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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, 2004
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ___________________
Commission file number: 0-17007
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REPUBLIC FIRST BANCORP, INC.
-----------------------------
(Exact name of registrant as specified in charter)
Pennsylvania 23-2486815
- ----------------------------------- -------------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
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.
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 ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES _____ NO X
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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 June 30, 2004. The aggregate market value of $63,047,004 was
based on the average of the bid and asked prices on the National Association of
Securities Dealers Automated Quotation System on June 30, 2004.
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 7,428,681
- ------------------------------------- ------------------------------
Title of Class Number of Shares Outstanding
as of February 16, 2005
Documents incorporated by reference
Part III incorporates certain information by reference from the Registrant's
Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on April
26, 2005.
REPUBLIC FIRST BANCORP | 3
REPUBLIC FIRST BANCORP, INC.
Form 10-K
INDEX
PART I Page
Item 1 Description of Business.............................................................................. 5
Item 2 Description of Properties............................................................................ 12
Item 3 Legal Proceedings.................................................................................... 13
Item 4 Submission of Matters to a Vote of Security Holders ................................................. 13
Item 4A Executive Officers .................................................................................. 13
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ............................... 14
Item 6 Selected Financial Data.............................................................................. 15
Item 7 Management's Discussion and Analysis of Results of Operations and Financial Condition................ 16
Item 7A Quantitative and Qualitative Disclosure about Market Risk (Item 305 of Reg S-K)...................... 40
Item 8 Financial Statements and Supplementary Data.......................................................... 40
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 40
Item 9A Controls and Procedures.............................................................................. 40
Item 9B Other Information Not Applicable..................................................................... 40
PART III
Item 10 Directors, Executive Officers, Promoters and Control Persons of the Registrant ...................... 41
Item 11 Executive Compensation .............................................................................. 41
Item 12 Security Ownership of Certain Beneficial Owners and Management ...................................... 41
Item 13 Certain Relationships and Related Transactions ...................................................... 41
Item 14 Principal Accounting Fees and Services .............................................................. 41
PART IV
Item 15 Exhibits, Certifications, Financial Statement Schedules and Reports on Form 8-K ..................... 42
REPUBLIC FIRST BANCORP | 4
PART I
Item 1: Description of Business
Republic First Bancorp, Inc.
Recent Development
The First Bank of Delaware was spun off by Republic First Bancorp, Inc.
(the "Company"), on January 31, 2005. All assets, liabilities and equity of
First Bank of Delaware were spun off as an independent company, trading on the
OTC market under FBOD. Shareholders received one share of stock in First Bank of
Delaware, for every share owned of the Company. After that date, the Company
became a one bank holding company.
The Company was established in 1987. At December 31, 2004, the Company was
a two-bank holding company organized and incorporated under the laws of the
Commonwealth of Pennsylvania. Its wholly-owned subsidiaries, Republic First Bank
(the "PA Bank"), and First Bank of Delaware (the "DE Bank") (sometimes hereafter
referred to jointly as the "Banks"), offer a variety of credit and depository
banking services. Such services are offered to individuals and businesses
primarily in the Greater Philadelphia and Delaware area through their ten
offices and branches in Philadelphia and Montgomery Counties in Pennsylvania and
New Castle County, Delaware, but also through the national consumer loan
products offered by the DE Bank.
As of December 31, 2004, the Company had total assets of approximately
$720.4 million, total shareholder's equity of approximately $65.2 million, total
deposits of approximately $545.4 million and net loans receivable outstanding of
approximately $582.9 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 office of the Company is located at 1608 Walnut Street, Suite 1000,
Philadelphia, PA 19103, telephone number (215) 735-4422.
At December 31, 2004 the Company and the Banks had a total of 166 full-time
equivalent employees.
Republic First Bank
The PA Bank is a commercial bank chartered pursuant to the laws of the
Commonwealth of Pennsylvania, and is subject to examination and comprehensive
regulation by the Federal Deposit Insurance Corporation ("FDIC") and the
Pennsylvania Department of Banking. The deposits held by the PA Bank are insured
up to applicable limits by the Bank Insurance Fund of the FDIC. The PA Bank
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.
Subsequent to December 31, 2004, an additional branch was opened in Media,
Pennsylvania in Delaware County.
As of December 31, 2004, the PA Bank had total assets of approximately
$661.8 million, total shareholder's equity of approximately $57.9 million, total
deposits of approximately $507.7 million and net loans receivable of
approximately $549.7 million. The majority of such loans were made for
commercial purposes.
First Bank of Delaware
The DE Bank is a commercial bank chartered pursuant to the laws of the
State of Delaware with its principal office located at Brandywine Commons II,
Concord Pike in Wilmington. The DE Bank is subject to examination and
comprehensive regulation by the FDIC and the Delaware Bank Commissioner. (As
noted above, the DE Bank was spun off as of January 31, 2005 and is no longer
owned by the Company.) The deposits held by the DE Bank are insured up to
applicable limits by the Bank Insurance Fund of the FDIC. The DE Bank presently
conducts its principal business banking activities primarily through its two
offices in Wilmington, Delaware but also makes substantial numbers of short-term
loans in Arizona, Michigan, California, Ohio, Texas and other states and via the
internet, and tax refund anticipation loans in numerous other states.
As of December 31, 2004, the DE Bank had total assets of approximately
$58.6 million, total shareholders' equity of approximately $11.4 million, total
deposits of approximately $37.7 million and net loans receivable of
approximately $41.0 million. In addition to loans made for commercial purposes,
the DE Bank also offers short-term consumer loans and tax refund anticipation
loans not offered by the PA Bank.
REPUBLIC FIRST BANCORP | 5
Services Offered
The Banks offer many commercial and consumer banking services with an
emphasis on serving the needs of individuals, small and medium-sized businesses,
executives, professionals and professional organizations in their service area.
The Banks attempt to offer a high level of personalized service to both
their small and medium-sized businesses and consumer customers. The Banks offer
both commercial and consumer deposit accounts, including checking accounts,
interest-bearing demand accounts, money market accounts, certificates of
deposit, savings accounts, sweep accounts, lockbox services and individual
retirement accounts (and other traditional banking services). The Banks actively
solicit both non-interest and interest-bearing deposits from their borrowers.
The Banks offer a broad range of loan and credit facilities to the
businesses and residents of their service area, including secured and unsecured
commercial loans, commercial real estate and construction loans, residential
mortgages, automobile loans, home improvement loans, home equity and overdraft
lines of credit, and other products.
The DE Bank also nationally offers short-term consumer loans, which are
considered to be sub-prime, and tax refund anticipation loans to the under
banked markets.
The Banks manage credit risk through loan application evaluation and
monitoring for adherence with credit policies. Since their inception, the Banks
have had a senior officer monitor compliance with the Banks' lending policies
and procedures by the Banks' loan officers.
The Banks also maintain investment securities portfolios. Investment
securities are purchased by the Banks in compliance with the Banks' Investment
Policies, which are approved annually by the Banks' Boards of Directors. The
Investment Policies address such issues as permissible investment categories,
credit quality, maturities and concentrations. At December 31, 2004 and 2003,
approximately 68% and 72%, 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. 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 remainder of the securities portfolio consists of trust
preferred securities, corporate bonds, and Federal Home Loan Bank (FHLB)
securities.
Service Area/Market Overview
The Banks' primary business banking service area consists of the Greater
Philadelphia region, including Center City Philadelphia and the northern and
western suburban communities located principally in Montgomery and Delaware
Counties in Pennsylvania and northern Delaware. The Banks also serve the
surrounding counties of Bucks, Chester and Delaware in Pennsylvania, southern
New Jersey and southern Delaware. Additionally, the DE Bank makes short-term
loans in Arizona, California, Ohio, Texas and other states. Tax refund loans are
made by the DE Bank in numerous additional states.
Competition
There is substantial competition among financial institutions in the Banks'
business banking 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 approximately $10.0 million at December 31, 2004. After the spin
off, the legal lending limit for the Company will be approximately $8.7 million.
The DE Bank will have a non-secured lending limit of approximately $1.7 million
and a secured lending limit of approximately $2.9 million. Loans above these
amounts may be made if the excess over the lending limit is participated to
other institutions. After the spin off, the Banks may continue to sell each
other such participations. 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
REPUBLIC FIRST BANCORP | 6
area. Several new 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.
Only a limited number of banks currently compete for the short-term and tax
refund anticipation loans offered nationally by the DE Bank. However, management
believes that competition for both types of loans is likely to increase both in
the number of competitors, and related competing products. For instance, many
banks have begun to offer courtesy overdraft products which may compete with
short-term loans.
Operating Strategy for Business Banking
Following the spin off of the DE Bank, the Company's business banking
objective is for the PA Bank 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 changes in their product offerings and in the degree of
personal attention they provide. The Company has sought to capitalize on these
changes by offering a community banking alternative. As a result of continuing
consolidations and its marketing efforts, the Company believes it has a
continuing opportunity to increase its market share.
Products and Services
Traditional Banking Products and Services
The Banks offer a range of competitively priced commercial and other
banking services, including secured and unsecured commercial loans, real estate
loans, construction and land development loans, automobile loans, home
improvement loans, mortgages, home equity and overdraft lines of credit and
others terms. 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 $5.0
million but customers may borrow significantly larger amounts up to the Banks'
combined legal lending limit of approximately $10.0 million. After the spin off,
the PA Bank will continue making loans in that typical range. The DE Bank's
loans will typically range from $250,000 to $3.0 million. Individual customers
may have several loans, often secured by different collateral. Relationships in
excess of $6.5 million at December 31, 2004, amounted to $82.8 million. The $6.5
million threshold approximates 10% of total capital and reserves and reflects an
additional internal monitoring guideline.
The Banks attempt to offer a high level of personalized service to both
their commercial and consumer customers. The Banks are members of the STAR(TM)
and PLUS(TM) automated teller ("ATM") networks in order to provide customers
with access to ATMs worldwide. The Banks currently have eight proprietary ATMs
at branch locations.
REPUBLIC FIRST BANCORP | 7
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' outstanding loans,
representing approximately 95% of total loans outstanding at December 31, 2004.
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. The Banks make both fixed and
variable rate loans with terms ranging from one to five years. Variable rate
loans are generally tied to the national prime rate of interest.
Tax Refund Anticipation Products
As described under "Description of Business - Recent Development" the DE
Bank was spun off on January 31, 2005. The DE Bank has a contractual
relationship with Liberty Tax Service, one of the nation's largest tax
preparation services, to provide tax refund products to consumer taxpayers for
whom Liberty Tax Service prepares and electronically files federal and state
income tax returns ("Tax Refund Products"). Tax Refund Products consist of
accelerated check refunds ("ACRs"), and refund anticipation loans ("RALs").
While the DE Bank is attempting to increase market penetration of these
products, there can be no assurance that revenue levels associated with them
will increase significantly in 2005 or thereafter.
Short-Term Consumer Loans
As described under "Description of Business - Recent Development" the DE
Bank was spun off on January 31, 2005. In continuing efforts to expand and
diversify fee income, the DE Bank began to offer short-term consumer loans, also
known as payday loans. Similar in some respects to the tax refund products
previously discussed, payday loan terms are relatively short (approximately 2
weeks) and have principal amounts of $1,500 or less. At December 31, 2004, there
were approximately $1.6 million of short-term consumer loans outstanding, which
the DE Bank originated in Texas. The DE Bank also originates payday loans in
Michigan, California, Arizona and Ohio and other states, and via the internet,
which are sold to third parties. At December 31, 2004, there were approximately
$26.0 million of such loans outstanding. Legislation eliminating, or limiting
interest rates and other terms of payday loans has from time to time been
proposed, primarily as a result of interest rate and 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 DE Bank 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.
Branch Expansion Plans and Growth Strategy
A branch was opened by the PA Bank in Media, Pennsylvania in first quarter
2005. Another branch is planned for 2005, but no lease has been signed.
Additional locations may also be pursued.
Supervision and Regulation
Various requirements and restrictions under the laws of the United States,
the Commonwealth of Pennsylvania and the State of Delaware affect the Company
and the Banks.
General
The Banks are subject to regulation by the FDIC. The Company is a bank
holding company subject to supervision and regulation by the Federal Reserve
Bank of Philadelphia ("FRB") under the federal Bank Holding Company Act of 1956,
as amended (the "BHC Act"). 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 PA Bank is a Pennsylvania-chartered bank subject to supervision and
regulation by the FDIC and the Pennsylvania Department of Banking. The DE Bank
is a Delaware-chartered bank subject to supervision and regulation by the FDIC
and the Delaware Bank Commissioner.
REPUBLIC FIRST BANCORP | 8
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 Banks.
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 market interest rates and
the national economy.
Holding Company Structure
The Banks are subject to restrictions under federal law which limits 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 loans or extensions
of credit to the Company or purchased any assets from the Company.
Under regulatory policy, the Company is expected to serve as a source of
financial strength to the Banks and to commit resources to support the Banks.
This support may be required at times when, absent such policy, the Company
might not otherwise provide such support. Any capital loans by the Company to
the Banks are subordinate in right of payment to deposits and to certain other
indebtedness of the Banks. In the event of the Company's bankruptcy, any
commitment by the Company to a federal bank regulatory agency to maintain the
capital of the Banks will be assumed by the bankruptcy trustee and entitled to a
priority of payment.
Gramm-Leach-Bliley Act
On November 12, 1999, the federal Gramm-Leach-Bliley Act (the "GLB Act")
was enacted. The GLB Act did three fundamental things:
(a) repealed the key provisions of the Glass Steagall Act so as to permit
commercial banks to affiliate with investment banks (securities
firms);
(b) amended the BHC Act to permit qualifying bank holding companies to
engage in any type of financial activities that were not permitted for
banks themselves; and
(c) permitted subsidiaries of banks to engage in a broad range of
financial activities that were not permitted for banks themselves.
The result was that banking companies would generally be able to offer a
wider range of financial products and services and would be more readily able to
combine with other types of financial companies, such as securities and
insurance companies.
The GLB Act created 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 Board of Governors of the Federal Reserve System (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 FHC 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 of these
authorized activities are as follows:
(a) Securities underwriting and dealing;
(b) Insurance underwriting and sales;
REPUBLIC FIRST BANCORP | 9
(c) Merchant banking activities;
(d) Activities determined by the Federal Reserve to be "financial in
nature" and incidental activities; and
(e) Activities determined by the Federal Reserve to be "complementary" to
financial activities.
Bank holding companies that do not qualify or elect to become FHCs will be
limited in their activities to those previously permitted by law and regulation.
The Company has not elected to become a FHC but has not precluded the
possibility of doing so in the future.
The GLB Act also authorized 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 Office of the Comptroller of
the Currency (the "OCC"). A national bank's "financial subsidiary" can engage in
most, but not all, of the newly authorized activities.
