated-mandatorily redeemable capital securities of subsidiary trust holding solely junior obligations of the corporation 6,000 6,000 --------------------- --------------------- Total Liabilities 606,349 605,486 --------------------- --------------------- Shareholders' Equity: Common stock par value $0.01 per share, 20,000,000 shares authorized; shares issued and outstanding, 6,391,008 as of June 30, 2002 and 6,358,126 as of December 31, 2001 64 63 Additional paid in capital 32,235 32,117 Retained earnings 18,369 16,560 Treasury stock at cost (175,172 shares) (1,541) (1,541) Accumulated other comprehensive income (loss) 932 (356) --------------------- --------------------- Total Shareholders' Equity 50,059 46,843 --------------------- --------------------- Total Liabilities and Shareholders' Equity $ 656,408 $ 652,329 ===================== ===================== (See notes to consolidated financial statements)
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Republic First Bancorp, Inc. and Subsidiaries Consolidated Statements of Operations For the Three and Six Months Ended June 30, dollars in thousands, except per share data (unaudited) Quarter to Date Year to Date June 30 June 30 ------- ------- 2002 2001 2002 2001 ---- ---- ---- ---- Interest income: Interest and fees on loans $9,387 $9,472 $18,920 $18,622 Interest and dividend income on federal funds sold and other interest-earning balances 224 404 393 1,057 Interest on investments 1,625 2,330 3,371 4,929 ------------ ------------ ------------ ------------ Total interest income 11,236 12,206 22,684 24,608 ------------ ------------ ------------ ------------ Time $100,000 or more Interest expense: Demand interest-bearing 120 145 241 295 Money market and savings 450 809 795 1,714 Time under $100,000 1,509 2,718 3,254 5,554 Time $100,000 or more 918 1,537 1,935 3,133 Other borrowed funds 2,097 2,241 4,317 4,782 ------------ ------------ ------------ ------------ Total interest expense 5,094 7,450 10,542 15,478 ------------ ------------ ------------ ------------ Net interest income 6,142 4,756 12,142 9,130 ------------ ------------ ------------ ------------ Provision for loan losses 1,248 620 2,529 777 ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 4,894 4,136 9,613 8,353 ------------ ------------ ------------ ------------ Non-interest income: Loan advisory and servicing fees 386 224 632 506 Service fees on deposit accounts 314 286 598 540 Gains on securities sold - - - 13 Tax refund products 350 27 734 253 Other income 19 24 40 47 ------------ ------------ ------------ ------------ 1,069 561 2,004 1,359 Non-interest expenses: Salaries and benefits 2,242 2,023 4,482 4,039 Occupancy 363 334 711 683 Equipment 235 231 479 448 Legal 382 44 727 118 Advertising 98 156 259 304 Other expenses 1,176 956 2,096 2,030 ------------ ------------ ------------ ------------ 4,496 3,744 8,754 7,622 ------------ ------------ ------------ ------------ Income before income taxes 1,467 953 2,863 2,090 Provision for income taxes 546 314 1,054 690 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income $921 $639 $1,809 $1,400 ============ ============ ============ ============ Net income per share: ------------ ------------ ------------ ------------ Basic $0.15 $0.10 $0.29 $0.23 ============ ============ ============ ============ ------------ ------------ ------------ ------------ Diluted $0.14 $0.10 $0.28 $0.22 ============ ============ ============ ============ (See notes to consolidated financial statements)
5 Republic First Bancorp, Inc. and Subsidiaries Consolidated Statements of Cash Flows For the Six Months Ended June 30, Dollars in thousands (unaudited)
2002 2001 ------------- ------------- Cash flows from operating activities: Net income $ 1,809 $ 1,400 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,529 777 Depreciation 479 448 Amortization of securities 212 176 Gain on sales of securities - 13 Increase in other assets (2,696) (2,116) Increase (decrease) in accrued expenses and other liabilities (343) 2,651 Net decrease in deferred fees (209) (36) ------------- ------------- Net cash provided by operating activities 1,781 3,313 ------------- ------------- Cash flows from investing activities: Purchase of securities: Held to maturity (956) (2,829) Available for sale (6,956) - Proceeds from Sale of securities: Available for sale - 7,842 Proceeds from principal receipts, calls and maturities of securities: Held to maturity 3,100 5,647 Available for sale 17,693 16,360 Net increase in loans (7,876) (20,455) Decrease (increase) in other interest-earning restricted cash 5 (5,883) Premises and equipment expenditures (146) (480) ------------- ------------- Net cash provided by investing activities 4,864 202 ------------- ------------- Cash flows from financing activities: Net proceeds from exercise of stock options 71 - Net increase in demand, money market and savings deposits 26,176 47,960 Net decrease in borrowed funds less than 90 days - (16,442) Repayment of borrowed funds greater than 90 days (17,500) (17,500) Net decrease in time deposits (7,470) (24,255) ------------- ------------- Net cash provided by (used in) financing activities 1,277 (10,237) ------------- ------------- Increase in cash and cash equivalents 7,922 (6,722) Cash and cash equivalents, beginning of period 41,420 50,657 ------------- ------------- Cash and cash equivalents, end of period $ 49,342 $ 43,935 ============= ============= Supplemental disclosure: Interest paid $ 10,846 $ 15,888 ============= ============= Taxes paid $ 2,950 $ 1,750 ============= =============
(See notes to consolidated financial statements) 6 REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Organization Republic First Bancorp, Inc. (the "Company"), is a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly-owned subsidiaries, Republic First Bank (the "Bank") and First Bank of Delaware (the "Delaware Bank") (together the "Banks"), offer a variety of banking services primarily to individuals and businesses throughout the Greater Philadelphia, Delaware and South Jersey area through offices and branches in Philadelphia and Montgomery Counties in Pennsylvania and in New Castle County, Delaware. The Delaware Bank also makes a number of short-term consumer loans nationally, which outstandings amount to less than 5% of total consolidated assets. These interim financial statements have been prepared in accordance with the instructions to Form 10-Q. Accordingly, these financial statements do not include information or footnotes necessary for a complete presentation of financial statements in accordance with accounting principles generally accepted in the United States of America. In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments (including normal recurring accruals) necessary to present fairly the financial position as of June 30, 2002, the results of operations for the three and six months ended June 30, 2002, and 2001, and the cash flows for the six months ended June 30, 2002, and 2001. The interim results of operations may not be indicative of the results of operations for the full year. The accompanying unaudited financial statements should be read in conjunction with the Company's audited financial statements, and the notes thereto, included in the Company's 2001 Form 10-K filed with the Securities and Exchange Commission. Note 2: Summary of Significant Accounting Policies: Risks and Uncertainties and Certain Significant Estimates: The earnings of the Company depend on the earnings of the Banks. The Banks' earnings 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. The Delaware Bank began to offer short-term consumer loans in 2001. At June 30, 2002, the Company had approximately $2.8 million of net short-term consumer loans outstanding, which were originated in Georgia and North Carolina through a single marketer. These loans generally have principal amounts of $600 or less and terms of approximately two weeks. Federal and state 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 Delaware Bank uses a single marketer under a contract which can be terminated upon short notice, under various circumstances. In the second quarter of 2002, as a result of legislation in Indiana, the Delaware Bank ceased making these loans in that state, which accounts for approximately 65% of the revenue for the program. Although, the Delaware Bank is in negotiations to expand the program to other states, there can be no assurance that the Delaware Bank will generate revenues comparable to the Indiana loans. 