In addition, the GLB Act provided 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. The GLB Act subjected 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 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
certainty, it will probably further narrow the differences and intensify
competition between and among commercial banks, investment banks, insurance
firms and other financial service companies.
Sarbanes-Oxley Act of 2002
The following is a brief summary of some of the provisions of the
Sarbanes-Oxley Act of 2002 ("SOX") that affect the Company. It is not intended
as an exhaustive description of SOX or its impact on the Company.
SOX instituted or increased various requirements for corporate governance,
board of director and audit committee composition and membership, board duties,
auditing standards, external audit firm standards, additional disclosure
requirements, including CEO and CFO certification of financial statements and
related controls, and other new requirements.
Boards of directors are now required to have a majority of independent
directors, and the audit committees are required to be wholly independent, with
greater financial expertise. Such independent directors are not allowed to
receive compensation from the company on whose board they serve except for
directors' fees. Additionally, requirements for auditing standards and
independence of external auditors were increased and included independent audit
partner review, audit partner rotation, and limitations over non-audit services.
Penalties for non-compliance with existing and new requirements were established
or increased.
In addition, Section 404 of SOX requires that by the end of 2006, our
management perform a detailed assessment of internal controls and report thereon
as follows:
1. We must state that we accept the responsibility for maintaining an
adequate internal control structure and procedures for financial
reporting;
2. We must present an assessment, as of the end of the December 31, 2006
fiscal year, of the effectiveness of the internal control structure
and procedure for our financial reporting; and
3. We must have our auditors attest to, and report on, the assessment
made by management. The attestation must be made in accordance with
standards for attestation engagements issued or adopted by the Public
Company Accounting Oversight Board.
We have taken necessary steps with respect to achieving compliance. Section
404, requiring the expanded assessment of internal control, is not required to
be completed until December 31, 2006, unless the market cap test at June 30,
2005 requires adoption by December 31, 2005. However, due to the great detail
and additional documentation required in performing the internal control
assessment, management's efforts in this regard have already begun.
REPUBLIC FIRST BANCORP | 10
Regulatory Restrictions on Dividends
Dividend payments by the PA Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code") 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
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 PA Bank would be limited to $32.2 million of dividends payable plus an
additional amount equal to its net profit for 2005, up to the date of any such
dividend declaration. Dividend payments by the DE Bank are similarly limited by
the FDIC and also the Delaware Bank Commissioner. Dividends for the DE Bank
would be limited to $6.2 million plus an additional amount equal to its net
profit for 2005. However, dividends would be further limited in order to
maintain capital ratios as discussed in "Regulatory Capital Requirements". The
Company may consider dividend payments in 2005.
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. The
Company may consider dividend payments in 2005.
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 has 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 has 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 FDIC subjects the Banks to similar capital
requirements.
The risk-based capital standards are required to take adequate account of
interest rate risk, concentration of credit risk and the risks of
non-traditional activities.
Interstate Banking
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995
(the "Interstate Banking Law") amended various federal banking laws to provide
for nationwide interstate banking, interstate bank mergers and interstate
branching. The interstate banking provisions allow for the acquisition by a bank
holding company of a bank located in another state.
Interstate bank mergers and branch purchase and assumption transactions
were allowed effective September 1, 1998; however, states may "opt-out" of the
merger and purchase and assumption provisions by enacting a law that
specifically prohibits
REPUBLIC FIRST BANCORP | 11
such interstate transactions. States could, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to September 1, 1999. States could also enact legislation to allow for de
novo interstate branching by out of state banks. In July 1997, Pennsylvania
adopted "opt-in" legislation that allows interstate merger and purchase and
assumption transactions.
Profitability, Monetary Policy and Economic Conditions
In addition to being affected by general economic conditions, the earnings
and growth of the Banks will be affected by the policies of regulatory
authorities, including the Pennsylvania Department of Banking, the Delaware Bank
Commissioner, 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 - Results of
Operations".
Item 2: Description of Properties
The PA Bank leases approximately 34,086 square feet on the second, fourth,
tenth and eleventh floors of 1608 Walnut Street, Philadelphia, Pennsylvania, as
its headquarter facilities. The space is occupied by the Company and the
executive offices of the Banks. Back office operations of the Banks and
commercial bank lending of the PA Bank are located therein. Management believes
that future staffing needs may require the PA Bank to secure additional space.
The current term of the lease on it's headquarter facilities expires on July 31,
2007 with annual rent expense of $458,772 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, and license and permit fees under its lease and to
maintain insurance on the premises.
The PA 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 PA Bank's main office. The initial ten year
term of the lease expired March 2003 and contains a five year renewal option
that has been exercised. The annual rent for such location is $94,680 payable in
monthly installments.
The PA 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 PA Bank leases approximately 972 square feet in the lower level of
Pepper Pavilion at Graduate Hospital, 19th and Lombard Streets, Philadelphia,
Pennsylvania. The space contains a banking area, lobby, office, and vault. The
current lease has an initial five year term and a one year renewal option which
expires June 2007. The annual rental at such location is $26,580 payable in
monthly installments.
The PA Bank leases approximately 798 square feet of space on the ground
floor and 903 square feet on the 2nd floor at 233 East Lancaster Avenue,
Ardmore, PA. The space contains a banking area and business development office.
The initial ten-year term of the lease expires in August 2005, and contains one
renewal option for five years. The annual rental at such location is $49,212,
payable in monthly installments.
The PA 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
$71,436, payable in monthly installments.
The PA Bank leases 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 $74,532, payable in monthly installments.
The PA 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 PA 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
$72,972, payable in monthly installments.
REPUBLIC FIRST BANCORP | 12
The PA Bank leases approximately 2,200 square feet of space on the ground
floor at 436 East Baltimore Avenue, Media, Pennsylvania. The space contains a
banking area and office space. The initial five-year term of the lease expires
October 2009 with one renewal option for five years. The annual rent is $31,200
payable in monthly installments.
The DE Bank has a land lease on approximately 2,000 sq. feet of ground at
Concord Pike and Rocky Run Parkway, Brandywine Hundred, Delaware for its branch
operations and headquarters. The DE 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
$76,884, payable in monthly installments.
The DE Bank leases approximately 3,092 square feet on the ground floor at
5301 Limestone Road, New Castle, Delaware. The space contains a banking area and
office space. The initial seven-year term of the lease expires September 2011
with one five-year renewal option. The annual rent for such location is $66,480,
payable in monthly installments.
Item 3: Legal Proceedings
The Company and the Banks are from time to time parties (plaintiff or
defendant) to lawsuits in the normal course of business. While any litigation
involves an element of uncertainty, management, after reviewing pending actions
with 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.
Item 4: Submission of Matters to a Vote of Security Holders
Not applicable.
Item 4A: Executive Officers
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and
Exchange Commission in connection with the Company's 2005 annual meeting of
shareholders scheduled for April 26, 2005.
REPUBLIC FIRST BANCORP | 13
PART II
Item 5: Market for Registrant's for Common Equity and Related Stockholder
Matters
Market Information
Shares of the Common Stock are quoted on Nasdaq under the symbol "FRBK."
The table below presents the range of high and low trade prices reported for the
Common Stock on Nasdaq for the periods indicated. Market quotations reflect
inter-dealer prices, without retail mark-up, markdown, or commission, and may
not necessarily reflect actual transactions. As of December 31, 2004, there were
approximately 1,903 holders of record of the Common Stock. On March 4, 2005, the
closing price of a share of Common Stock on Nasdaq was $14.26. That price was
adjusted for the spin-off of First Bank of Delaware, which trades under the
symbol "FBOD" which closed at $4.11 on March 4, 2005.
Year Quarter High Low
------ ---------- -------- --------
2004........................ 4th $15.50 $12.75
3rd 14.13 12.00
2nd 13.10 11.42
1st 13.02 11.35
2003..................... 4th $14.00 $10.25
3rd 11.81 7.96
2nd 8.39 7.56
1st 7.83 6.34
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. The
Company may consider dividend payments in 2005. 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 "Description of Business - Supervision and Regulation".
REPUBLIC FIRST BANCORP | 14
Item 6: Selected Financial Data
As of or for the Years Ended December 31,
------------------------------------------------------------------
(Dollars in thousands, except per share data) 2004 2003 2002 2001 2000
INCOME STATEMENT DATA:
Total interest income ........................................... $ 37,730 $ 42,404 $ 44,123 $ 49,014 $ 46,887
Total interest expense .......................................... 15,131 16,653 20,162 28,659 29,792
--------- ----------- ----------- ----------- -----------
Net interest income ............................................. 22,599 25,751 23,961 20,355 17,095
Provision for loan losses ....................................... 1,149 6,764 5,303 3,964 666
Non-interest income ............................................. 12,194 7,136 3,282 2,944 1,724
Non-interest expenses ........................................... 20,299 18,725 18,586 16,180 13,132
Federal income taxes ............................................ 4,405 2,484 1,154 1,041 1,657
--------- ----------- ----------- ----------- -----------
Net income ...................................................... $ 8,940 $ 4,914 $ 2,200 $ 2,114 $ 3,364
========= =========== =========== =========== ===========
PER SHARE DATA (1)
Basic earnings per share ........................................ $ 1.24 $ 0.69 $ 0.32 $ 0.31 $ 0.50
Diluted earnings per share ...................................... 1.18 0.66 0.31 0.30 0.49
Book value per share ............................................ 9.01 7.85 7.48 6.89 6.33
BALANCE SHEET DATA
Total assets .................................................... $ 720,412 $ 654,792 $ 647,692 $ 652,329 $ 655,637
Total loans, net (2) ............................................ 582,919 479,523 457,047 463,888 418,313
Total investment securities ..................................... 50,368 69,946 96,561 125,442 169,841
Total deposits .................................................. 545,396 453,605 456,302 447,217 425,551
FHLB & overnight advances ....................................... 86,090 127,852 125,000 142,500 176,442
Subordinated debt ............................................... 6,186 6,000 6,000 6,000 --
Total shareholders' equity ...................................... 65,224 56,376 51,276 46,843 43,030
PERFORMANCE RATIOS
Return on average assets ........................................ 1.30% 0.75% 0.34% 0.33% 0.55%
Return on average shareholders' equity .......................... 14.64 9.20 4.52 4.59 7.73
Net interest margin ............................................. 3.53 4.24 3.85 3.25 2.91
Total non-interest expenses as a percentage of average assets (3) 2.94 2.86 2.63 2.49 2.16
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of loans (2) .......... 1.31% 1.78% 1.43% 1.16% 0.96%
Allowance for loan losses as a percentage of non-performing loans 154.44 101.00 94.57 124.89 118.96
Non-performing loans as a percentage of total loans (2) ......... 0.85 1.76 1.51 0.93 0.81
Non-performing assets as a percentage of total assets ........... 0.71 1.35 1.24 0.95 0.52
Net charge-offs (recoveries) as a percentage of average loans, 0.40 1.00 0.87 0.58 (0.05)
net (2)
LIQUIDITY AND CAPITAL RATIOS
Average equity to average assets ................................ 8.85% 8.16% 7.57% 7.02% 6.12%
Leverage ratio .................................................. 10.43 9.64 8.56 8.07 6.91
Tier 1 capital to risk-weighted assets .......................... 12.28 12.66 13.24 12.73 11.99
Total capital to risk-weighted assets ........................... 13.53 13.92 14.49 13.98 13.08
(1) Restated for 10% stock dividend
(2) Includes loans held for sale.
(3) Excluding other real estate owned expenses of $1.5 million in 2002.
REPUBLIC FIRST BANCORP | 15
Item 7: Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following is management's discussion and analysis of the significant
changes in the Company's results of operations, financial condition and capital
resources presented in the accompanying consolidated financial statements of
Republic First Bancorp, Inc. This discussion should be read in conjunction with
the accompanying notes to the consolidated financial statements.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may", "believes", "expect", "estimate", "project", "anticipate",
"should", "would", "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, 2004, Quarterly Reports on Form 10-Q
filed by the Company in 2004 and any Current Reports on Form 8-K filed by the
Company, as well as similar filings in 2004.
Critical Accounting Policies
In accordance with FAS No. 144, the Company will present the operations of
First Bank of Delaware as discontinued operations starting with the first
quarter 2005. On January 31, 2005 the First Bank of Delaware was spun off. All
assets, liabilities and equity of First Bank of Delaware were spun off as an
independent company, trading on the OTC market under FBOD. Shareholders received
one share of stock in First Bank of Delaware, for every share owned of the
Company. The short-term loan and tax refund lines of business were accordingly
transferred after that date. However, the PA Bank may continue to purchase tax
refund anticipation loans from the DE Bank.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned income and an allowance for loan losses.
Interest on loans is calculated based upon the principal amounts outstanding.
The Company defers and amortizes certain origination and commitment fees, and
certain direct loan origination costs over the contractual life of the related
loan. This results in an adjustment of the related loans yield.
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.
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 collectibles of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the allowance.
The allowance is an amount that represents management's best estimate of
known and inherent loan losses. Management's evaluations of the allowance for
loan losses consider such factors as an examination of the portfolio, past loss
experience, the results of the most recent regulatory examination, current
economic conditions and other relevant factors.
The Company accounts for income taxes under the liability method of
accounting. Deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at the tax rates expected to be in effect
when the temporary differences are realized or settled. In addition, a deferred
tax asset is recorded to reflect the future benefit of net operating loss carry
forwards. 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
REPUBLIC FIRST BANCORP | 16
Fees earned on short-term loans which are not sold, are recorded as
interest income. At December 31, 2004, there were approximately $1.6 million of
these loans outstanding.
The majority of short-term loans are now sold to third parties effective in
the third quarter of 2003. The DE Bank records fees on sold loans as
non-interest income. The DE Bank had total short-term loan participations sold
of $26.0 million at December 31, 2004. The Company evaluated these sales and
determined that they qualified as such under FASB 140.
Results of Operations for the years ended December 31, 2004 and 2003
Overview
The Company's net income increased $4.0 million, or 81.9%, to $8.9 million
or $1.18 per diluted share for the year ended December 31, 2004, compared to
$4.9 million, or $0.66 per diluted share for the prior year. While net interest
income decreased $3.2 million in 2004 primarily because fewer short-term loans
were retained but were instead sold, related loan loss provisions were reduced
by $3.8 million, more than offsetting that decrease. Increased volumes of such
sales were the primary factor in a $2.6 million increase in short-term loan fee
income from $4.0 million in 2003 to $6.6 million in 2004. In addition to the
$3.8 million reduction in the provision for loan losses due to fewer short-term
loan charge-offs, a $1.4 million third quarter recovery on a charged-off loan
resulted in an excess in the allowance for loan losses. That excess, in
conjunction with our customary credit analysis, also served to reduce the
provision for loan losses in 2004. A favorable judgment on a lawsuit related to
that charged-off loan resulted in $1.3 million of other income in 2004.
Increases in service fees on deposit accounts, tax refund products and other
income amounted to $1.4 million. The increased net income resulted in a return
on average assets and average equity of 1.30% and 14.64%, respectively, in 2004
compared to .75% and 9.20%, respectively, for the same period in 2003.
REPUBLIC FIRST BANCORP | 17
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). Averages are computed based on daily balances.
Non-accrual loans are included in average loans receivable. Yields are not
adjusted for tax equivalency, as the Banks had no tax-exempt income. However,
the PA Bank may have such income in the future.
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate (1) Balance Expense Rate (1) Balance IExpense Rate (1)
----------------------------- ----------- --------- --------- ----------- ---------- ---------
(Dollars in thousands) For the Year For the Year For the Year
Ended Ended Ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------------------- ------------------------------- --------------------------------
Interest-earning assets:
Federal funds sold and other
interest-earning assets....... $ 49,431 $ 682 1.37% $ 72,761 $ 895 1.23% $ 42,835 $ 759 1.77%
Investment securities.......... 61,273 2,054 3.35% 64,590 2,858 4.42% 111,486 6,284 5.64%
Loans receivable .............. 527,723 34,994 6.63% 470,237 38,651 8.22% 468,239 37,080 7.92%
----------------------------- ----------- --------- --------- ----------- ---------- ---------
Total interest-earning assets..... 638,427 37,730 607,588 42,404 622,560 44,123 7.09%
5.90% 6.98%
Other assets................... 51,054 46,909 29,180
---------- ----------- -----------
Total assets...................... $689,481 $654,497 $651,740
========== =========== ===========
Interest-bearing liabilities:
Demand - non-interest
Bearing....................... $96,565 $ -- N/A $ 75,469 $ -- N/A $ 58,338 $ -- N/A
Demand - interest-bearing...... 57,541 352 0.61% 59,274 448 0.76% 47,019 497 1.06%
Money market & savings......... 156,106 2,425 1.55% 127,685 1,708 1.34% 112,321 1,907 1.70%
Time deposits.................. 185,336 5,153 2.78% 192,735 6,243 3.24% 240,230 9,290 3.87%
----------------------------- ----------- --------- --------- ----------- ---------- ---------
Total deposits ................... 495,548 7,930 1.60% 455,163 8,399 1.85% 457,908 11,694 2.55%
-------------------- ----------- --------- ----------- ----------
Total interest-
bearing deposits............... 398,983 7,930 1.99% 379,694 8,399 2.21% 399,570 11,694 2.93%
-------------------- ----------- --------- ----------- ----------
Other borrowings.................. 118,115 7,201 6.10% 134,057 8,254 6.16% 135,505 8,468 6.25%
-------------------- ----------- --------- ----------- ----------
Total interest-bearing
liabilities ................... 517,098 15,131 2.93% 513,751 16,653 3.24% 535,075 20,162 3.77%
----------------------------- ----------- --------- --------- ----------- ---------- ---------
Total deposits and
other borrowings............... 613,663 15,131 2.47% 589,220 16,653 2.83% 593,413 20,162 3.40%
----------------------------- ----------- --------- --------- ----------- ---------- ---------
Non-interest-bearing
Other liabilities.............. 14,770 11,890 8,958
Shareholders' equity.............. 61,048 53,387 49,369
---------- ----------- -----------
Total liabilities and
Shareholders' equity........... $689,481 $654,497 $651,740
========== =========== ===========
Net interest income............... $22,599 $25,751 $23,961
========== ========= ==========
Net interest spread............... 2.97% 3.74% 3.32%
========= ========= =========
Net interest margin (2)........... 3.53% 4.24% 3.85%
========= ========= =========
- ----------
(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.
REPUBLIC FIRST BANCORP | 18
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,
2004 vs. 2003 2003 vs. 2002
------------------------------------ ------------------------------------
Change due to Change due to
Average Average Average Average
(Dollars in thousands) Volume Rate Total Volume Rate Total
---------- --------- --------- ---------- ---------- ---------
Interest earned on:
Federal funds sold and other
interest-earning assets ......... $ (321) $ 108 $ (213) $ 368 $ (232) $ 136
Securities ...................... (111) (693) (804) (2,075) (1,351) (3,426)
Loans ........................... 3,812 (7,469) (3,657) 163 1,408 1,571
------- ------- ------- ------- ------- -------
Total interest earning assets ...... $ 3,380 $(8,054) $(4,674) $(1,544) $ (175) $(1,719)
------- ------- ------- ------- ------- -------
Interest expense of
Deposits
Interest-bearing demand deposits $ 11 $ 85 $ 96 $ (92) $ 141 $ 49
Money market and savings ....... (442) (275) (717) (205) 404 199
Time deposits .................. 206 884 1,090 1,539 1,508 3,047
------- ------- ------- ------- ------- -------
Total deposit interest expense ..... (225) 694 469 1,242 2,053 3,295
------- ------- ------- ------- ------- -------
Other borrowings ................ 971 82 1,053 88 126 214
------- ------- ------- ------- ------- -------
Total interest expense ............. 746 776 1,522 1,330 2,179 3,509
------- ------- ------- ------- ------- -------
Net interest income ............. $ 4,126 $(7,278) $(3,152) $ (214) $ 2,004 $ 1,790
======= ======= ======= ======= ======= =======
Net Interest Income
The Company's net interest margin decreased 71 basis points to 3.53% for
the year ended December 31, 2004 versus the prior year. The decline reflected
the decision to sell a majority of the short-term loan outstandings to third
parties beginning in the third quarter of 2003, thereby reducing interest income
and increasing non-interest income. Interest on short-term consumer loans
contributed approximately $1.9 million to net interest income in 2004 and 29
basis points to the margin, versus $8.1 million and 1.32% in 2003. Excluding the
impact of those loans, margins increased to 3.24% in 2004 from 2.92% in the
prior year. That 32 basis point increase reflected a reduction in the yield paid
on interest bearing deposits and other borrowings, which decreased 31 basis
points from 2003 to 2004. Growth in non-interest bearing demand balances and
reductions in rates paid on time deposits (certificates of deposits) were
significant factors in that reduction. Excluding short-term loan income, yields
on interest earning assets were comparable in 2004 and 2003, amounting to 5.61%
and 5.66%, respectively, in those years. Additionally, maturities of higher rate
FHLB advances, which represent the highest cost liabilities on the balance
sheet, were also reflected in a lower cost of funds. A total of $125.0 million
of FHLB advances which carry an average interest rate of 6.19% began maturing in
the third quarter of 2004. Of the $125 million, all but $25 million had matured
by December 31, 2004. That remaining $25 million advance matured in February
2005. These advances are repriceable to a significantly lower rate in the
current interest rate environment. Excluding short term loan income, loan yields
decreased to 6.26% from 6.40%. While the prime rate increased 1.25% in 2004,
most of the impact was experienced in the fourth quarter, minimizing its impact
on the full year. Thus, lower commercial loan rates were experienced for most of
the year, contributing to the decrease.
Notwithstanding that 1.25% increase in the prime rate, yields on
certificates of deposit continued to decrease as renewal rates were lower than
previous rates. The impact of such re-pricings and a 28.0% increase in average
non-interest bearing deposits were the primary factors in the lower rate paid on
interest-bearing liabilities. Increases in non-interest bearing deposits allow
the Company to lower rates on other accounts. The average rate paid on
interest-bearing liabilities decreased 36 basis points to 2.47% for 2004, from
2.83% in the prior year.
The Company's net interest income decreased $3.2 million, or 12.2%, to
$22.6 million for year ended December 31, 2004, from $25.8 million for the prior
year. As shown in the Rate/Volume table above, the decrease in net interest
income reflected the impact of participating the majority of short-term consumer
loans to third parties, beginning in the third quarter of
REPUBLIC FIRST BANCORP | 19
2003. Reductions in these relatively higher rate loans were reflected in the
$7.5 million decrease in interest due to average rate. Interest income on short
term loans decreased $6.5 million, accounting for the majority of that $7.5
million reduction.
The Company's total interest income decreased $4.7 million, or 11.02%, to
$37.7 million for the year ended December 31, 2004, from $42.4 million for the
prior year. Interest and fees on loans decreased $3.7 million, or 9.5%, to $35.0
million for 2004, from $38.7 million for 2003. Both of these decreases reflect
the $6.5 million decrease in consumer short-term loan interest, which was
partially offset by the impact of net average loan growth of $57.5 million. The
vast majority of such growth was in commercial loans. The decrease in interest
income for short-term loans is the principal factor in the decrease in yield on
loans of 1.59% to 6.63%. Interest and dividend income on securities decreased
$804,000, or 28.1%, to $2.1 million for 2004, from $2.9 million for the prior
year. This decline was due principally to a lower average rate earned on
investment securities, which declined 1.07% to 3.35% as higher coupon
investments prepaid more rapidly than lower coupon investments and the rates
earned on variable rate securities declined due to the lower interest rate
environment. Interest income on federal funds sold and other interest-earning
assets decreased $213,000 primarily because average federal funds sold
outstanding decreased $23.3 million to $49.4 million. Federal funds sold
balances were decreased to fund commercial loan growth and the impact of the
resulting decreased average balances more than offset the slightly higher market
rates available for such investments.
The Company's total interest expense decreased $1.5 million, or 9.1%, to
$15.1 million for the year ended December 31, 2004, from $16.7 million for the
prior year, as the Company reduced the interest rates on certificates of
deposit. The decrease also reflected the 28.0% growth in 2004 of non-interest
bearing demand deposits. Additionally, average other borrowings decreased $15.9
million in 2004 compared to 2003. That reduction was the primary factor
resulting in a $1.1 million decrease in interest expense for other borrowings.
Interest-bearing liabilities averaged $517.1 million for the year ended December
31, 2004, versus $513.8 million for the prior year, reflecting higher amounts of
lower cost non-interest bearing demand and money market and savings accounts.
The average rate paid on interest-bearing liabilities decreased 31 basis points
to 2.93% for 2004, due to the decrease in average rates paid on certificates of
deposit, and the reduction in higher cost other borrowings (primarily FHLB
advances) which were replaced by lower cost non-interest bearing demand and
money market and savings accounts.
Interest expense on time deposits (certificates of deposit) decreased $1.1
million, or 17.5%, to $5.2 million for 2004, from $6.2 million for the prior
year. This decline reflected the repricing of such certificates to lower rates
as the average rate declined 46 basis points to 2.78%. In addition, average
certificates of deposit outstanding decreased $7.4 million, or 3.8%, to $185.3
million, for 2004, from $192.7 million in the prior year, as higher cost time
deposits matured and were not replaced due to the growth in core deposits.
Interest expense on other borrowings, primarily FHLB advances, decreased
$1.1 million, or 12.8%, to $7.2 million for 2004, compared to $8.3 million for
the prior year. This decrease resulted from a $15.9 million decline in average
other borrowings to $118.1 million at December 31, 2004, versus $134.1 million
for 2003. The decline in average other borrowings reflected increased
non-interest bearing demand and savings and money market balances, which
replaced higher 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. That expense was $324,000 for 2004 versus $372,000 for
2003.
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 $5.6 million to $1.1 million for the year ended December 31,
2004, from $6.8 million for the prior year. This decrease reflected a $3.8
million decrease in provisions primarily related to lower short-term loan
charge-offs which resulted from the sale of such loans to third parties
beginning in the third quarter of 2003. The reduction in the provision also
reflected a $1.4 million charge-off recovery in 2004, which resulted in an
excess in the allowance for loan losses. That excess was recognized as a
negative provision for loan losses in the third quarter. The reduction also
reflected a $559,000 decrease relating to tax refund loan net charge-offs.
Non-Interest Income
Total non-interest income increased $5.1 million, or 70.9%, to $12.2
million for the year ended December 31, 2004, versus $7.1 million for the prior
year due primarily to fees earned when short-term loans are sold to third
parties. In the third quarter of 2003, the DE Bank began selling an increased
volume of such loans volume generated in Texas, Michigan, Arizona, California,
Ohio and other states, and via the internet. Such fees increased $2.6 million,
or 63.9%, to $6.6 million in 2004 primarily due to the increased volume of such
sales. Additionally, 2004 non-interest income reflects a $1.3 million favorable
judgment and related lawsuit damage award, received for damages previously
incurred in connection with a loan charge off and subsequent recovery. Fees on
tax refund products increased $687,000, or 141.1% in 2004, primarily due to
increases in volume. Service fees on deposit accounts increased $381,000, or
26.3%, primarily reflecting increases in the customer base on which
REPUBLIC FIRST BANCORP | 20
charges are assessed. Other income increased $345,000, or 93.8%, to $713,000 in
2004. That increase reflected a $158,000 increase in bank owned life insurance
income, as related balances were outstanding for the full year of 2004, but for
only a portion of the prior year. The balance of the increase resulted primarily
from one time charges for special services to a bank customer. The Company also
sold one other real estate owned (OREO) property at a gain of $224,000 in the
fourth quarter of 2003.
Non-Interest Expenses
Total non-interest expenses increased $1.6 million, or 8.4%, to $20.3
million for the year ended December 31, 2004, from $18.7 million for the prior
year. Salaries and employee benefits increased $294,000, or 3.0%, to $10.1
million for the year ended December 31, 2004, from $9.8 million for the prior
year comparable period. The increase reflected normal merit and promotional
increases which averaged approximately 3%.
Occupancy expense increased $91,000, or 5.9%, to $1.6 million for the year
ended December 31, 2004, due primarily to increased rent expense which reflected
increased space leased at the main office.
Depreciation expense was comparable in both years and amounted to $1.3
million in 2004.
Legal fees increased $266,000, or 27.0% to $1.3 million for the year ended
December 31, 2004, from $986,000 for the prior year. The increase primarily
reflected legal expense related to the spin-off of First Bank of Delaware.
Advertising expense was comparable in both years and amounted to $178,000
in 2004.
Other real estate owned expense amounted to $81,000 in 2004, reflecting the
write down of the sole property owned at December 31, 2004.
Other expense increased $1.2 million to $5.7 million in 2004, from $4.6
million in the prior year. Of that increase, $197,000 reflected higher
correspondent bank fees, primarily due to price increases. State taxes increased
by $150,000 as a result of a sales tax audit. Directors' fees increased
$156,000, as a result of the increased number of meetings and rate increases
reflecting changes in regulations. Audit fees increased $135,000, reflecting
both increases in price and audit services, including those related to the
spin-off.