7 Note 3: Legal Proceedings The Company and the Banks are from time to time parties (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 liabilities of the Company and the Banks, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of the Company and the Banks. 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 and has been paying, all legal costs of defense, and indemnify the Delaware Bank against any resulting legal liability. Note 4: 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 loans ("RALs") offered on a national basis to customers of Liberty Tax Services, an unaffiliated national tax preparation firm. Short-term consumer loans are loans made to customers offered through the Delaware Bank, 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 either of the Banks. The Company evaluates the performance of the community banking segments based upon net income, return on equity and return on average assets. Tax refund products and short-term consumer loans are evaluated based upon net income. Tax refund products and short-term consumer loans are provided to satisfy consumer demands while diversifying the Company's earnings stream. Segment information for the six and three months ended June 30, 2002 and 2001, is as follows: 8
As of and for the six months ended June 30, 2002 (dollars in thousands) Short-term Republic First First Bank of Tax Refund Consumer Bank Delaware Products loans Total ------------------ -------------- ---------------- ------------- --------------- Net interest income $ 8,933 $ 613 $ (21) $ 2,617 $ 12,142 Provision for loan losses 1,600 10 - 919 2,529 Non-interest income 1,034 236 734 - 2,004 Non-interest expenses 7,262 774 258 460 8,754 ------------------ -------------- ---------------- ------------- --------------- Net income $ 760 $ 49 $ 276 $ 724 $ 1,809 ================== ============== ================ ============= =============== Selected Balance Sheet Accounts: Total assets 616,598 35,498 572 3,740 656,408 Total loans, net 444,626 22,023 - 2,795 469,444 Total deposits 437,890 27,461 572 - 465,923 June 30, 2001 (dollars in thousands) Short-term Republic First First Bank of Tax Refund Consumer Bank Delaware Products loans Total ------------------ -------------- ---------------- ------------- --------------- Net interest income $ 8,190 $ 446 $ - $ 494 $ 9,130 Provision for loan losses 515 52 - 210 777 Non-interest income 829 277 253 - 1,359 Non-interest expenses 6,471 763 90 298 7,622 ------------------ -------------- ---------------- ------------- --------------- Net income $ 1,362 $ (57) $ 104 $ (9) $ 1,400 ================== ============== ================ ============= =============== Selected Balance Sheet Accounts: Total assets $ 608,648 $ 35,425 $ - $ 5,952 $ 650,025 Total loans, net 411,615 23,017 - 3,395 438,027 Total deposits 421,389 27,867 - - 449,256
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As of and for the three months ended June 30, 2002 (dollars in thousands) Short-term Republic First First Bank of Tax Refund Consumer Bank Delaware Products loans Total ------------------ -------------- ---------------- ------------- --------------- Net interest income $ 4,483 $ 339 $ 17 $ 1,303 $ 6,142 Provision for loan losses 850 - - 398 1,248 Non-interest income 604 115 350 - 1,069 Non-interest expenses 3,769 392 104 231 4,496 ------------------ -------------- ---------------- ------------- --------------- Net income $ 332 $ 37 $ 161 $ 391 $ 921 ================== ============== ================ ============= =============== Selected Balance Sheet Accounts: Total assets 616,598 35,498 572 3,740 656,408 Total loans, net 444,626 22,023 - 2,795 469,444 Total deposits 437,890 27,461 572 - 465,923 June 30, 2001 (dollars in thousands) Short-term Republic First First Bank of Tax Refund Consumer Bank Delaware Products loans Total ------------------ -------------- ---------------- ------------- --------------- Net interest income $ 4,047 $ 215 $ - $ 494 $ 4,756 Provision for loan losses 400 30 - 190 620 Non-interest income 448 86 27 - 561 Non-interest expenses 3,223 391 50 80 3,744 ------------------ -------------- ---------------- ------------- --------------- Net income $ 585 $ (76) $ (14) $ 144 $ 639 ================== ============== ================ ============= =============== Selected Balance Sheet Accounts: Total assets $ 608,648 $ 35,425 $ - $ 5,952 $ 650,025 Total loans, net 411,615 23,017 - 3,395 438,027 Total deposits 421,389 27,867 - - 449,256
10 Note 5: Earnings Per Share: Earnings per share ("EPS") consists of two separate components, basic EPS and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding for each period presented. Diluted EPS is calculated by dividing net income by the weighted average number of common shares outstanding plus dilutive common stock equivalents ("CSEs"). CSEs consist of dilutive stock options granted pursuant to the Company's stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. CSEs that are not dilutive are not included in the following calculation. At June 30, 2002, and 2001, respectively, there were 106,340 and 104,940 of stock options, that were not included in the calculation of EPS because the exercise price was higher than the average market price for the period. These CSEs, however, may become dilutive in the future. The following table is a comparison of EPS for the three and six months ended June 30, 2002, and 2001.
Quarter to Date | Year to Date 2002 2001 | 2002 2001 | Net Income | $921,000 $639,000 | $1,809,000 $1,400,000 Per Per | Per Per Shares Share Shares Share | Shares Share Shares Share ----------------------------------------------------------------------------------------------- Weighted average shares | For period 6,199,395 6,182,954 | 6,191,175 6,182,954 Basic EPS $0.15 $0.10 | $0.29 $0.23 Add common stock equivalents 287,149 202,666 | 264,559 190,618 ------- ------- | ------- ------- representing dilutive stock options | Effect on basic EPS of dilutive CSE $(0.01) - | $(0.01) ------- ---- | -------- | $(0.01) Equals total weighted average | shares and CSE (diluted) 6,486,544 6,385,620 | 6,455,734 6,373,572 ========= ========= | ========= ========= Diluted EPS $0.14 $0.10 | $0.28 $0.22 ------- ===== | ===== =====
Note 6: Comprehensive Income The following table displays net income and the components of other comprehensive income to arrive at total comprehensive income. For the Company, the only components of other comprehensive income are those related to the unrealized gains (losses) on available for sale investment securities.