Provision for Income Taxes
The provision for income taxes increased $1.9 million to $4.4 million for
2004, from $2.5 million for the prior year. This increase was primarily the
result of the increase in pre-tax income. The effective tax rate of 33.0% for
the year ended December 31, 2004 was comparable to the prior year.
Results of Operations for the years ended December 31, 2003 and 2002
Overview
The Company's net income increased $2.7 million, or 123%, to $4.9 million
or $0.66 per diluted share for the year ended December 31, 2003, compared to
$2.2 million, or $0.31 per diluted share for the prior year. The prior year
reflected an after tax write down of one other real estate owned property of
$909,000, or $0.13 per diluted share. The improvement in earnings reflected
increases in net interest income and non-interest income, a lower commercial
loan loss provision and the absence of the OREO write down. In 2003, net
interest income increased $1.8 million, or 7%, compared to the prior year
period. Interest margins in that year continued to be significantly impacted by
continued prepayments of the residential real estate and mortgage backed
securities portfolios which lowered net interest income. However, continued
reductions in deposit rates and increased short-term loan and tax refund product
fees more than offset the impact of those prepayments. The increase in net
interest income also reflected the impact of a 21% increase in lower cost
average core deposits in 2003 compared to the prior year. The provision for loan
losses increased $1.5 million between those periods primarily reflecting higher
charge-offs of short-term and tax refund loans. Increased net interest income
and non- interest income from the short-term loan and tax refund products more
than offset that increase. In 2003 non-interest income increased $3.9 million
primarily reflecting increased revenue from the short-term loan product
resulting from the sale of short-term loans to third parties. Non-interest
expenses net of OREO expense increased 7.9% reflecting increased depreciation
and incentive expenses. The increased net income resulted in a return on average
assets and average equity of .75% and 9.20% respectively, compared to .34% and
4.52% respectively for the same period in 2002.
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
REPUBLIC FIRST BANCORP | 21
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).
Averages are computed based on daily balances. Non-accrual loans are included in
average loans receivable. Yields are not adjusted for tax equivalency, as the
Banks had no tax-exempt income, but may have such income in the future.
Financial Condition
December 31, 2004 Compared to December 31, 2003
Total assets increased $65.6 million to $720.4 million at December 31,
2004, versus $654.8 million at December 31, 2003. This net increase reflected
higher commercial loans outstanding, partially offset by reduced residential
mortgage and mortgage backed securities balances.
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 $102.4 million, or 21.0%,
to $590.7 million at December 31, 2004, versus $488.2 million at December 31,
2003. The increase reflected $106.3 million, or 23.3%, of growth in commercial
and construction loans versus a $6.7 million, or 44.7%, decline in residential
mortgage loans resulting primarily from historically high prepayments reflecting
the decline in long-term mortgage rates. The loan portfolio consists of secured
and unsecured commercial loans including commercial real estate, construction
loans, residential mortgages, automobile loans, home improvement loans,
short-term consumer loans, home equity loans and lines of credit, overdraft
lines of credit and others. The Banks' commercial loans typically range between
$250,000 and $5,000,000 but customers may borrow significantly larger amounts up
to the Banks' combined legal lending limit of approximately $10 million at
December 31, 2004. Individual customers may have several loans that are secured
by different collateral. The aggregate amount of those relationships that
exceeded $6.5 million at December 31, 2004, was $82.8 million. The $6.5 million
threshold approximates 10% of total capital and reserves and reflects an
additional internal monitoring guideline. At December 31, 2004, the Company
through the DE Bank had $1.6 million in short-term consumer loans outstanding
versus $1.4 million at December 31, 2003.
Investment Securities:
Investment securities available-for-sale are investments which may be sold
in response to changing market and interest rate conditions and for liquidity
and other purposes. The Company's investment securities available-for-sale
consist primarily of U.S Government debt securities, U.S. Government agency
issued mortgage backed securities, and debt securities, which include corporate
bonds and trust preferred securities. Available-for-sale securities totaled
$44.9 million at December 31, 2004, a decrease of $16.7 million, or, 27.1%, from
year-end 2003. This decrease resulted primarily from historically high principal
repayments on mortgage backed securities. At December 31, 2004 and December 31,
2003, the portfolio had net unrealized gains of $502,000 and $1.2 million,
respectively.
Investment securities held-to-maturity are investments for which there is
the intent and ability to hold the investment to maturity. These investments are
carried at amortized cost. The held-to-maturity portfolio consists primarily of
FHLB securities. At December 31, 2004, securities held to maturity totaled $5.4
million, a decrease of $2.8 million, or 34.3%, from $8.3 million at year-end
2003. The decline reflected a reduction in the amount of FHLB stock held. At
both dates, respective carrying values approximated market values.
Cash and Due From Banks:
Cash and due from banks, interest bearing deposits and federal funds sold
comprise this category which consists of the Company's most liquid assets. The
aggregate amount in these three categories decreased by $25.6 million, to $45.0
million at December 31, 2004, from $70.6 million at December 31, 2003. Federal
funds sold decreased by $15.9 million to $23.0 million from $39.0 million,
respectively, reflecting the net increase in commercial loan growth.
Other Interest-Earning Restricted Cash:
REPUBLIC FIRST BANCORP | 22
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. At December 31, 2004,
the balance was $2.9 million versus $3.5 million at December 31, 2003.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, increased
$614,000, or 13.9%, to $5.0 million at December 31, 2004, from $4.4 million at
December 31, 2003. The increase reflected investments in telephone and computer
equipment, as well as expenditures for new locations.
Other Real Estate Owned:
The OREO property represents retail stores in a strip mall. The original
loan balance was $357,000 of which $150,000 was charged to the allowance for
loan losses in the fourth quarter of 2003 resulting in a $207,000 balance in
other real estate owned. In 2004 the property was additionally written down
$70,000 for a balance at December 31, 2004 of $137,000.
Business Owned Life Insurance:
In the second quarter of 2003, the Company purchased $11.5 million of
business owned life insurance. The income earned on these policies is reflected
in non-interest income. At December 31, 2004, the value of the insurance was
$12.2 million.
Deposits:
Deposits, which include non-interest and interest-bearing demand deposits,
money market, savings and time deposits including some brokered 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 $91.8 million to $545.4 million at December 31,
2004, from $453.6 million at December 31, 2003. Average core deposits increased
18.2% or $47.8 million more than the prior year end to $310.2 million in 2004.
Time deposits increased $3.4 million, or 1.8%, to $191.0 million at December 31,
2004, versus $187.6 million at the prior year-end. Core deposit growth benefited
from the Company's business development efforts and bank consolidations in the
Philadelphia market that continue to leave some customers underserved.
FHLB Borrowings and Overnight Advances:
FHLB borrowings and overnight advances are used to supplement deposit
generation. FHLB term borrowing by the PA Bank totaled $25.0 million and $125
million at December 31, 2004 and December 31, 2003, respectively. The Company's
remaining term borrowing matures in the first quarter of 2005. The PA Bank also
had short-term borrowings (overnight) of $61.1 million at December 31, 2004
versus $2.8 million at the prior year-end.
Shareholders' Equity:
Total shareholders' equity increased $8.8 million to $65.2 million at
December 31, 2004, versus $56.4 million at December 31, 2003. This increase was
primarily the result of 2004 net income of $8.9 million.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Prepayments on residential real estate mortgages and other fixed rate loans
and mortgage backed securities vary significantly and may cause significant
fluctuations in interest margins.
Short-term consumer loans were first offered through the DE Bank in 2001.
At December 31, 2004, there was approximately $1.6 million of short-term
consumer loans outstanding, which were originated in Texas. The DE Bank also
originates loans in Michigan, California, Arizona, Ohio, and via the internet,
which are sold to third parties. The participations sold at December 31, 2004
were $26.0 million. 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
REPUBLIC FIRST BANCORP | 23
fees. Further, the DE Bank 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 DE Bank began offering two tax refund products in 2001 with Liberty Tax
Service. Liberty Tax Service is a nationwide professional tax service provider
which prepares and electronically files federal and state income tax returns
("Tax Refund Products"). Tax Refund Products consist of accelerated check
refunds ("ACRs"), and refund anticipation loans ("RALs"). There can be no
assurance that revenue levels will increase significantly in future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America require management
to make significant estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned, and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Since the allowance for loan losses and carrying value of real estate owned are
dependent, to a great extent, on the general economy and other conditions that
may be beyond the Banks' control, it is at least reasonably possible that the
estimates of the allowance for loan losses and the carrying values of the real
estate owned could differ materially in the near term.
The Company and its subsidiaries are subject to federal and state
regulations governing virtually all aspects of their activities, including but
not limited to, lines of business, liquidity, investments, the payment of
dividends, and others. Such regulations and the cost of adherence to such
regulations can have a significant impact on earnings and financial condition.
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 $156.6 million and $94.8
million and standby letters of credit of approximately $8.0 million and $4.0
million at December 31, 2004 and 2003, respectively. The increase in commitments
reflects an increase in commercial lending. However, commitments often expire
without being drawn upon. The $156.6 million of commitments to extend credit at
December 31, 2004, 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.
REPUBLIC FIRST BANCORP | 24
Contractual obligations and other commitments
The following table sets forth contractual obligations and other
commitments representing required and potential cash outflows as of December 31,
2004:
One to Three to After
Less than Three Five Five
(Dollars in thousands) Total One Year Years Years Years
----- -------- ----- ----- -----
Minimum annual rentals or noncancellable $ 3,252 $ 1,056 $ 1,953 $ 106 $ 137
operating leases
Remaining contractual maturities of time 190,989 86,838 73,212 26,917 4,022
deposits
Contingent liabilities on equipment 15 15 -- -- --
Benefit plans 1,376 527 849 -- --
Loan commitments 156,636 120,558 35,378 -- 700
Long-term borrowed funds 25,000 25,000 -- -- --
Standby letters of credit 7,963 6,586 1,337 -- 40
-------- -------- -------- -------- --------
Total $385,231 $240,580 $112,729 $ 27,023 $ 4,899
======== ======== ======== ======== ========
As of December 31, 2004, the Company had entered into non-cancelable lease
agreements for its main office and operations center, nine PA Bank retail branch
facilities and two DE Bank retail branches, expiring through September 30, 2011.
The leases are accounted for as operating leases. The minimum annual rental
payments required under these leases are $3.3 million through the year 2011.
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 $15,000 through
2005. The Company has entered into employment agreements with the President of
the Company and the President of the PA Bank. The aggregate commitment for
future salaries and benefits under these employment agreements at December 31,
2004 is approximately $1.4 million.
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
At December 31, 2004, 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 $163.5 million, which
represented 27.7% of gross loans receivable at December 31, 2004. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and others. Loan
concentrations are considered to exist when there is amounts loaned to a
multiple number of borrowers engaged in similar activities that management
believes would cause them to be similarly impacted by economic or other
conditions.
Interest Rate Risk Management
Interest rate risk management involves managing the extent to which
interest-sensitive assets and interest-sensitive liabilities are matched. The
Company attempts to optimize net interest income while managing period-to-period
fluctuations therein. The Company typically defines interest-sensitive assets
and interest-sensitive liabilities as those that reprice within one year or
less.
The difference between interest-sensitive assets and interest-sensitive
liabilities is known as the "interest-sensitivity gap" ("GAP"). A positive GAP
occurs when interest-sensitive assets exceed interest-sensitive liabilities
repricing in the same time periods, and a negative GAP occurs when
interest-sensitive liabilities exceed interest-sensitive assets repricing in the
same time periods. A negative GAP ratio suggests that a financial institution
may be better positioned to take advantage of declining interest rates rather
than increasing interest rates, and a positive GAP ratio suggests the converse.
REPUBLIC FIRST BANCORP | 25
Static GAP analysis describes interest rate sensitivity at a point in time.
However, it alone does not accurately measure the magnitude of changes in net
interest income since changes in interest rates do not impact all categories of
assets and liabilities equally or simultaneously. Interest rate sensitivity
analysis also requires assumptions about repricing certain categories of assets
and liabilities. For purposes of interest rate sensitivity analysis, assets and
liabilities are stated at either their contractual maturity, estimated likely
call date, or earliest repricing opportunity. Mortgage backed securities and
amortizing loans are scheduled based on their anticipated cash flow, including
prepayments based on historical data and current market trends. Savings, money
market and interest-bearing demand accounts do not have a stated maturity or
repricing term and can be withdrawn or repriced at any time. Management
estimates the repricing characteristics of these accounts based on historical
performance and other deposit behavior assumptions. These deposits are not
considered to reprice simultaneously and, accordingly, a portion of the deposits
are moved into time brackets exceeding one year. However, management may choose
not to reprice liabilities proportionally to changes in market interest rates,
for competitive or other reasons.
Shortcomings, inherent in a simplified and static GAP analysis, may result
in an institution with a negative GAP having interest rate behavior associated
with an asset-sensitive balance sheet. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Furthermore, repricing
characteristics of certain assets and liabilities may vary substantially within
a given time period. In the event of a change in interest rates, prepayments and
other cash flows could also deviate significantly from those assumed in
calculating GAP in the manner presented in the table below.
The Company attempts to manage its assets and liabilities in a manner that
optimizes net interest income in a range of interest rate environments.
Management uses GAP analysis and simulation models to monitor behavior of its
interest sensitive assets and liabilities. Adjustments to the mix of assets and
liabilities are made periodically in an effort to provide steady growth in net
interest income.
Management presently believes that the effect on the Banks of any future
fall in interest rates, reflected in lower yielding assets, would be detrimental
since the Banks do not have the immediate ability to commensurately decrease
rates on its interest bearing liabilities, primarily time deposits, other
borrowings and certain transaction accounts. An increase in interest rates could
have a positive effect on the Banks, due to repricing of certain assets,
primarily adjustable rate loans and federal funds sold, and a possible lag in
the repricing of core deposits not assumed in the model.
The following tables present a summary of the Company's interest rate
sensitivity GAP at December 31, 2004. For purposes of these tables, the Company
has used assumptions based on industry data and historical experience to
calculate the expected maturity of loans because, statistically, certain
categories of loans are prepaid before their maturity date, even without regard
to interest rate fluctuations. Additionally, certain prepayment assumptions were
made with regard to investment securities based upon the expected prepayment of
the underlying collateral of the mortgage-backed securities. The interest rate
on the trust preferred securities is variable and adjusts semi-annually.
REPUBLIC FIRST BANCORP | 26
Interest Sensitivity Gap
At December 31, 2004
(Dollars in thousands)
More Financial
0-90 91-180 181-365 1-2 2-3 3-4 4-5 than 5 Statement Fair
Days Days Days Years Years Years Years Years Total Value
------------------------------ ------------------------------------------------------------------------
Interest Sensitive
Assets:
Investment securities
and other
interest-bearing
balances.............. $ 43,138 $ 474 $ 25,823 $ 3,622 $ 1,804 $ 918 $ 476 $ 729 $ 76,984 $ 77,005
Average interest rate. 2.94% 5.40% 2.75% 5.64% 5.66% 5.67% 5.67% 5.68%
Loans receivable...... 310,368 20,310 31,850 62,647 51,063 51,058 37,190 18,433 582,919 584,010
Average interest rate. 5.85% 6.55% 6.63% 6.51% 6.56% 6.27% 6.33% 6.16%
------------------------------ ------------------------------------------------------------------------
Total................. 353,506 20,784 57,673 66,269 52,867 51,976 37,666 19,162 659,903 661,015
------------------------------ ------------------------------------------------------------------------
Cumulative Totals..... $ 353,506 $374,290 $ 431,963 $ 498,232 $551,099 $603,075 $640,741 $659,903
============================== ====================================================
Interest Sensitive
Liabilities:
Demand Interest $ 27,609 $ - $ - $ 27,610 $ - $ - $ - $ - $55,219 $55,219
Bearing(1)............
Savings Accounts (1).. 32,353 - - 32,352 - - - - 64,705 64,705
Average interest rate. 2.40% - - 2.40% - - - -
Money Market Accounts(1) 64,780 - - 64,780 - - - - 129,560 129,560
Average interest rate. 1.50% - - 1.50% - - - -
Time Deposits......... 48,327 20,560 17,951 38,495 27,171 7,546 26,917 4,022 190,989 187,708
Average interest rate. 2.2% 2.75% 2.69% 2.93% 3.15% 3.12% 3.42% 2.91% - -
FHLB and Short Term
Advances (2).......... 86,090 - - - - - - - 86,090 86,255
Average interest rate. 3.72% - - - - - - - - -
Subordinated Debt..... - 6,186 - - - - - - 6,186 6,186
Average interest rate. 5.61%
------------------------------ ------------------------------------------------------------------------
Total................. 259,159 26,746 17,951 163,237 27,171 7,546 26,917 4,022 532,749 529,633
------------------------------ ------------------------------------------------------------------------
Cumulative Totals..... $ 259,159 $285,905 $ 303,856 $ 467,093 $494,264 $501,810 $528,727 $532,749
============================== ====================================================
Interest Rate
Sensitivity GAP....... $ 94,347 $(5,962) $ 39,722 $ (96,968) $ 25,696 $44,430 $ 10,749 $ 15,140
Cumulative GAP........ $ 94,347 $ 88,385 $ 128,107 $ 31,139 $ 56,835 $101,265 $112,014 $127,154
Interest Sensitive
Assets/
Interest Sensitive
Liabilities........... 136.41% 130.91% 142.16% 106.67% 111.50% 120.18% 121.19% 123.87%
Cumulative GAP/
Total Earning Assets.. 14% 13% 19% 5% 9% 15% 17% 19%
(1) Demand, savings and money market accounts are shown to reprice based upon
management's estimate of when rates would have to be increased to retain
balances in response to competition. Such estimates are necessarily
arbitrary and wholly judgmental.
(2) FHLB has the option of calling 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.
REPUBLIC FIRST BANCORP | 27
Through the use of income simulation modeling the Company has estimated net
interest income for the year ending December 31, 2005, based upon the assets,
liabilities and off-balance sheet financial instruments at December 31, 2004.
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, excluding the
impact of short-term and tax refund loans.
Note the spin off of First Bank of Delaware is not expected to have a
significant impact on the following table.
Percent change
---------------------------
Rate shocks to interest rates 2005 2004
----------------------------- ----------- -----------
+2% -% 17.3%
+1% 0.1 9.3
-1% (2.1) (7.4)
-2% (11.1) (18.7)
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. Periodically, the
Company may and does make significant changes to underlying assumptions, which
are wholly judgmental. Prepayments on residential mortgage loans and mortgage
backed securities have increased over historical levels due to the lower
interest rate environment, and may result in reductions in margins.
Capital Resources
The Company is required to comply with certain "risk-based" capital
adequacy guidelines issued by the FRB and the FDIC. The risk-based capital
guidelines assign varying risk weights to the individual assets held by a bank.
The guidelines also assign weights to the "credit-equivalent" amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts. Under these guidelines, banks are expected to meet a
minimum target ratio for "qualifying total capital" to weighted risk assets of
8%, at least one-half of which is to be in the form of "Tier 1 capital".
Qualifying total capital is divided into two separate categories or "tiers".
"Tier 1 capital" includes common stockholders' equity, certain qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited
in the aggregate to one-half of total qualifying capital) includes allowances
for credit losses (within limits), certain excess levels of perpetual preferred
stock and certain types of "hybrid" capital instruments, subordinated debt and
other preferred stock. Applying the federal guidelines, the ratio of qualifying
total capital to weighted-risk assets, was 13.53% and 13.92% at December 31,
2004 and 2003, 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, 2004 and 2003 were 12.28% and
12.66%, respectively. At December 31, 2004 and 2003, the Company exceeded the
requirements for risk-based capital adequacy under both federal and Pennsylvania
state guidelines.
Under FRB and FDIC regulations, a bank and a holding company are 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, 2004 and 2003, the Company's leverage ratio was 10.43% and 9.64%,
respectively. Accordingly, at December 31, 2004 and 2003, the Company was
considered "well capitalized" under FRB and FDIC regulations.
On November 28, 2001, Republic First Bancorp, Inc., through a pooled
offering with Sandler O'Neill & Partners, issued $6.0 million of
corporation-obligated mandatorily redeemable capital securities of the
subsidiary trust holding solely junior subordinated debentures of the
corporation more commonly known as trust preferred securities. The purpose of
the issuance was to increase capital as a result of the Company's continued loan
and core deposit growth. The trust preferred securities qualify as Tier 1
capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
The Company may call the securities on any interest payment date after five
years, without a prepayment penalty, notwithstanding their final 30 year
maturity. The interest rate is variable and adjustable semi-annually at 3.75%
over the 6 month London Interbank Offered Rate ("Libor").
The shareholders' equity of the Company as of December 31, 2004, totaled
approximately $65.2 million compared to approximately $56.4 million as of
December 31, 2003. This increase of $8.8 million reflected 2004 net income of
$8.9 million.
REPUBLIC FIRST BANCORP | 28
That net income increased the book value per share of the Company's common stock
from $7.85 as of December 31, 2003, based upon 7,367,426 shares outstanding, to
$9.01 as of December 31, 2004, based upon 7,428,681 shares outstanding at
December 31, 2004.
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, 2004 and 2003:
To be well
capitalized under
For Capital regulatory capital
Actual Adequacy Purposes guidelines
------------------------ ------------------------ ------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ----------- --------- ----------- ----------
At December 31, 2004
Total risk based capital
Republic First Bank.......... $64,251 12.09% $42,526 8.00% $53,158 10.00%
First Bank of DE............. 11,948 26.27% 3,638 8.00% 4,548 10.00%
Republic First Bancorp, Inc.. 78,120 13.53% 46,203 8.00% - -
Tier one risk based capital
Republic First Bank.......... 57,606 10.84% 21,263 4.00% 31,895 6.00%
First Bank of DE............. 11,374 25.01% 1,819 4.00% 2,729 6.00%
Republic First Bancorp, Inc.. 70,894 12.28% 23,102 4.00% - -
Tier one leverage capital
Republic First Bank.......... 57,606 9.25% 31,143 5.00% 31,143 5.00%
First Bank of DE............. 11,374 20.56% 2,766 5.00% 2,766 5.00%
Republic First Bancorp, Inc.. 70,894 10.43% 33,982 5.00% - -
At December 31, 2003
Total risk based capital
Republic First Bank.......... $57,417 12.57% $36,534 8.00% $45,667 10.00%
First Bank of DE............. 8,399 29.06% 2,312 8.00% 2,891 10.00%
Republic First Bancorp, Inc.. 67,436 13.92% 38,765 8.00% - -
Tier one risk based capital
Republic First Bank.......... 51,689 11.32% 18,267 4.00% 27,475 6.00%
First Bank of DE............. 8,025 27.76% 1,156 4.00% 1,734 6.00%
Republic First Bancorp, Inc.. 61,346 12.66% 19,382 4.00% - -
Tier one leverage capital
Republic First Bank.......... 51,689 8.77% 29,475 5.00% 29,475 5.00%
First Bank of DE............. 8,025 16.55% 2,410 5.00% 2,410 5.00%
Republic First Bancorp, Inc.. 61,346 9.64% 31,817 5.00% - -
Management believes that the Company and Banks met, as of December 31, 2004
and 2003, all capital adequacy requirements to which they are subject. As of
December 31, 2004, the FDIC categorized the Banks as well capitalized under the
regulatory framework for prompt corrective action provisions of the Federal
Deposit Insurance Act. There are no calculations or events since that
notification, which management believes would have changed the Banks' category.
After the spin off of First Bank of Delaware, the Company's capital levels
will approximate those of the PA Bank.
REPUBLIC FIRST BANCORP | 29
The Company and the Banks' ability to maintain the required levels of
capital is substantially dependent upon the success of their capital and
business plans, the impact of future economic events on the Banks' loan
customers and the Banks' ability to manage their interest rate risk, growth and
other operating expenses.
In addition to the above minimum capital requirements, the Federal Reserve
Bank approved a rule that became effective on December 19, 1992, implementing a
statutory requirement that federal banking regulators take specified "prompt
corrective action" when an insured institution's capital level falls below
certain levels. The rule defines five capital categories based on several of the
above capital ratios. The Banks currently exceed the levels required for a bank
to be classified as "well capitalized". However, the Federal Reserve Bank may
consider other criteria when determining such classifications, which criteria
could result in a downgrading in such classifications.
The Company's equity to assets ratio increased from 8.61% as of December
31, 2003, to 9.05% as of December 31, 2004. The increase at year-end 2004 was a
result of the improvement in net income. The Company's average equity to assets
ratio for 2004, 2003 and 2002 was 8.85%, 8.16% and 7.57%, respectively. The
Company's average return on equity for 2004, 2003 and 2002 was 14.64%, 9.20% and
4.52%, respectively; and its average return on assets for 2004, 2003 and 2002,
was 1.30%, 0.75% and 0.34%, respectively.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, time investment purchases to market
conditions and provide a cushion against unforeseen needs. Liquidity needs can
be met by either reducing assets or increasing liabilities. The most liquid
assets consist of cash, amounts due from banks and federal funds sold.
Regulatory authorities require the Company to maintain certain liquidity
ratios such that the Banks maintain available funds, or can obtain available
funds at reasonable rates, in order to satisfy commitments to borrowers and the
demands of depositors. In response to these requirements, the Company has formed
an Asset/Liability Committee (ALCO), comprised of certain members of the Banks'
board of directors and senior management, which monitors such ratios. The
purpose of the committee is, in part, to monitor the Banks' liquidity and
adherence to the ratios in addition to managing relative interest rate risk. The
ALCO meets at least quarterly.
The Company's most liquid assets, comprised of cash and cash equivalents on
the balance sheet, totaled $45.0 million at December 31, 2004, compared to $70.6
million at December 31, 2003. Loan maturities and repayments are another source
of asset liquidity. At December 31, 2004, the PA Bank estimated that in excess
of $50.0 million of loans would mature or repay in the six-month period ended
June 30, 2005. Additionally, the majority of its securities are available to
satisfy liquidity requirements through pledges to the FHLB to access the PA
Banks' line of credit.
Funding requirements have historically been satisfied by generating core
deposits and certificates of deposit with competitive rates, buying federal
funds or utilizing the facilities of the Federal Home Loan Bank System ("FHLB").
At December 31, 2004, the PA Bank had $100.6 million in unused lines of credit
available under arrangements with the FHLB and with correspondent banks,
compared to $67.0 million at December 31, 2003. The reduction in available lines
resulted from prepayments of the PA Bank's mortgage backed securities and
residential mortgage loan portfolio pledged as collateral against those lines.
Notwithstanding these reductions, management believes it satisfactorily exceeds
regulatory liquidity guidelines. These lines of credit enable the PA 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, 2004, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $156.6 million. Certificates of
deposit scheduled to mature in one year totaled $86.8 million at December 31,
2004. The PA Bank has $25.0 million in term FHLB borrowings at December 31,
2004. This amount will mature in 2005. These term borrowings are expected to be
replaced by overnight borrowings. The Company anticipates that it will have
sufficient funds available to meet its current commitments. In addition, the
Company can use term borrowings to replace these borrowed funds.
The Banks' target and actual liquidity levels are determined by comparisons
of the estimated repayment and marketability of the Banks' interest-earning
assets with projected future outflows of deposits and other liabilities. The PA
Bank has established a line of credit with a correspondent bank to assist in
managing the PA Banks' liquidity position. That line of credit totaled $10.0
million at December 31, 2004. The PA Bank had drawn down $0 on this line at
December 31, 2004. Additionally, the PA Bank has established a line of credit
with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity
of approximately $186.7 million. That $186.7 million capacity is reduced by
advances outstanding to arrive at the unused line of credit available. As of
December 31, 2004 and 2003, the PA Bank had borrowed $86.1 million and $125.0
million, respectively
REPUBLIC FIRST BANCORP | 30
from the FHLB. Investment securities represent a primary source of liquidity for
the PA Bank. Accordingly, investment decisions generally reflect liquidity over
other considerations.
Operating cash flows are primarily derived from cash provided from net
income during the year and are another source of liquidity. In 2003, significant
cash flows were provided from the maturities and principal paydowns of
securities.
The Company's primary short-term funding sources are certificates of
deposit and its securities portfolio. The circumstances that are reasonably
likely to affect those sources are as follows. The PA 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 ALCO committee is responsible for managing the liquidity position and
interest sensitivity of the Banks. That committee's primary objective is to
maximize net interest income while configuring the Banks' interest-sensitive
assets and liabilities to manage interest rate risk and provide adequate
liquidity for projected needs.
Investment Securities Portfolio
The Banks' investment securities portfolio is intended to provide liquidity
and contribute to earnings while diversifying credit risk. The Company attempts
to maximize earnings while minimizing its exposure to interest rate risk. The
securities portfolio consists primarily of U.S. Government agency securities,
mortgage backed securities, corporate bonds, trust preferred securities and FHLB
stock. The Company's ALCO monitors and approves all security purchases. The
decline in securities in 2003 and 2004 was a result of the Company's strategy to
reduce the amount of the investment securities by not replacing mortgage backed
securities prepayments in the lower interest rate environment. The Company
instead was able to increase its commercial loan balances, through increased
loan production.
A summary of investment securities available-for-sale and investment
securities held-to-maturity at December 31, 2004, 2003 and 2002 follows.