(dollar amounts in thousands) Three months ended Six months ended June 30, June 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Net income $ 921 $ 639 $1,809 $1,400 Other comprehensive income, net of tax: Unrealized gains/(losses) on securities: Unrealized holding gains/(losses) during the period 1,800 (889) 1,288 584 Less: Reclassification adjustment for gains included in net income - - - (9) ------------ ------------ ------------ ------------ Comprehensive income $2,721 $ (250) $3,097 $1,975 ============ ============ ============ ============
11 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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; new service and product offerings by competitors and price pressures; and similar items. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the year ended December 31, 2001, Quarterly Reports on Form 10-Q, filed by the Company in 2002 and 2001, and any Current Reports on Form 8-K filed by the Company, as well as other filings. Financial Condition: June 30, 2002, Compared to December 31, 2001 Total assets increased $4.1 million to $656.4 million June 30, 2002, versus $652.3 million at December 31, 2001. This increase reflected increased loans outstanding. 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 $6.9 million, to $476.3 million at June 30, 2002, versus $469.3 million at December 31, 2001, due to an increase in commercial loans which offset declines in residential mortgages and short-term consumer loans. 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 the second quarter of 2001, home equity loans and lines of credit and others. Commercial loans typically range between $250,000 and $3,000,000 but customers may borrow significantly larger amounts up to the Banks' combined legal lending limit of $8.5 million at June 30, 2002. Individual customers may have several loans that are often secured by different collateral. The aggregate amount of loans in excess of $5,000,000 at June 30, 2002, was $33.6 million. The Company allowed the residential mortgage portfolio to decline through prepayments by $6.2 million to $61.6 million as these loans yield less than the growing commercial loan portfolio. At June 30, 2002, the Company had $2.8 million in net short-term consumer loans, which were first offered in the second quarter of 2001, versus $6.8 million of such loans at December 31, 2001. These loans have principal amounts of less than $600, terms 12 of approximately two weeks and were originated in North Carolina and Georgia through a single marketer. The decline in loans outstanding reflected the second quarter termination of business in Indiana. 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 primarily of securities issued by the Federal Home Loan Mortgage Corporation. Securities available for sale totaled $104.9 million at June 30, 2002, a decrease of $9.0 million or 7.9%, from year-end 2001. This decrease primarily reflected principal repayments on mortgage-backed securities which were used to reduce borrowings. Additionally, the Company experienced a $1.9 million gain in the market value of available for sale securities which is reflected on the balance sheet. At June 30, 2002, the portfolio had net unrealized gains of $1.4 million, compared to unrealized losses of $540,000 at the end of the prior year. Securities held to maturity are investments for which there is the positive intent and ability to hold the investment to maturity. These investments are carried at amortized cost. The held to maturity portfolio consists primarily of Federal Home Loan Bank ("FHLB") securities. In addition, the Bank holds agency securities, other debt securities and a small amount of CMO securities. At June 30, 2002, securities held to maturity totaled $9.4 million, a decrease of $2.2 million from $11.6 million at year-end 2001. This decline was due primarily to maturities of U.S. government agency securities. The market value of the held to maturity portfolio was $9.5 million at June 30, 2002, versus $11.6 million at December 31, 2001. Cash and due from Banks: Cash and due from banks, interest bearing deposits and federal funds sold are all liquid funds. The aggregate amount in these three categories increased by $7.9 million, to $49.3 million at June 30, 2002, from $41.4 million at December 31, 2001, reflecting increased deposits which were temporarily invested in federal funds. Other interest-earning restricted cash: Other interest-earning restricted cash represents funds provided to fund an offsite ATM network for which the Company is compensated. At June 30, 2002, and December 31, 2001, the balance was $4.9 million. Fixed Assets: Bank premises and equipment, net of accumulated depreciation, decreased $333,000 to $4.9 million at June 30, 2002, from $5.2 million at December 31, 2001, due to depreciation. Other Real Estate Owned: The $1.9 million balance of other real estate owned represents a hotel property acquired in the fourth quarter of 2001. The appraisal for the property (commercial real estate), indicates a market value that exceeds its carrying value at June 30, 2002. 13 Deposits: Deposits, which include non-interest and interest-bearing demand deposits, money market, savings and time deposits, are the Banks' primary source of funding. Deposits are generally solicited from the Company's primary market area through a variety of products to attract and retain customers, with a primary focus on multi-product relationships. Total deposits increased by $18.7 million, or 4.2% to $465.9 million at June 30, 2002, from $447.2 million at December 31, 2001. Core deposits, which include demand, money market and savings accounts, increased by $26.2 million, or 13.3% to $223.1 million at June 30, 2002, versus $196.9 million at the prior year-end. Deposit growth has benefited from the Company's business development efforts and bank consolidations in the Philadelphia market that left some customers underserved. Time deposits decreased $7.5 million, or 3.0% to $242.8 million at June 30, 2002, versus $250.3 million at the prior year-end. The decrease reflected the Company's strategy of allowing higher costing time deposits to mature and not be replaced. 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 $17.5 million to $125.0 million at June 30, 2002, from $142.5 million at December 31, 2001, due to the maturity of two FHLB advances. Shareholders' Equity: Total shareholders' equity increased $3.2 million to $50.1 million at June 30, 2002, versus $46.8 million at December 31, 2001. This increase was the result of year-to-date 2002 net income of $1.8 million and an increase in the market value of available for sale securities of $1.3 million. 14 Three Months Ended June 30, 2002 Compared to June 30, 2001 ---------------------------------------------------------- Results of Operations: Overview The Company's net income increased $282,000, or 44.1% to $921,000, or $0.14 per diluted share for the three months ended June 30, 2002, compared to $639,000, or $0.10 per diluted share for the prior year comparable period. The increase reflected improvements in both net interest and non-interest income. Between those periods, the Company increased its average commercial and construction loans 9.4% and increased its average lower cost core deposits 15.6%. The Company also added the short-term consumer loan product in the second quarter of 2001. These items had a favorable impact on net interest income. Non-interest income was favorably impacted by the growth of the tax refund products. However, the increase in net interest income implied by loan and core deposit growth was partially offset by the effect of interest rate reductions of 475 basis points in 2001, which continued to impact the current year. Also partially offsetting the impact of these increases were a larger provision for loan losses and higher operating expenses. However, the ongoing repricing of certificates of deposit in a lower interest rate environment continues to contribute positively to the margin. The increased net income resulted in a return on average assets and average equity of .56% and 7.65% respectively, compared to .40% and 5.63% respectively for the same period in 2001. Analysis of Net Interest Income Historically, the Company's earnings have depended significantly upon the Banks' net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is impacted by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. 15
For the three months ended For the three months ended June 30, 2002 June 30, 2001 ------------------------------------------------- ------------------------------------------------ Interest-earning assets: Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate --------------- ------------- ------------- ------------------- ------------ ------------ Federal funds sold and other interest- earning assets 50,909 224 1.76% 35,737 404 4.53% Securities 111,265 1,625 5.84% 151,748 2,330 6.14% Loans receivable 467,343 9,387 8.05% 437,673 9,472 8.68% --------------- ------------- ------------- ------------------- ------------ ------------ Total interest-earning assets 629,517 11,236 7.15% 625,158 12,206 7.82% Other assets 25,516 22,385 --------------- ------------------- Total assets $ 655,033 $ 647,543 =============== =================== Interest-bearing liabilities: Demand-non interest bearing $ 55,253 $ 47,963 Demand interest-bearing 44,183 120 1.09% 31,650 145 1.84% Money market & savings 105,516 450 1.71% 97,330 809 3.33% Time deposits 260,318 2,427 3.74% 270,796 4,255 6.30% --------------- ------------- ------------- ------------------- ------------ ------------ Total deposits 465,270 2,997 2.58% 447,739 5,209 4.67% Total interest-bearing deposits 410,017 2,997 2.93% 399,776 5,209 5.23% --------------- ------------- ------------- ------------------- ------------ ------------ Other borrowings 134,212 2,097 6.27% 145,467 2,241 6.18% --------------- ------------- ------------- ------------------- ------------ ------------ Total interest-bearing liabilities $ 544,229 $5,094 3.75% 545,243 7,450 5.48% =============== ============= ============= =================== ------------ ------------ Total deposits and other borrowings 599,482 5,094 3.41% 593,206 7,450 5.04% --------------- ------------- ------------- ------------------- ------------ ------------ Noninterest-bearing liabilites 7,351 9,992 Shareholders' equity 48,200 44,345 --------------- ------------------- Total liabilities and shareholders' equity $ 655,033 $ 647,543 =============== =================== Net interest income $6,142 $4,756 ============= ============ Net interest spread 3.75% 2.79% ============= ============ Net interest margin 3.91% 3.05% ============= ============
16 The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volumes and rates during the period. Changes due to rate and volume variances have been allocated to rate. Rate/Volume Table
Three months ended June 30, 2002 versus 2001 (dollars in thousands) Due to change in: Volume Rate Total ------------------- ------------- -------------------- Interest earned on: Federal funds sold $ 67 $ (247) $ (180) Securities (585) (120) (705) Loans 1,378 (1,463) (85) ----------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 860 (1,830) (970) Interest Expense of Deposits Interest-bearing demand deposits (34) 59 25 Money market and savings (35) 394 359 Time deposits 98 1,730 1,828 ----------------------------------------------------------------------------------------------------------------------- Total deposit interest expense 29 2,183 2,212 Other borrowings 176 (32) 144 ----------------------------------------------------------------------------------------------------------------------- Total interest expense 205 2,151 2,356 ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 1,065 $ 321 $ 1,386 -----------------------------------------------------------------------------------------------------------------------
The Company's net interest margin increased 86 basis points to 3.91% for the three months ended June 30, 2002, versus the prior year comparable period. The improvement reflected the 9.4% average growth in commercial and construction loans, the 15.6% increase in average lower costing core deposits (demand, money market and savings accounts), the repricing of certificates of deposit in the lower rate environment and the growth of the short-term consumer loan program fees. Fees on short-term consumer loans, first offered in the second quarter of 2001, contributed $1.3 million to interest income and 87 basis points to the net interest margin in 2002 and contributed $519,000 to interest income and 34 basis points to the net interest margin in the second quarter of 2001. 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 repricing of certificates of deposit. The average yield on interest-earning assets declined 67 basis points to 7.15% for the three months ended June 30, 2002, from 7.82% for the prior year comparable period due principally to the decline in the prime rate of interest. This decline reflected the impact of the lower interest rate environment which was partially offset by higher yields on short-term consumer loans. Overall, the average rate paid on interest-bearing liabilities decreased 173 basis points to 3.75% for the for the three months ended June 30, 2002, from 5.48% in the prior year comparable period reflecting the lower interest rate environment. The Company's net interest income increased $1.4 million, or 29.1%, to $6.1 million for the three months ended June 30, 2002, from $4.8 million for the 17 prior year comparable period. As shown in the Rate Volume table above, the increase in net interest income was due to the positive effect of volume changes of approximately $1.1 million with a $321,000 increase reflecting deposits repricing to lower rates. The positive impact of volume changes reflected the increases in average commercial and construction loans, lower cost core deposits and the short-term consumer loans discussed previously. Average interest-earning assets increased $4.4 million, to $629.5 million for the three months ended June 30, 2002, from $625.2 million for the prior year comparable period. The Company's total interest income decreased $970,000, or 8.0%, to $11.2 million for the three months ended June 30, 2002, from $12.2 million for the prior year comparable period, reflecting the lower interest rate environment. The lower interest rates earned on interest-earning assets resulted in a $1.8 million decline in interest income. Partially offsetting that decline was the positive effect of volume changes in commercial and consumer loans which resulted in a $860,000 increase in interest income. Interest and fees on loans decreased $85,000, to $9.4 million for the three months ended June 30, 2002, from $9.5 million for the prior year comparable period. The decline reflected a lower rate earned on average loans resulting from the lower rate environment. This was partially offset by the short-term consumer loan product, which contributed $1.3 million in interest income versus $519,000 in the second quarter of 2001. The impact of the lower prime rate was the principal factor reducing the yield on loans 63 basis points to 8.05%. Interest and dividend income on securities decreased $705,000 to $1.6 million for the three months ended June 30, 2002, from $2.3 million for the prior year comparable period. This decline was due principally to the $40.5 million, or 26.7% decrease in average securities outstanding to $111.3 million at June 30, 2001 from $151.7 million for the prior year period. In addition, the average rate earned on securities declined 30 basis points to 5.84% as higher coupon investments prepaid more rapidly than lower coupons and the rates earned on variable rate securities declined due to the lower interest rate environment. Proceeds from these securities were utilized to reduce FHLB borrowings or were invested as federal funds sold. Interest income on federal funds sold and other interest-earning assets decreased $180,000, reflecting the lower interest rate environment. The Company's total interest expense decreased $2.4 million, or 31.6%, to $5.1 million for the three months ended June 30, 2002, from $7.5 million for the prior year comparable period, due principally to the lower rate environment. Interest-bearing liabilities averaged $544.2 million for the three months ended June 30, 2002, versus $545.2 million for the prior year comparable period. Average interest-bearing lower cost core deposits increased $20.7 million, while higher cost time deposits and other borrowings declined $10.5 million and $11.3 million, respectively. Both factors contributed to a reduction in interest expense. The average rate paid on interest-bearing liabilities decreased 173 basis points to 3.75% for the three months ended June 30, 2002, due to the decrease in average rates paid on deposit products as a result of the lower interest rate environment. Interest expense on time deposits (certificates of deposit) decreased $1.8 million, or 43%, to $2.4 million at June 30, 2002, from $4.3 million for the prior year comparable period. This increase reflected the lower interest rate environment as the average rate declined 256 basis points to 3.74%. In addition, average certificates of deposit outstanding decreased $10.5 million, or 3.9%, to $260.3 million, for the three months ended June 30, 2002, from $270.8 million as higher cost time deposits matured and were not replaced. Interest expense on other borrowings, which consist of FHLB advances and the trust preferred securities, decreased $144,000 or 6.5% to $2.1 million for the for the three months ended June 30, 2002, compared to $2.2 million for the prior year comparable period. This decrease resulted from a $11.3 million, or 7.7% decline in average other borrowings to $134.2 million at June 30, 2002, versus $145.5 million for the prior year comparable. The decline in average other borrowings reflected increased deposit generation and securities maturities and prepayments which were used to pay down term borrowings. The Company issued $6.0 million of trust preferred securities in November 2001, the expense for which is included in other borrowings expense. These expenses were $98,000 for the three months ended June 30, 2002. 