Investment Securities Available for Sale at
December 31,
-----------------------------------------------
(Dollars in thousands)
2004 2003 2002
----------- ----------- ------------
U.S. Government Agencies............................ $ 20,258 $24,425 $ 5,759
Mortgage backed Securities/CMOs (1)................. 13,675 24,235 71,623
Other debt securities (3)........................... 10,506 11,843 7,352
----------- ----------- ------------
Total amortized cost of securities.................. $ 44,439 $60,503 $84,734
----------- ----------- ------------
Total fair value of investment securities........... $ 44,941 $61,686 $87,291
----------- ----------- ------------
Investment Securities Held to Maturity at
December 31,
-----------------------------------------------
(Dollars in thousands)
2004 2003 2002
----------- ----------- ------------
U.S. Government Agencies............................ $ 3 $ 68 $ 122
Mortgage backed Securities/CMOs (1)................. 108 265 760
Other securities (2)................................ 5,316 7,927 8,388
----------- ----------- ------------
Total amortized cost of investment securities....... $ 5,427 $ 8,260 $ 9,270
----------- ----------- ------------
Total fair value of investment securities........... $ 5,448 $ 8,300 $ 9,297
----------- ----------- ------------
- ----------
(1) Substantially all of these obligations consist of U.S. Government Agency
issued securities.
(2) Comprised primarily of FHLB stock.
(3) Comprised primarily of corporate bonds and trust preferred securities.
REPUBLIC FIRST BANCORP | 31
The following table presents the contractual maturity distribution and
weighted average yield of the securities portfolio of the Company at December
31, 2004 Mortgage backed securities are presented without consideration of
amortization or prepayments.
Investment Securities Available for Sale at December 31, 2004
---------------------------------------------------------------------------------------------------------
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 $19,950 2.19% $152 2.67% $ - - $ - - $20,102 $20,258 2.19%
Other debt securities - - - - - - 10,573 3.95% 10,573 10,506 3.95%
(1).....................
Mortgage backed
securities.............. - - - - 825 6.24% 13,441 5.86% 14,266 13,675 5.88%
------ ----- ------ ----- ------ ----- ------ ----- ---------- ---- ------
Total AFS securities.... $19,950 2.19% $152 2.67% $825 6.24% $24,014 5.02% $44,941 $44,439 3.78%
========= =============== ======== ==================== =========== ================ ========= ========
Investment Securities Held to Maturity at December 31, 2004
---------------------------------------------------------------------------------------------
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 $ - - $ - - $ - - $ 3 2.12% $ 3 2.12%
Mortgage backed - - - - - - 108 7.35% 108 7.35%
securities..............
Other securities........ 150 7.17% 155 6.39% 103 6.33% 4,908(2) 2.09% 5,316 2.49%
--------- ------------------------- ---------------------------- ---------------- --------
Total HTM securities.... $ 150 7.17% $155 6.39% $103 6.33% $5,019 2.30% $5,427 2.62%
========= ========================= ============================ ================ ========
(1) Variable rate instruments
(2) Primarily comprised of FHLB stock, which is targeted by the FHLB to
yield a variable rate tied to market indices; however, the yield is
wholly dependent on dividends actually paid
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
secured term loans made to small to medium-sized businesses and professionals
for working capital, asset acquisition and other purposes. Commercial loans are
originated as either fixed or variable rate loans with typical terms of 1 to 5
years. The Banks' commercial loans typically range between $250,000 and $5.0
million but customers may borrow significantly larger amounts up to the Banks'
combined legal lending limit of approximately $10.0 million at December 31,
2004. Individual customers may have several loans often secured by different
collateral. Such relationships in excess of $6.5 million (an internal monitoring
guideline which approximates 10% of capital and reserves) at December 31, 2004,
amounted to $82.8 million. There were no loans in excess of the combined legal
lending limit at December 31, 2004.
The Company's total loans increased $102.5 million, or 21.0%, to $590.7
million at December 31, 2004, from $488.2 million at December 31, 2003. That
increase reflected a $72.6 million, or 24.0%, increase in real estate secured
loans, which represents the Company's largest loan portfolio. The increase also
reflected a $28.5 million, or 32.1%, increase in construction loans, a category
which the Company had targeted for growth.
The following table sets forth the Company's gross loans by major
categories for the periods indicated:
At December 31,
---------------------------------------------------------------------
(Dollars in thousands)
2004 2003 2002 2001 2000
----------- ------------ ------------ ------------ ------------
Commercial:
Real estate secured (1).................... $375,241 $302,618 $297,193 $286,583 $271,222
Construction and land development.......... 117,388 88,850 32,377 34,996 12,860
Non real estate secured.................... 61,891 52,041 54,163 53,388 39,016
Non real estate unsecured.................. 9,023 13,688 8,513 7,229 10,543
----------- ------------ ------------ ------------ ------------
Total commercial......................... 563,543 457,197 392,246 382,196 333,641
Residential real estate (2)................... 8,219 14,875 51,265 67,821 74,825
Consumer and other............................ 18,890 16,147 20,178 19,302 13,919
----------- ------------ ------------ ------------ ------------
Total loans, net of unearned income...... $590,652 $488,219 $463,689 $469,319 $422,385
=========== ============ ============ ============ ============
- ----------
(1) Includes loans held for sale.
(2) Residential real estate secured is comprised of jumbo residential first
mortgage loans for all years presented.
REPUBLIC FIRST BANCORP | 32
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:
At December 31, 2004
------------------------------------------------------------------
(Dollars in thousands)
One Year More Than One Year Over Total
or Less Through Five Years Five Years Loans
----------- ---------------------- ------------ --------------
Commercial and Commercial Real Estate................ $53,021 $274,804 $118,330 $446,155
Construction and Land Development.................... 69,507 41,985 5,896 117,388
Residential Real Estate.............................. - - 8,219 8,219
Consumer and Other................................... 2,976 2,237 13,677 18,890
----------- ----------- ------------ --------------
Total........................................... $125,504 $319,026 $146,122 $590,652
=========== =========== ============ ==============
Loans with Fixed Rates............................... 25,453 219,845 70,752 316,050
Loans with Floating Rates............................ 100,051 99,181 75,370 274,602
----------- ----------- ------------ --------------
Total........................................... $125,504 $319,026 $146,122 $590,652
=========== =========== ============ ==============
Percent Composition by Maturity...................... 21.2% 54.1% 24.7% 100.0%
Fixed Rate Loans as Percent of Total................. 20.3 68.9 48.4 53.5
Floating Rate Loans as Percent of Total.............. 79.7 31.1 51.6 46.5
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, 2004, 53.5% of total loans were fixed rate compared to
50.8% at December 31, 2003.
Credit Quality
The Banks' written lending policies require specified underwriting, loan
documentation and credit analysis standards to be met prior to funding, with
independent credit department approval for the majority of new loan balances. A
committee of the Board of Directors oversees the loan approval process to
monitor that proper standards are maintained, while approving the majority of
commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of interest or principal for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. For non-accrual
loans which have 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.
REPUBLIC FIRST BANCORP | 33
The following summary shows information concerning loan delinquency and
non-performing assets at the dates indicated.
At December 31,
----------------------------------------------------------
2004 2003 2002 2001 2000
---------- ----------- ----------- ----------- ----------
(Dollars in thousands)
Loans accruing, but past due 90 days or more.................. $ - $3,084 $4,051 $ 518 $ 91
Restructured loans............................................ - - - 1,982
-
Non-accrual loans............................................. 5,007 5,527 2,972 3,830 1,350
---------- ----------- ----------- ----------- ----------
Total non-performing loans.................................... 5,007 8,611 7,023 4,348 3,423
Other real estate owned....................................... 137 207 1,015 1,858 -
---------- ----------- ----------- ----------- ----------
Total non-performing assets(1)................................ $5,144 $8,818 $8,038 $6,206 $3,423
========== =========== =========== =========== ==========
Non-performing loans as a percentage of total
loans, net of unearned income (1)(2)....................... 0.85% 1.76% 1.51% 0.93% 0.81%
Non-performing assets as a percentage of total assets......... 0.71% 1.35% 1.24% 0.95% 0.52%
(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.
Total non-performing loans decreased $3.6 million to $5.0 million at
December 31, 2004, from $8.6 million at the prior year-end. The $3.6 million
decrease in 2004 non-performing loans compared to 2003 reflected the resolution
of two loans totaling $3.1 million. The first loan amounted to $1.2 million and
was secured by a single residential property. That loan was collected in full
including $170,000 of non-accrual income which is reflected in the following
table. The second loan amounted to $1.9 million, of which $427,000 was charged
off and $1.5 million was transferred to OREO and sold for that amount. 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, 2004, all identified problem loans are
included in the preceding table, or are classified as substandard or doubtful,
with a reserve allocation in the allowance for loan losses (see "Allowance For
Loan Losses"). Management believes that the appraisals and other estimates of
the value of the collateral pledged against the non-accrual loans generally
exceed the amount of related balances.
The following summary shows the impact on interest income of non-accrual
loans for the periods indicated:
For the Year Ended December 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ------------ -----------
Interest income that would have been recorded
Had the loans been in accordance with their
original terms................................... $399,000 $285,000 $241,000 $203,000 $125,000
Interest income included in net income............. $170,000 $ -- $ -- $ -- $171,000\
At December 31, 2004, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to
non-residential building operators and real estate agents and managers in the
aggregate amount of $163.5 million, which represented 27.7% of gross loans
receivable at December 31, 2004. Various types of real estate are included in
this category, including industrial, retail shopping centers, office space,
residential multi-family and others. Loan concentrations are considered to exist
when multiple number of borrowers are engaged in similar activities that
management believes would cause them to be similarly impacted by economic or
other conditions. The Banks had no credit exposure to "highly leveraged
transactions" at December 31, 2004 as defined by the FRB.
REPUBLIC FIRST BANCORP | 34
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for the
years ended December 31, 2004, 2003, 2002, 2001 and 2000 is as follows: (Dollars
in thousands)
For the Year Ended December 31,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
Balance at beginning of period.............. $ 8,696 $ 6,642 $ 5,431 $ 4,072 $ 3,208
Charge-offs:
Commercial................................ 1,412 365 2,542 2,077 66
Tax refund loans.......................... 700 1,393 - - -
Consumer.................................. 210 53 3 - 90
Short-term loans.......................... 1,381 4,299 1,670 802 -
------------ ------------ ------------ ------------ ------------
Total charge-offs....................... 3,703 6,110 4,215 2,879 156
------------ ------------ ------------ ------------ ------------
Recoveries:
Commercial................................ 1,383 1,066 123 257 340
Tax refund loans.......................... 200 334 - - -
Consumer.................................. 8 - - 17 14
------------ ------------ ------------ ------------ ------------
Total recoveries........................ 1,591 1,400 123 274 354
------------ ------------ ------------ ------------ ------------
Net charge-offs (recoveries)................ 2,112 4,710 4,092 2,605 (198)
------------ ------------ ------------ ------------ ------------
Provision for loan losses................... 1,149 6,764 5,303 3,964 666
------------ ------------ ------------ ------------ ------------
Balance at end of period.................. $ 7,733 $ 8,696 $ 6,642 $ 5,431 $ 4,072
============ ============ ============ ============ ============
Average loans outstanding (1)............. $527,723 $470,237 $468,239 $448,397 $389,156
As a percent of average loans (1):
Net charge-offs (recoveries) (2).......... 0.40% 1.00% 0.87% 0.58% (0.05)%
Provision for loan losses................. 0.22 1.44 1.13 0.88 0.17
Allowance for loan losses................. 1.47 1.85 1.42 1.21 1.05
Allowance for loan losses to:
Total loans, net of unearned income....... 1.31% 1.78% 1.43% 1.16% 0.96%
Total non-performing loans................ 154.44% 101.00% 94.57% 124.89% 118.96%
- ----------
(1) Includes non-accruing loans.
(2) Excluding short-term and tax refund loan charge-offs, ratios were 0.04%,
(.14%) and 0.52% in 2004, 2003 and 2002, respectively.
The Company experienced a $1.4 million loan loss recovery on a single
commercial loan in 2004. In 2003, approximately $700,000 was collected on that
loan, the majority of which was charged-off in 2002. The Company also recovered
$268,000 in 2003 related to another borrower, the majority of whose loan was
charged-off in 2001. In 2004, commercial loan charge-offs increased
approximately $1.0 million over 2003. The single largest charge-off reflected in
the increase totaled $427,000 as previously discussed under "Credit Quality."
Additionally, a total of $248,000 of Community Reinvestment Act loans were
charged-off in 2004. The significant increase in short-term loan charge-offs in
2003 reflected greater amounts of loans generated in that year. However, since
the vast majority of such loans are now sold, lower levels of charge-offs
occurred in 2004. Charge-offs on tax refund loans decreased to $700,000 in 2004,
from $1.4 million in 2003, as a result of increased underwriting and other
controls. 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.
REPUBLIC FIRST BANCORP | 35
The Company has an existing loan review program, which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
who reports quarterly, directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any
given date is difficult, particularly in a continually changing economy. In
Management's opinion, the allowance for loan losses was appropriate at December
31, 2004. 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 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 accordingly 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)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Allocation of the % of % of % of % of % of
allowance for loan Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
losses (1), (2):
Commercial............ $5,324 75.5% $5,531 75.5% $5,336 77.5% $4,540 73.9% $3,048 76.0%
Construction.......... 861 19.9 1,133 18.1 359 7.0 274 7.5 96 3.0
Residential real 33 1.4 60 3.1 205 11.1 203 14.5 224 17.7
estate................
Consumer and other.... 115 2.9 96 3.2 104 3.3 104 2.6 110 3.3
Short-term loans...... 563 0.3 883 0.1 97 1.1 78 1.5 47 -
Unallocated........... 837 - 993 - 541 - 232 - 547 -
--------------------- -------------------- ------------------- ------------------- ------------------
Total.............. $7,733 100% $8,696 100% $6,642 100% $5,431 100% $4,072 100%
===================== ==================== =================== =================== ==================
- ----------
(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. In 2004, excluding short-term and tax
refund loans, the Company experienced net charge-offs to average loans of
approximately .04%. Net recoveries and net charge-offs, respectively, excluding
short-term and tax refund loans, to average loans were (.14%) and .52% in 2003
and 2002. While in 2001 that ratio was .40%, substantially all of the
charge-offs in 2002 and 2001, related to two borrowers. However, of total
charge-offs resulting in the .52% and .40% ratios in 2002 and 2001, subsequent
collections amounted to 45.5% of such charge-offs. In the previous three years,
the charge-off 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 2004. The Company applied historical loss
percentages for short-term consumer loans and added additional reserves based on
industry experience, which in some cases is greater than the Company's
experience. 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 that may have characteristics
that 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%, and doubtful-50%. Also, the
Company may estimate and recognize reserve allocations above these regulatory
reserve percentages based upon any factor that might impact the loss estimates.