18 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 $628,000 to $1.2 million for the three months ended June 30, 2002, from $620,000 for the prior year comparable period. This increase reflected additional provisions based on regulatory classifications as detailed in the Company's Annual Report on Form 10K for 2001. In addition, the short-term consumer loan program, first offered in the second quarter of 2001, had provisions of $398,000 in the second quarter of 2002 versus $190,000 in the second quarter of 2001. Finally, 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 $509,000, or 90.7% to $1.1 million for the three months ended June 30, 2002, versus $561,000 for the prior year comparable period due primarily to increased revenue reflecting a greater volume of tax refund products. Non-Interest Expenses Total non-interest expenses increased $752,000, or 20.1% to $4.5 million for the three months ended June 30, 2002, from $3.7 million for the prior year comparable period. Salaries and employee benefits increased $219,000 or 10.8%, to $2.2 million for the three months ended June 30, 2002, from $2.0 million for the prior year comparable period. The increase reflected operational support for the tax refund and short-term consumer loan products, business development efforts and normal merit increases. Occupancy expenses increased $29,000 to $363,000 for the three months ended June 30, 2002, versus $334,000 for the prior year comparable period due to rent and repairs and maintenance increases. Legal fees increased $338,000 to $382,000 for the for the three months ended June 30, 2002, from $44,000 for the prior year comparable period. This increase reflected legal expenses related to loan collections and legal expenses associated with the short-term loan and tax refund programs. Advertising expense declined $58,000, or 37.2% to $98,000 as the company reduced the number of advertisements during the year. Other operating expenses increased $220,000, or 23.0% to $1.2 million for the for the three months ended June 30, 2002, from $1.0 million for the prior year comparable period. This increase reflected the write off a receivable of approximately $200,000. Provision for Income Taxes The provision for income taxes increased $232,000, or 73.9%, to $546,000 for the three months ended June 30, 2002, from $314,000 for the prior year comparable period. This increase was primarily the result of the increase in pre-tax income. The effective tax rate was 37.2% for the three months ended June 30, 2002, versus 33.0% for the prior year comparable period due to an increase in state income tax expense. 19 Six Months Ended June 30, 2002 Compared to June 30, 2001 -------------------------------------------------------- Results of Operations: Overview The Company's net income increased $409,000, or 29.2% to $1.8 million, or $0.28 per diluted share for the six months ended June 30, 2002, compared to $1.4 million, or $0.22 per diluted share for the prior year comparable period. The increase reflected improvements in both net interest and non-interest income. Between those periods, the Company increased its average commercial and construction loans 10.8% and increased its average lower cost core deposits 20.4%. The Company also benefited from the full period effect of the short-term consumer loan product, first offered in the second quarter of 2001. These items had a favorable impact on net interest income. Non-interest income was favorably impacted by the growth of the tax refund products. However, the increase in net interest income implied by loan and core deposit growth was partially offset by the effect of interest rate reductions of 475 basis points in 2001, which continued to impact the current year. Also, partially offsetting the impact of these increases were a larger provision for loan losses and higher legal and operating expenses. However, the ongoing repricing of certificates of deposit in a lower interest rate environment continues to contribute positively to the margin. The increased net income resulted in a return on average assets and average equity of .55% and 7.64% respectively, compared to .43% and 6.25% respectively for the same period in 2001. Analysis of Net Interest Income Historically, the Company's earnings have depended significantly upon the Banks' net interest income, which is the difference between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Net interest income is impacted by changes in the mix of the volume and rates of interest-earning assets and interest-bearing liabilities. 20
Interest Interest Average Income/ Yield/ Average Income/ Yield/ (Dollars in thousands) Balance Expense Rate Balance Expense Rate ------------------ ------------- ------------- ------------------- ------------ ------------ For the six months ended For the six months ended Interest-earning assets: June 30, 2002 June 30, 2001 ------------------------------------------------- ------------------------------------------------- Federal funds sold and other interest- earning assets 45,162 393 1.75% 40,580 1,057 5.25% Securities 115,785 3,371 5.82% 157,862 4,929 6.24% Loans receivable 467,253 18,920 8.16% 431,246 18,622 8.70% ------------------ ------------- ------------- ------------------- ------------ ------------ Total interest-earning assets 628,200 22,684 7.27% 629,688 24,608 7.86% Other assets 31,128 25,092 ------------------ ------------------- Total assets $ 659,328 $ 654,780 ================== =================== Interest-bearing liabilities: Demand-non interest bearing 58,172 - 47,179 Demand interest-bearing 45,968 241 1.06% 32,225 295 1.85% Money market & savings 100,804 795 1.59% 90,871 1,714 3.80% Time deposits 256,696 5,189 4.08% 273,307 8,687 6.41% ------------------ ------------- ------------- ------------------- ------------ ------------ Total deposits 461,640 6,225 2.72% 443,582 10,696 4.86% Total interest-bearing deposits 403,468 6,225 3.11% 396,403 10,696 5.44% ------------------ ------------- ------------- ------------------- ------------ ------------ Other borrowings 140,235 4,317 6.21% 157,212 4,782 6.13% ------------------ ------------- ------------- ------------------- ------------ ------------ Total interest-bearing liabilities $ 543,703 $10,542 3.91% 553,615 15,478 5.64% ================== ============= ============= =================== ============ ============ Total deposits and other borrowings 601,875 10,542 3.53% 600,794 15,478 5.20% ---------------------------------- ------------- ------------------- ------------ ------------ Noninterest-bearing liabilites 9,797 9,977 Shareholders' equity 47,656 44,009 ------------------ ------------------- Total liabilities and shareholders' equity $ 659,328 $ 654,780 ================== =================== Net interest income $12,142 $ 9,130 ============= ============ Net interest spread 3.74% 2.67% ============= ============ Net interest margin 3.88% 2.90% ============= ============
21 The rate volume table below presents an analysis of the impact on interest income and expense resulting from changes in average volumes and rates during the period. Changes due to rate and volume variances have been allocated to rate. Rate/Volume Table
Six months ended June 30, 2002 versus 2001 (dollars in thousands) Due to change in: Volume Rate Total ------------------- ------------- -------------------- Interest earned on: Federal funds sold $ 40 $ (704) $ (664) Securities (1,225) (333) (1,558) Loans 3,526 (3,228) 298 ----------------------------------------------------------------------------------------------------------------------- Total interest-earning assets 2,341 (4,265) (1,924) Interest Expense of Deposits Interest-bearing demand deposits (72) 126 54 Money market and savings (78) 997 919 Time deposits 336 3,162 3,498 ----------------------------------------------------------------------------------------------------------------------- Total deposit interest expense 186 4,285 4,471 Other borrowed funds 523 (58) 465 ----------------------------------------------------------------------------------------------------------------------- Total interest expense 709 4,227 4,936 ----------------------------------------------------------------------------------------------------------------------- Net interest income $ 3,050 $ (38) $ 3,012 -----------------------------------------------------------------------------------------------------------------------
The Company's net interest margin increased 98 basis points to 3.88% for the six months ended June 30, 2002, versus the prior year comparable period. The improvement reflected the 10.8% average growth in commercial and construction loans, the 20.4% increase in average lower cost core deposits (demand, money market and savings accounts), the repricing of certificates of deposit in the lower rate environment and the full year impact of the short-term consumer loan fees. Fees on short-term consumer loans, first offered in the second quarter of 2001, contributed $2.8 million to interest income and contributed 88 basis points to the margin in 2002 versus $519,000 and 16 basis points to the margin in 2001. The Company continues to be 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 of certificates of deposit. The average yield on interest-earning assets declined 59 basis points to 7.27% for the six months ended June 30, 2002, from 7.86% for the prior year comparable period due principally to the decline in prime rate partially offset by the higher yielding short-term consumer loans. The average rate paid on interest-bearing liabilities decreased 173 basis points to 3.91% for the for the six months ended June 30, 2002, from 5.64% in the prior year comparable period reflecting the lower interest rate environment. The Company's net interest income increased $3.0 million, or 33.0%, to $12.1 million for the six months ended June 30, 2002, from $9.1 million for