Those factors include but are not limited to the impact of economic conditions
on the borrower and management's potential alternative strategies for loan or
collateral disposition. In 2003, the unallocated component increased $452,000 to
$993,000, primarily for economic reasons. At December 31, 2004, based upon some
sustained stabilization and improvement in certain economic trends, the
unallocated component decreased to $837,000 from $993,000 at the prior year-end.
That decrease resulted notwithstanding that total loans at December 31, 2004,
increased to $590.7 million from $488.2 million at the prior year-end. The
unallocated allowance is established for losses that have not been identified
through the formulaic and other specific components of the allowance as
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 macro and micro
economic conditions, industry and geographic loan concentrations, changes in the
composition of the loan portfolio, changes in
REPUBLIC FIRST BANCORP | 36
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, 2004, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $563.5
million, $8.2 million and $18.9 million.
The recorded investment in loans that are impaired in accordance with SFAS
114 totaled $5.0 million, $5.5 million and $3.0 million at December 31, 2004,
2003 and 2002 respectively. The amounts of related valuation allowances were
$1.2 million, $1.4 million and $665,000 respectively at those dates. For the
years ended December 31, 2004, 2003 and 2002 the average recorded investment in
impaired loans was approximately $5.3 million, $3.6 million, and $3.4 million,
respectively. The Company did not recognize any interest income on impaired
loans during 2004 or 2003. 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, 2004 and 2003, accruing substandard loans totaled
approximately $10.8 million and $11.2 million respectively; and doubtful loans
totaled approximately $386,000 and $895,000, respectively. The Banks had
delinquent loans as follows: (i) 30 to 59 days past due, at December 31, 2004
and 2003, in the aggregate principal amount of $1.6 million and $2.6 million
respectively; and (ii) 60 to 89 days past due, at December 31, 2004 and 2003 in
the aggregate principal amount of $137,294 and $2.1 million respectively.
The following table is an analysis of the change in Other Real Estate Owned
for the years ended December 31, 2004 and 2003.
Dollars in thousands
2004 2003
------------- -------------
Balance at January 1,................ $207 $1,015
Additions, net....................... 1,500 207
Sales................................ 1,500 1,015
Write downs.......................... 70 -
------------- -------------
Balance at December 31,.............. $137 $ 207
============= =============
Deposit Structure
Of the total daily average deposits of approximately $495.5 million held by
the Banks during the year ended December 31, 2004, approximately $96.6 million,
or 19.5%, represented non-interest bearing demand deposits, compared to
approximately $75.5 million, or 16.6%, of total daily average deposits during
2003. Total deposits at December 31, 2004, consisted of $104.9 million in
non-interest-bearing demand deposits, $55.2 million in interest-bearing demand
deposits, $194.3 million in savings and money market accounts, $102.0 million in
time deposits under $100,000 and $89.0 million in time deposits greater than
$100,000. In general, the Banks pay higher interest rates on time deposits
compared to other deposit categories. The Banks various deposit liabilities may
fluctuate from period-to-period, reflecting customer behavior and strategies to
optimize net interest income.
The following table is a distribution of the average balances of the Banks'
deposits and the average rates paid thereon, for the twelve months periods ended
December 31, 2004, 2003 and 2002.
REPUBLIC FIRST BANCORP | 37
For the Years Ended December 31,
------------------------------------------------------------------------------------
(Dollars in thousands)
2004 2003 2002
------------------------- ------------------------- ----------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
------------- ---------- ------------- ---------- -------------- ------------
Demand deposits,
non-interest-bearing................ $ 96,565 -% $ 75,469 -% $ 58,338 -%
Demand deposits, interest-bearing... 57,541 0.61% 59,274 0.76% 47,019 1.06%
Money market & savings deposits..... 156,106 1.55% 127,685 1.34% 112,321 1.70%
Time deposits....................... 185,336 2.78% 192,735 3.24% 240,230 3.87%
------------- ---------- ------------- ---------- -------------- ------------
Total deposits...................... $495,548 1.60% $455,163 1.85% $457,908 2.55%
============= ========== ============= ========== ============== ============
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, 2004.
Certificates of Deposit
------------------------
(Dollars in thousands)
2004
---------------------
Maturing in:
Three months or less........................ $52,745
Over three months through six months........ 4,970
Over six months through twelve months....... 2,691
Over twelve months.......................... 28,571
---------------------
Total..................................... $88,977
=====================
The following is a breakdown, by contractual maturities of the Company's
time certificates of deposit for the years 2005 through 2009 and beyond:
2005 2006 2007 2008 2009 Thereafter Totals
------- ------- ------- ------ ------- ---------- --------
(Dollars in thousands)
Time certificates of deposit.. $86,838 $38,495 $27,170 $7,547 $26,917 $4,022 $190,989
======= ======= ======= ====== ======= ====== ========
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, to certain
entities in which voting rights are not effective in identifying the investor
with the controlling financial interest. An entity is subject to consolidation
under FIN 46 if the investors either do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support, are unable to direct the entity's activities, or are not exposed to the
entity's losses or entitled to its residual returns ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both.
Management has determined that Republic First Capital Trust I, utilized for
the Company's $6,000,000 of pooled trust preferred securities issuance,
qualifies as a variable interest entity under FIN 46. Republic First Capital
Trust I issued mandatorily redeemable preferred stock to investors and loaned
the proceeds to the Company. Republic First Capital Trust I holds, as its sole
asset, subordinated debentures issued by the Company in 2001. Republic First
Capital Trust I is currently included in the Company's consolidated balance
sheet and statements of income. The Company has evaluated the impact of FIN 46
and concluded it should continue to consolidate Republic First Capital Trust I
as of December 31, 2003, in part due to its ability to call the preferred stock
prior to the mandatory redemption date and thereby benefit from a decline in
required dividend yields.
The Company adopted the provisions under the revised interpretation in the
first quarter of 2004. Accordingly, the Company no longer consolidates RFCT as
of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded
in the preferred stock when determining if the Company has the right to a
majority of RFCT's expected residual returns. The deconsolidation resulted in
the investment in the common stock of RFCT to be included in other assets as of
September 30, 2004
REPUBLIC FIRST BANCORP | 38
and the corresponding increase in outstanding debt of $186,000. In addition, the
income received on the Company's common stock investment is included in other
income. The adoption of FIN 46R did not have a material impact on the financial
position or results of operations. The Federal Reserve has issued final guidance
on the regulatory capital treatment for the trust-preferred securities issued by
RFCT as a result of the adoption of FIN 46(R). The final rule would retain the
current maximum percentage of total capital permitted for trust preferred
securities at 25%, but would enact other changes to the rules governing trust
preferred securities that affect their use as part of the collection of entities
known as "restricted core capital elements". The rule would take effect March
31, 2009; however, a five-year transition period starting March 31, 2004 and
leading up to that date would allow bank holding companies to continue to count
trust preferred securities as Tier 1 Capital after applying FIN-46(R).
Management has evaluated the effects of the final rule and does not anticipate a
material impact on its capital ratios.
Recent Accounting Pronouncements
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the
evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 required that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows excepted at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.
The Company adopted EITF 03-1, The Meaning of Other than Temporary
Impairment and Its Application to Certain Investments as of December 31, 2003.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under FAS 115, Accounting
for Certain Investments in Debt and Equity Securities that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements. In September 2004, the FASB issued a proposed Staff
Position, EITF Issue 03-1-a, Implementation Guidance for the Application of
Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF 03-1. In September
2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No.
03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments
delays the effective date of certain provisions of EITF Issue 03-1, including
steps two and three of the Issue's three-step approach for determining whether
an investment is other-than-temporarily impaired. However, step one of that
approach must still be initially applied for impairment evaluations in reporting
periods beginning after June 15, 2004. The delay of the effective date for
paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance
of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF Issue No. 03-1, `'The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The Company is in the
process of determining the impact that this EITF will have on its financial
statements.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's need and ability to react to
changes in interest rates. As discussed previously, Management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest income
from being affected by wide interest rate fluctuations.
REPUBLIC FIRST BANCORP | 39
Item 7A: Quantitative and Qualitative Disclosure about Market Risk (Item 305
of Reg S-K)
See "Management Discussion and Analysis of Results of Operations and
Financial Condition - Interest Rate Risk Management".
Item 8: Financial Statements and Supplementary Data
The financial statements of the Company begin on Page 46.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
Item 9A: Controls and Procedures
An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by us under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon that
evaluation, our CEO and CFO concluded that, as of the end of the period covered
by this Annual Report, our disclosure controls and procedures were effective to
provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There has been no change in our internal
control over financial reporting identified in connection with that evaluation
that occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Item 9B: Other Information Not Applicable
REPUBLIC FIRST BANCORP | 40
PART III
Item 10: Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and
Exchange Commission in connection with the Company's 2005 annual meeting of
shareholders scheduled for April 26, 2005.
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 Securities and
Exchange Commission in connection with the Company's 2005 annual meeting of
shareholders scheduled for April 26, 2005.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise exercise price of available for future issuance under
of outstanding options, outstanding options, equity compensation plans (excluding
warrants and rights warrants and rights securities reflected in column (a))
Equity compensation plans
approved by security
holders 768,498 $5.07 0
Equity compensation plans
not approved by security
holders: Incentives to
acquire new employees
58,300 9.90 0
---------------------------------------------------------------------------------------
Total 826,798 $5.77 0
======= ====== ==
Item 13: Certain Relationships and Related Transactions
Certain of the directors of the Company and/or their affiliates have loans
outstanding from the Banks. All such loans were made in the ordinary course of
the Banks' business; were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons; and, in the opinion of management, do not
involve more than the normal risk of collectibility or present other unfavorable
features.
Harry D. Madonna is of counsel to Spector Gadon and Rosen effective January
2, 2002. In 2004, the Company paid $1,250,432 in legal fees to that firm,
primarily for loan workout and collection matters.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and
Exchange Commission in connection with the Company's 2005 annual meeting of
shareholders scheduled for April 26, 2005.
REPUBLIC FIRST BANCORP | 41
PART IV
Item 15: Exhibits and Financial Statements
A. Financial Statements
(1) Report of Independent Registered Accounting Firm
(2) Consolidated Balance Sheets as of December 31, 2004 and 2003
(3) Consolidated Statements of Income for the years ended December 31,
2004, 2003 and 2002
(4) Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003 and 2002
(5) Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 2004, 2003 and 2002
(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)
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.
Exhibit
Number Description Manner of Filing
------- ----------- ----------------
3.1 Amended and Restated Articles of Incorporation of Republic Filed Herewith
First Bancorp, Inc.
3.2 Amended and Restated By-Laws of Republic First Bancorp, Inc. Filed Herewith
10.1 Employment Contract Between the Company and Harry D. Incorporated by reference to Form
Madonna* 10-Q/A Filed February 7, 2005
10.2 Employment Contract Between the Company and Robert D. Davis* Incorporated by reference to Form
10-Q/A Filed February 7, 2005
10.3 Amended and Restated Stock Option Plan and Restricted Stock Incorporated by reference to Form
Plan* S-8 Filed March 26, 2001
10.4 Deferred Compensation Plan* Incorporated by reference to Form
10-Q Filed November 15, 2004
10.5 Human Resources and Payroll Services Agreement between Filed Herewith
Republic First Bank and BSC Services Corp. dated January 1,
2005
10.6 Operation and Data Processing Services Agreement between Filed Herewith
Republic First Bank and BSC Services Corp. dated January 1,
2005
REPUBLIC FIRST BANCORP | 42
10.7 Compliance Services Agreement between Republic First Bank Filed Herewith
and BSC Services Corp. dated January 1, 2005
10.8 Financial Accounting and Reporting Services Agreement Filed Herewith
between Republic First bank and BSC Services Corp. dated
January 1, 2005
21.1 Subsidiaries of the Company Filed Herewith
23.1 Consent of Independent Registered Public Accounting Firm Filed Herewith
31.1 Certification of Chairman and Chief Executive Officer of Filed herewith
Republic First Bancorp, Inc. pursuant to Commission Rule
13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Vice President and Chief Financial Officer Filed herewith
of Republic First Bancorp, Inc. pursuant to Commission Rule
13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification under Section 906 of the Sarbanes Oxley Act Filed Herewith
of Harry D. Madonna.
32.2 Certification under Section 906 of the Sarbanes Oxley Act Filed Herewith
of Paul Frenkiel.
* Constitutes a compensation agreement or arrangement.
REPUBLIC FIRST BANCORP | 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania.
REPUBLIC FIRST BANCORP, INC. [registrant]
Date: March 18, 2005 By:/s/ Harry D. Madonna
----------------------------------
Harry D. Madonna
President and
Chief Executive Officer
Date: March 18, 2005 By:/s/ Paul Frenkiel
----------------------------------
Paul Frenkiel,
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Date: March 18, 2005
/s/ Harris Wildstein, Esq.
-----------------------------------
Harris Wildstein, Esq., Director
/s/ Neal I. Rodin
-----------------------------------
Neal I. Rodin, Director
/s/ Steven J. Shotz
-----------------------------------
Steven J. Shotz, Director
/s/ Harry D. Madonna
-----------------------------------
Harry D. Madonna, Director and
Chairman of the Board
/s/ Kenneth Adelberg
-----------------------------------
Kenneth Adelberg, Director
/s/ William Batoff
-----------------------------------
William Batoff, Director
/s/ Robert Coleman
-----------------------------------
Robert Coleman, Director
/s/ Barry L. Spevak
-----------------------------------
Barry L. Spevak, Director
/s/ Lyle W. Hall
-----------------------------------
Lyle W. Hall, Director
REPUBLIC FIRST BANCORP | 44
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
REPUBLIC FIRST BANCORP, INC.
Page
Report of Independent Registered Accounting Firm 46
Consolidated Balance Sheets as of December 31, 2004 and 2003 47
Consolidated Statements of Income
for the years ended December 31, 2004, 2003 and 2002 48
Consolidated Statements of Cash Flows
for the years ended December 31, 2004, 2003 and 2002 49
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2004, 2003 and 2002 50
Notes to Consolidated Financial Statements 51
REPUBLIC FIRST BANCORP | 45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
Board of Directors and
Shareholders of Republic First Bancorp, Inc.