the prior year comparable period. As shown in the Rate Volume table above, the increase in net interest income was due primarily to the positive effect of volume changes of approximately $3.1 million, partially offset by a $38,000 22 decline in net interest income resulting from the lower rate environment. The positive impact of volume changes reflected the increases in average commercial and construction loans and the short-term consumer loans discussed previously. Average interest-earning assets decreased $1.5 million, to $628.2 million for the for the six months ended June 30, 2002, from $629.7 million for the prior year comparable period as the Company used cash from the maturities and prepayments of securities to reduce other borrowings. The Company's total interest income decreased $1.9 million, or 7.8%, to $22.7 million for the six months ended June 30, 2002, from $24.6 million for the prior year comparable period, reflecting the lower interest rate environment. That decrease reflected a $4.3 million decline in interest income due to rate which was partially offset by the positive effect of volume changes in commercial and consumer loans of $2.3 million. Interest and fees on loans increased $298,000, or 1.6%, to $18.9 million for the for the six months ended June 30, 2002, from $18.6 million for the prior year comparable period. This increase reflected an increase in average loans, primarily in commercial and construction loans, of $36.0 million, or 8.4% to $467.3 million and the addition of the short-term consumer loan product, which contributed $2.8 million in interest income versus $519,000 in the first six months of 2001. The impact of the lower prime rate was the principal factor reducing the yield on loans 54 basis points to 8.16%. Interest and dividend income on securities decreased $1.6 million to $3.4 million for the six months ended June 30, 2002, from $4.9 million for the prior year comparable period. This decline was due principally to the $42.1 million, or 26.7% decrease in average securities outstanding to $115.8 million at June 30, 2001 from $157.9 million for the prior year period. In addition, the average rate earned on securities declined 42 basis points to 5.82% as higher coupon investments prepaid more rapidly than lower coupons and the rates earned on variable rate securities declined due to the lower interest rate environment. Proceeds from these securities were utilized to reduce FHLB borrowings. Interest income on federal funds sold and other interest-earning assets decreased $664,000, reflecting the lower interest rate environment. The Company's total interest expense decreased $4.9 million, or 31.9%, to $10.5 million for the six months ended June 30, 2002, from $15.5 million for the prior year comparable period, due principally to the lower rate environment. Interest-bearing liabilities averaged $543.7 million for the for the six months ended June 30, 2002, a decrease of $9.9 million, or 1.8%, from $553.6 million for the prior year comparable period. The decline resulted from lower average borrowings and certificates of deposit. The average rate paid on interest-bearing liabilities decreased 173 basis points to 3.91% for the six months ended June 30, 2002, due to the decrease in average rates paid on deposit products as a result of the lower interest rate environment. Interest expense on time deposits (certificates of deposit) decreased $3.5 million, or 40.3%, to $5.2 million at June 30, 2002, from $8.7 million for the prior year comparable period. This decrease reflected the lower interest rate environment as the average rate declined 233 basis points to 4.08%. In addition, average certificates of deposit outstanding decreased $16.6 million, or 6.1%, to $256.7 million, for the six months ended June 30, 2002, from $273.3 million for the prior year comparable period as the Company was able to increase its lower cost core deposits. Interest expense on other borrowings, which consist of FHLB advances and trust preferred securities, decreased $465,000 or 9.7% to $4.3 million for the for the six months ended June 30, 2002, compared to $4.8 million for the prior year comparable period. This decrease resulted from a $17.0 million, or 10.8% decline in average other borrowings to $140.2 million at June 30, 2002, versus $157.2 million for the prior year comparable. The decline in average other borrowings reflected increased deposit generation and securities maturities and prepayments. 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"). These expenses were $194,000 for the six months ended June 30, 2002. 23 Provision for Loan Losses The provision for loan losses is charged to operations in an amount necessary to bring the total allowance for loan losses to a level that reflects the known and estimated inherent losses in the portfolio. The provision for loan losses increased $1.8 million to $2.5 million for the six months ended June 30, 2002, from $777,000 for the prior year comparable period. This increase reflected additional provisions based on regulatory classifications as detailed in the Company's Annual Report on Form 10K for 2001. In addition, the short-term consumer loan program, first offered in the second quarter of 2001, had provisions of $919,000 in the year 2002 versus $210,000 in 2001. Finally, provisions also 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 $645,000, or 47.5% to $2.0 million for the six months ended June 30, 2002, versus $1.4 million for the prior year comparable period reflecting increased revenue resulting from a greater volume of tax refund products. Non-Interest Expenses Total non-interest expenses increased $1.1 million, or 14.9% to $8.8 million for the for the six months ended June 30, 2002, from $7.6 million for the prior year comparable period. Salaries and employee benefits increased $443,000 or 11.0%, to $4.5 million for the for the six months ended June 30, 2002, from $4.0 million for the prior year comparable period. The increase reflected operational support for the tax refund and short-term consumer loan products, business development efforts and normal merit increases. Legal fees increased $609,000 to $727,000 for the for the six months ended June 30, 2002, from $118,000 for the prior year comparable period. This increase reflected legal expenses related to loan collections and legal costs related to the short-term loan and tax refund product programs. Advertising expense declined $45,000, or 14.8% to $259,000 as the company reduced the number of advertisements this year. Other operating expenses increased $66,000, or 3.3% to $2.1 million for the for the six months ended June 30, 2002, from $2.0 million for the prior year comparable period. Provision for Income Taxes The provision for income taxes increased $364,000, or 52.7%, to $1.1 million for the six months ended June 30, 2002, from $690,000 for the prior year comparable period. This increase was primarily the result of the increase in pre-tax income. The effective tax rate was 36.8% for the six months ended June 30, 2002, versus 33.0% for the prior year comparable period due to an increase in state income tax expense. 24 Commitments, Contingencies and Concentrations The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit totaling $75.6 million at June 30, 2002. 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 $67.5 million and $57.7 million and standby letters of credit of approximately $8.1 million and $5.3 million at June 30, 2002, and December 31, 2001, respectively. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and many require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. Standby letters of credit are conditional commitments that guarantee the performance of a customer to a third party. The credit risk and collateral policy involved in issuing letters of credit is essentially the same as that involved in extending loan commitments. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies but may include real estate, marketable securities, pledged deposits, equipment and accounts receivable. At June 30, 2002, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to real estate operators and lessors in the aggregate amount of $151.9 million, which represented 31.9% of gross loans receivable at June 30, 2002. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others. Loan concentrations are considered to exist when there is amounts loaned to a multiple number of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. 25 ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK Interest Rate Risk Management There has been no material change in the Company's assessment of its sensitivity to market risk since its presentation in the 2001 Annual Report on Form 10-K filed with the SEC. Regulatory Matters The following table presents the Company's capital regulatory ratios at June 30, 2002, and December 31, 2001:
Actual For Capital To be well Adequacy purposes capitalized under FRB capital guidelines Amount Ratio Amount Ratio Amount Ratio ------------- ------------ ------------- ----------- ----------- ----------- Dollars in thousands At June 30, 2002 Total risk based capital Republic First Bank $52,245 13.03% $32,083 8.00% $40,103 10.00% First Bank of Delaware 6,018 28.15% 1,710 8.00% 2,138 10.00% Republic First Bancorp, 60,176 14.25% 33,791 8.00% 42,239 N/A Inc. Tier one risk based capital Republic First Bank 47,215 11.77% 16,041 4.00% 24,062 6.00% First Bank of Delaware 5,749 26.89% 855 4.00% 1,283 6.00% Republic First Bancorp, 54,877 12.99% 16,896 4.00% 25,343 N/A Inc. Tier one leveraged capital Republic First Bank 47,215 7.64% 30,882 5.00% 30,882 5.00% First Bank of Delaware 5,749 13.82% 2,081 5.00% 2,081 5.00% Republic First Bancorp, 54,877 8.38% 32,743 5.00% 32,743 N/A Inc. Actual For Capital To be well Adequacy purposes capitalized under FRB capital guidelines Amount Ratio Amount Ratio Amount Ratio ------------ ----------- ----------- ---------- ----------- ---------- At December 31, 2001 Total risk based capital Republic First Bank $51,000 12.96% $31,493 8.00% $39,366 10.00% First Bank of Delaware 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 N/A Tier one risk based capital Republic First Bank 46,078 11.70% 15,747 4.00% 23,620 6.00% First Bank of Delaware 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 N/A Tier one leveraged capital Republic First Bank 46,078 7.46% 30,884 5.00% 30,884 5.00% First Bank of Delaware 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 N/A
26 Dividend Policy The Company has not paid any cash dividends on its Common Stock and does not currently plan to pay cash dividends to shareholders in the next year. Liquidity Financial institutions must maintain liquidity to meet day-to-day requirements of depositors and borrowers, take advantage of market opportunities, and provide a cushion against unforeseen needs. Liquidity needs can be met by either reducing assets or increasing liabilities. The most liquid assets consist of cash, amounts due from banks and federal funds sold. Regulatory authorities require the Banks to maintain certain liquidity ratios such that the Banks maintain available funds, or can obtain available funds at reasonable rates, in order to satisfy commitments to borrowers and the demands of depositors. In response to these requirements, the Banks have each formed Asset/Liability Committees (ALCOs), comprised of selected members of the Banks' boards of directors and senior management, which monitor such ratios. The purpose of the Committees are in part, to monitor the Banks' liquidity and adherence to the ratios in addition to managing the relative interest rate risk to the Banks'. The ALCOs meet at least quarterly. The Company's most liquid assets totaled $49.3 million at June 30, 2002, compared to $41.4 million at December 31, 2001, due to an increase in federal funds sold. Loan maturities and repayments are a primary source of asset liquidity. At June 30, 2002, the Bank estimated that in excess of $50.0 million of loans would mature or be repaid in the six month period that will end December 31, 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 primarily by generating core deposits and certificates of deposit with competitive rates and utilizing the facilities of the Federal Home Loan Bank System. At June 30, 2002, the Bank had $161.0 million in unused lines of credit available under arrangements with correspondent banks compared to $162.5 million at December 31, 2001. These lines of credit enable the Bank to purchase funds for short or long-term needs at rates often lower than other sources and require pledging of securities or loan collateral. At June 30, 2002, the Company had aggregate outstanding commitments (including unused lines of credit and letters of credit) of $75.6 million. Certificates of deposit scheduled to mature in one year totaled $170.9 million at June 30, 2002, and no borrowings were scheduled to mature within that period. The Company anticipates that it will have sufficient funds available to meet its current commitments. The Bank has $125.0 million in other borrowings that are callable by the FHLB, whereupon they would likely be replaced by borrowings at then current rates. In addition, the Company can use overnight borrowings or other term borrowings to replace these borrowed funds. The Banks target and actual liquidity levels are determined by comparisons of the estimated repayment and marketability of the Banks interest-earning assets with projected future outflows of deposits and other liabilities. The 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 June 30, 2002. Additionally, the Bank has established a line of credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of approximately $276.0 million. As of June 30, 2002, and December 31, 2001, the Company had borrowed $125.0 million and $142.5 million, respectively, under its lines of credit. Securities also represent a primary source of liquidity for the Bank. Accordingly, investment decisions generally reflect liquidity over other considerations. 27 The Company's primary short-term funding sources are certificates of deposit and its securities portfolio. The circumstances that are reasonably likely to affect those sources are as follows. The Banks have historically been able to generate certificates of deposit by matching Philadelphia market rates or paying a premium rate of 25 to 50 basis points over those market rates. It is anticipated that this source of liquidity will continue to be available; however, its incremental cost may vary depending on market conditions. The Company's securities portfolio is also available for liquidity, 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' ALCOs are responsible for managing the liquidity position and interest sensitivity of the Banks. Those committees' primary objective is to maximize net interest income while configuring the Banks' interest-sensitive assets and liabilities to manage interest rate risk and provide adequate liquidity. Securities Portfolio At June 30, 2002, the Company had identified certain investment securities that are being held for indefinite periods of time, including securities that will be used as part of the Company's asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors. These securities are classified as available for sale and are intended to increase the flexibility of the Company's asset/liability management. Available for sale securities consist of US Government Agency securities and other investments. The book and market values of securities available for sale were $103.5 million and $104.9 million as of June 30, 2002, respectively. The net unrealized gain on securities available for sale as of that date was $1.4 million. Loan Portfolio The Company's loan portfolio consists of secured and unsecured commercial loans including commercial real estate loans, loans secured by one-to-four family residential property, commercial construction and residential construction loans as well as residential mortgages, home equity loans, consumer and other loans. Commercial loans are primarily term loans made to small to medium-sized businesses and professionals for working capital, asset acquisition and other purposes. The Banks commercial loans typically range between $250,000 and $3,000,000 but customers may borrow significantly larger amounts up to the Banks combined legal lending limit of $8.5 million at June 30, 2002. Individual customers may have several loans often secured by different collateral. The aggregate amount of such loans that were in excess of $5,000,000 at June 30, 2002, was $33.6 million. The Company's net loans increased $5.6 million, to $469.4 million at June 30, 2002 from $463.9 million at December 31, 2001. The following table sets forth the Company's gross loans by major categories for the periods indicated: 28
(dollars in thousands) As of June 30, 2002 As of December 31, 2001 ------------------------------------------------------------------------------ Balance % of Total Balance % of Total ------------------------------------------------------------------------------ Commercial: Real estate secured $ 334,307 70.2 $ 321,579 68.5 Non real estate secured 51,215 10.8 53,388 11.4 Unsecured 10,470 2.2 7,229 1.5 ------------------------------------------------------------------------------ 395,992 83.2 382,196 81.4 Residential real estate 61,623 12.9 67,821 14.5 Consumer, short-term & other 18,636 3.9 19,302 4.1 ------------------------------------------------------------------------------ Total loans 476,251 100.0% 469,319 100.0% Less allowance for loan losses (6,807) (5,431) ---------------- ------------------ Net loans $ 469,444 $ 463,888 ================ ==================
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. 29 The following summary shows information concerning loan delinquency and other non-performing assets at the dates indicated.
June 30, December 31, 2002 2001 --------------------------------------------- (dollars in thousands) Loans accruing, but past due 90 days or more $3,967 $518 Non-accrual loans 5,768 3,830 --------------------------------------------- Total non-performing loans (1) 9,735 4,348 Other real estate owned 1,858 1,858 --------------------------------------------- Total non-performing assets (2) $11,593 $6,206 ============================================= Non-performing loans as a percentage of total loans net of unearned Income 2.04% 0.93% Non-performing assets as a percentage of total assets 1.77% 0.95% (1) Non-performing loans are comprised of (i) loans that are on a nonaccrual basis; (ii) accruing loans that are 90 days or more past due and (iii) restructured loans. (2) Non-performing assets are composed of non-performing loans and other real estate owned (assets acquired in foreclosure).
Total non-performing loans increased $5.4 million to $9.7 million at June 30, 2002. The increase in loans over 90 days past due reflected loans to two different borrowers. The increase in non-accrual loans, resulted from a loan to one borrower classified as non-accrual in the second quarter of 2002. The recorded investment in impaired loans totaled $5.3 million and $4.3 million at June 30, 2002, and December 31, 2001, respectively, and the amount of such valuation allowances were $734,000 and $288,000, respectively. There were no commitments to extend credit to any borrowers with impaired loans as of the end of the periods presented herein. At June 30, 2002, and December 31, 2001, internally classified substandard loans totaled approximately $13.5 million and $8.7 million respectively; and for doubtful loans totaled approximately $2.7 million and $62,000, respectively. There were no loans classified as loss at those dates. The increase in doubtful loans represent loans to one borrower which were classified as doubtful and placed in non-accrual status in the second quarter of 2002. The Bank had delinquent loans as follows: (i) 30 to 59 days past due, at June 30, 2002 and December 31, 2001, in the aggregate principal amount of $1.0 million and $6.1 million respectively; and (ii) 60 to 89 days past due, at June 30, 2002 and December 31, 2001, in the aggregate principal amount of $1.0 million and $853,000 respectively. At June 30, 2002, the Company had no foreign loans and no loan concentrations exceeding 10% of total loans except for credits extended to real estate operators and lessors in the aggregate amount of $151.9 million, which 30 represented 31.9% 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. Potential problem loans consist of loans that are included in performing loans, but for which potential credit problems of the borrowers have caused management to have serious doubts as to the ability of such borrowers to continue to comply with present repayment terms. At June 30, 2002, all identified problem loans are included in the preceding table with the exception of loans classified as substandard but still accruing which totaled $6.9 million as of June 30, 2002. Other Real Estate Owned: Other real estate owned ("OREO") is initially recorded at the lower or cost or estimated fair value, net of estimated selling costs at the date of foreclosure. After foreclosure, management periodically performs valuations and any subsequent deteriorations in fair value, and all other revenue and expenses are charged against operating expenses in the period in which they occur. Currently, the Company has one OREO property which consists of a hotel property acquired in the fourth quarter of 2001. The Company had no credit exposure to "highly leveraged transactions" at June 30, 2002, as defined by the Federal Reserve Bank. 31 Allowance for Loan Losses An analysis of the Company's allowance for loan losses for the six months ended June 30, 2002, and 2001, and the twelve months ended December 31, 2001 is as follows:
For the six months For the twelve months For the six months ended ended ended (dollars in thousands) June 30, 2002 December 31, 2001 June 30, 2001 ---------------------- ----------------------- ----------------------- Balance at beginning of period ............ $ 5,431 $ 4,072 $ 4,072 Charge-offs: Commercial ............................. 91 2,074 7 Consumer and short-term ................ 1,071 805 111 -------- -------- -------- Total charge-offs ................... 1,162 2,879 118 -------- -------- -------- Recoveries: Commercial ............................. 9 257 10 Consumer ............................... -- 17 17 -------- -------- -------- Total recoveries .................... 9 274 27 -------- -------- -------- Net charge-offs ........................... 1,153 2,605 91 -------- -------- -------- Provision for loan losses ................. 2,529 3,964 777 -------- -------- -------- Balance at end of period ............... $ 6,807 $ 5,431 $ 4,758 ======== ======== ======== Average loans outstanding (1)........... $467,253 $448,397 $431,246 ======== ======== ======== As a percent of average loans (1): Net charge-offs/Recoveries............... 0.25% 0.58% -% Provision for loan losses................. 0.54% 0.88% 0.18% Allowance for loan losses................ 1.46% 1.21% 1.10% Allowance for loan losses to: Total loans, net of unearned income at period end.............................. 1.43% 1.16% 1.07% Total non-performing loans at period end..................................... 69.93% 124.89% 56.19% (1) Includes nonaccruing loans.
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, historic 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. Estimating the appropriate level of the allowance for loan losses at any given date is difficult, particularly in a continually changing economy. In 32 management's opinion, the allowance for loan losses was appropriate at June 30, 2002. However, there can be no assurance that, if asset quality deteriorates in future periods, additions to the allowance for loan losses will not be required. It is impractical to determine in which 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 June 30, 2002 At December 31, 2001 ---------------- -------------------- Percent of Loans Percent of Loans Amount In Each Category Amount (in In Each Category (in 000's) To Loans 000's) to Loans Allocation of allowance for loan losses: Commercial $6,130 83.2% $4,814 81.4% Residential real estate 184 12.9% 203 14.5% Consumer, short-term and other 146 3.9% 182 4.1% Unallocated 347 -% 232 -% ----------------------------------------------------------------------- Total $6,807 100.00% $5,431 100.00% ================== ===============
The majority of the Company's loan portfolio represents loans made for commercial purposes, while significant amounts of residential property may serve as collateral for such loans. The Company attempts to evaluate larger loans individually, on the basis of its loan review process, which scrutinizes loans on a selective basis; and other available information. Even if all commercial purpose loans could be reviewed, there is no assurance that information on potential problems would be available. The Company's portfolios of loans made for purposes of financing residential mortgages and consumer loans are evaluated in groups. At June 30, 2002, loans made for commercial and construction, residential mortgage and consumer purposes, respectively, amounted to $396.0 million, $61.6 million and $18.6 million. Effects of Inflation The majority of assets and liabilities of a financial institution are monetary in nature. Therefore, a financial institution differs greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Management believes that the most significant impact of inflation on financial results is the Company's need and ability to react to changes in interest rates. As discussed previously, management attempts to maintain an essentially balanced position between rate sensitive assets and liabilities over a one year time horizon in order to protect net interest income from being affected by wide interest rate fluctuations. 33 Part II Other Information Item 1: Legal Proceedings ----------------- The Company and the Banks are from time to time parties (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 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 defense costs, and to indemnify the Bank against any resulting legal liability. Item 2: Changes in Securities and Use of Proceeds ----------------------------------------- None Item 3: Defaults upon Senior Securities ------------------------------- None Item 4: Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5: Other Information ----------------- Certification Under Sarbanes-Oxley Act Our chief executive officer and chief financial officer have furnished to the SEC the certification with respect to this Report that is required by Section 906 of the Sarbanes-Oxley Act of 2002. Item 6: Exhibits and Reports on Form 8-K -------------------------------- The following Exhibits are filed as part of this report. (Exhibit numbers correspond to the exhibits required by Item 601 of Regulation S-K for an annual report on Form 10-K) 34 Exhibit No. 10 Material Contracts.- None 21 Subsidiaries of the Company Republic First Bank (the "Bank"), a wholly-owned subsidiary, commenced operations on November 3, 1988. The Bank is a commercial bank chartered pursuant to the laws of the Commonwealth of Pennsylvania. First Bank of Delaware (the "Delaware Bank"), which also is a wholly-owned subsidiary of the Company, commenced operations on 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. All other schedules and exhibits are omitted because they are not applicable or because the required information is set out in the financial statements or the notes hereto. **Incorporated by reference in the Company's Form 10-K, filed February 28, 2002. Reports on Form 8-K and 8-KA None. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Republic First Bancorp, Inc. /s/ Harry D. Madonna Harry D. Madonna President and Chief Executive Officer /s/ Paul Frenkiel Paul Frenkiel Executive Vice President and Chief Financial Officer Dated: August 14, 2002 36