We have audited the accompanying consolidated statements of financial
position of Republic First Bancorp, Inc. and subsidiaries as of December 31,
2004 and 2003, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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, 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 consolidated financial position of
Republic First Bancorp, Inc. and Subsidiaries as of December 31, 2004 and 2003,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the interim standards adopted
by the Public Company Accounting Oversight Board (United States), the
effectiveness of Republic First Bank's (a subsidiary of Republic First Bancorp,
Inc.) internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated March 24, 2005 expressed an unqualified opinion on management's
assertion that Republic First Bancorp, Inc. maintained effective internal
control over financial reporting.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
March 24, 2005
REPUBLIC FIRST BANCORP | 46
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Dollars in thousands, except per share data)
2004 2003
-------- --------
ASSETS:
Cash and due from banks ........................................................... $ 21,313 $ 28,103
Interest bearing deposits with banks .............................................. 663 3,547
Federal funds sold ................................................................ 23,030 38,952
-------- --------
Total cash and cash equivalents .............................................. 45,006 70,602
Other interest-earning restricted cash ............................................ 2,923 3,483
Investment securities available for sale, at fair value ........................... 44,941 61,686
Investment securities held to maturity, at amortized cost
(fair value of $5,448 and $8,300 respectively) .............................. 5,427 8,260
Loans receivable, (net of allowance for loan losses of $7,733 and $8,696
respectively) ............................................................. 582,919 479,523
Premises and equipment, net ....................................................... 5,026 4,412
Other real estate owned, net ...................................................... 137 207
Accrued interest receivable ....................................................... 3,587 3,710
Bank owned life insurance ......................................................... 12,185 11,763
Other assets ...................................................................... 18,261 11,146
-------- --------
Total Assets ................................................................. $720,412 $654,792
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand -- non-interest-bearing .................................................... $104,923 $ 82,311
Demand -- interest-bearing ........................................................ 55,219 73,315
Money market and savings .......................................................... 194,265 110,389
Time less than $100,000 ........................................................... 102,012 102,508
Time over $100,000 ................................................................ 88,977 85,082
-------- --------
Total Deposits ............................................................... 545,396 453,605
Short-term borrowings ............................................................. 61,090 2,852
FHLB advances ..................................................................... 25,000 125,000
Accrued interest payable .......................................................... 2,146 2,841
Other liabilities ................................................................. 15,370 8,118
Subordinated debt ................................................................. 6,186 --
Corporation-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior obligations of the corporation ......................... -- 6,000
-------- --------
Total Liabilities ............................................................ $655,188 $598,416
-------- --------
Commitments and contingencies
Shareholders' Equity:
Common stock, par value $0.01 per share; 20,000,000 shares authorized; shares
issued 7,428,681 as of December 31, 2004 and
7,367,426 as of December 31, 2003............................................ 74 67
Additional paid in capital........................................................ 42,494 33,396
Retained earnings................................................................. 23,867 23,674
Treasury stock at cost (192,689 shares)........................................... (1,541) (1,541)
Accumulated other comprehensive income............................................ 330 780
-------- --------
Total Shareholders' Equity................................................... 65,224 56,376
-------- --------
Total Liabilities and Shareholders' Equity................................... $720,412 $654,792
======== ========
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 47
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except per share data)
2004 2003 2002
----------- ----------- -----------
Interest income:
Interest and fees on loans................................................. $34,994 $38,651 $37,080
Interest on federal funds sold and other interest-earning assets........... 682 895 759
Interest and dividends on investment securities............................ 2,054 2,858 6,284
----------- ----------- -----------
37,730 42,404 44,123
----------- ----------- -----------
Interest expense:
Demand - interest bearing.................................................. 352 448 497
Money market and savings................................................... 2,425 1,708 1,907
Time less than $100,000.................................................... 3,074 4,088 5,963
Time over $100,000......................................................... 2,079 2,155 3,327
Other borrowings........................................................... 7,201 8,254 8,468
----------- ----------- -----------
15,131 16,653 20,162
----------- ----------- -----------
Net interest income............................................................. 22,599 25,751 23,961
Provision for loan losses....................................................... 1,149 6,764 5,303
----------- ----------- -----------
Net interest income after provision for loan losses............................. 21,450 18,987 18,658
----------- ----------- -----------
Non-interest income:
Loan advisory and servicing fees........................................... 541 585 1,218
Service fees on deposit accounts........................................... 1,827 1,446 1,227
Gains on investment securities sold........................................ 5 - -
Gain on sale of other real estate owned.................................... - 224 -
Short-term loan fee income................................................. 6,597 4,026 -
Tax refund products........................................................ 1,174 487 761
Lawsuit damage award.................................................... 1,337 - -
Other income............................................................... 713 368 76
----------- ----------- -----------
12,194 7,136 3,282
----------- ----------- -----------
Non-interest expenses:
Salaries and employee benefits............................................. 10,092 9,798 8,483
Occupancy ................................................................. 1,627 1,536 1,429
Depreciation............................................................... 1,338 1,416 1,045
Legal...................................................................... 1,252 986 1,721
Other real estate ......................................................... 81 240 1,452
Advertising ............................................................... 178 190 413
Other operating expenses................................................... 5,731 4,559 4,043
----------- ----------- -----------
20,299 18,725 18,586
----------- ----------- -----------
Income before income taxes...................................................... 13,345 7,398 3,354
----------- ----------- -----------
Provision for income taxes...................................................... 4,405 2,484 1,154
----------- ----------- -----------
Net Income...................................................................... $ 8,940 $ 4,914 $ 2,200
=========== =========== ===========
Net income per share:
Basic .......................................................................... $ 1.24 $0.69 $ 0.32
----------- ----------- -----------
Diluted......................................................................... $ 1.18 $0.66 $ 0.31
=========== =========== ===========
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 48
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---------- ---------- -----------
Cash flows from operating activities:
Net income............................................................. $ 8,940 $ 4,914 $ 2,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.......................................... 1,149 6,764 5,303
Write down or loss of other real estate owned...................... 70 56 1,358
Gain on sale of other real estate owned............................ (224) -
Depreciation ...................................................... 1,338 1,416 1,045
Gains on sales of securities sold.................................. (5) - -
Amortization of securities......................................... 252 192 317
Increase in value of business owned life insurance................. (422) (263) -
Increase in accrued interest receivable and other assets........... (6,505) (3,190) (2,487)
Increase (decrease) in accrued expenses and other liabilities...... 6,764 1,845 (655)
---------- ---------- -----------
Net cash provided by operating activities.............................. 11,581 11,510 7,081
---------- ---------- -----------
Cash flows from investing activities:
Purchase of securities:
Available for sale................................................. (7,500) (31,894) (17,507)
Held to maturity................................................... - (2,571) (1,273)
Proceeds from maturities and calls of securities:
Available for sale................................................. 11,500 6,500 4,500
Held to maturity................................................... 2,583 35 2,765
Proceeds from sale of securities:
Available for sale................................................. 1,500 1,003 -
Principal collected on MBS's and CMO's:
Available for sale................................................. 10,039 48,429 42,364
Held to maturity................................................... 251 3,546 812
Net decrease (increase) in loans....................................... (104,545) (29,447) 1,023
Net proceeds from sale of real estate owned............................ - 1,015 -
Purchase of bank owned life insurance.................................. - (11,500) -
Decrease in other interest-earning restricted cash..................... 560 745 685
Premises and equipment expenditures.................................... (1,952) (828) (834)
---------- ---------- -----------
Net cash provided by (used in) investing activities.................... (87,564) (14,967) 32,535
---------- ---------- -----------
Cash flows from financing activities:
Net proceeds from exercise of stock options............................ 358 1,094 189
Net increase in demand, money market and savings....................... 88,392 32,955 36,113
Net increase (decrease) in time deposits............................... 3,399 (35,652) (27,028)
Net increase in short term borrowings.................................. 58,238 2,852 -
Repayment of long term borrowings...................................... (100,000) - (17,500)
---------- ---------- -----------
Net cash provided by (used in) financing activities.................... 50,387 1,249 (8,226)
---------- ---------- -----------
Increase (decrease) in cash and cash equivalents........................... (25,596) (2,208) 31,390
Cash and cash equivalents, beginning of year............................... 70,602 72,810 41,420
---------- ---------- -----------
Cash and cash equivalents, end of year..................................... $45,006 $70,602 $72,810
========== ========== ===========
Supplemental disclosures:
Interest paid.......................................................... 15,826 17,408 20,913
Income taxes paid...................................................... 3,300 2,650 4,025
Non-monetary transfers from loans to other real estate owned........... $ 1,500 $ 207 $ 515
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 49
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
Accumulated
Additional Other Total
Comprehensive Common Paid in Retained Treasury Comprehensive Shareholders'
Income/(loss) Stock Capital Earnings Stock Income (loss) Equity
-----------------------------------------------------------------------------------------
Balance January 1, 2002................ $63 $32,117 $16,560 $(1,541) $(356) $46,843
--------------------------------------------- ----------- ------------
Total other comprehensive income, net
of reclassification adjustments and 2,044 - - - - 2,044 2,044
taxes
Net income for the year................ 2,200 - - 2,200 - - 2,200
-----------
Total comprehensive income............. $ 4,244 - - - - - -
===========
Options exercised 1 188 - - - 189
--------------------------------------------- ----------- ------------
Balance December 31, 2002.............. 64 32,305 18,760 (1,541) 1,688 51,276
- -----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive loss, net of
reclassification adjustments and taxes. (908) - - - - (908) (908)
Net income for the year................ 4,914 - - 4,914 - - 4,914
-----------
Total comprehensive income............. $ 4,006 - - - - - -
===========
Options exercised...................... 3 1,091 - - - 1,094
--------------------------------------------- ----------- ------------
Balance December 31, 2003.............. 67 33,396 23,674 (1,541) 780 56,376
- -----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive loss, net of
reclassification adjustments and taxes. (450) - - - - (450) (450)
Net income for the year................ 8,940 - - 8,940 - - 8,940
-----------
Total comprehensive income............. $ 8,490 - - - - - -
===========
Stock dividend......................... 7 8,740 (8,747) - - -
Options exercised...................... - 358 - - - 358
--------------------------------------------- ----------- ------------
Balance December 31, 2004.............. $74 $42,494 $23,867 $(1,541) $ 330 $65,224
--------------------------------------------- ----------- ------------
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 50
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
The First Bank of Delaware was spun off by Republic First Bancorp, Inc.
(the "Company"), effective January 31, 2005. After that date, the Company became
a one-bank holding company.
At December 31, 2004, the Company was a two-bank holding company organized
and incorporated under the laws of the Commonwealth of Pennsylvania. Its
wholly-owned subsidiary, Republic First Bank (the PA Bank"), offers a variety of
banking services to individuals and businesses throughout the Greater
Philadelphia and South Jersey area through its offices and branches in
Philadelphia and Montgomery Counties.
Its other wholly-owned subsidiary, until the January 31, 2005 spin off, was
First Bank of Delaware ("DE Bank"); a Delaware State chartered Bank, located at
Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New
Castle County, Delaware. The DE Bank offers many of the same services and
financial products as the PA Bank, and additionally offers nationally,
short-term consumer loans and other loan products not offered by the PA Bank.
The Company and the Banks encounter vigorous competition for market share
from bank holding companies, other community banks, thrift institutions and
other non-bank financial organizations, such as mutual fund companies, insurance
companies and brokerage companies.
The Company and the Banks are subject to regulations of certain state and
federal agencies. These regulatory agencies periodically examine the Company and
its subsidiaries for adherence to laws and regulations. As a consequence, the
cost of doing business may be affected.
Subsequent Events
On January 31, 2005, the Board if Directors of the Company declared a pro
rata distribution payable to the holders of record of outstanding Company common
stock at the close of business on January 31, 2005, the record date of
distribution, of one share of First Bank of Delaware (DE Bank) for every share
of the Company's common stock outstanding on the record date. As a result of the
distribution, all of the outstanding shares of DE Bank common stock were
distributed to the Company's shareholders. Immediately following the
distribution, the Company and its subsidiaries did not own any shares of DE Bank
common stock and DE Bank became an independent public company. DE Bank's common
stock is listed Over the Counter (OTC) under the symbol FBOD. The Company and DE
Bank have certain agreements in place so that DE Bank can provide certain back
office services. A fee will be charged by DE Bank for these services. In
accordance with FAS no. 144, the Company will present the operations of DE Bank
as discontinued operations for the first quarter 2005.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements of the Company include the accounts
of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, Republic
First Bank and First Bank of Delaware, (together, the "Banks"). Such statements
have been presented in accordance with accounting principles generally accepted
in the United States of America or applicable to the banking industry. All
significant inter-company accounts and transactions have been eliminated in the
consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans
and mortgage backed securities vary significantly and may cause significant
fluctuations in interest margins.
Short-term consumer loans were first offered through the DE Bank in 2001.
At December 31, 2004, there was approximately $1.6 million of short-term
consumer loans outstanding, which were originated in Texas. The DE Bank also
originates loans in Michigan, California, Arizona, Ohio and other states, and
via the internet, which are sold to third parties. Legislation eliminating,
REPUBLIC FIRST BANCORP | 51
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 DE Bank 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 DE Bank offers two tax refund products with Liberty Tax Service.
Liberty Tax Service is a nationwide tax service provider that prepares and
electronically files federal and state income tax returns ("Tax Refund
Products"). Tax Refund Products consist of accelerated check refunds ("ACRs"),
and refund anticipation loans ("RALs"). There can be no assurance that revenue
levels will increase significantly in future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make significant estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Since the allowance for loan losses and carrying value of other real estate
owned are dependent, to a great extent, on the general economy and other
conditions that may be beyond the Banks' control, it is at least reasonably
possible that the estimates of the allowance for loan losses and the carrying
values of other real estate owned could differ materially in the near term.
The Company 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.
Restrictions on Cash and Due From Banks:
The Banks are required to maintain certain average reserve balances as
established by the Federal Reserve Board. The amounts of those balances for the
reserve computation periods that include December 31, 2004 and 2003 were $11.4
million and $7.8 million, respectively. These requirements were satisfied
through the restriction of vault cash and a balance at the Federal Reserve Bank
of Philadelphia.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. These funds are not
considered cash equivalents because the Company is contractually obligated to
provide these funds and is not immediately able to withdraw the funds.
Investment Securities:
Debt and equity investment securities are classified in one of three
categories, as applicable, and accounted for as follows: debt securities which
the Company has the positive intent and ability to hold to maturity are
classified as "securities held to maturity" and are reported at amortized cost;
debt and equity securities that are bought and sold in the near term are
classified as "trading" and are reported at fair market value with unrealized
gains and losses included in earnings; and debt and equity securities not
classified as either held to maturity and/or trading securities are classified
as "investment securities available for sale" and are reported at fair market
value with net unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. Gains or losses on disposition are based on
the net proceeds and cost of securities sold, adjusted for amortization of
premiums and accretion of discounts, using the specific identification method.
The Company does not have any investment securities designated as trading as of
December 31, 2004 and 2003.
REPUBLIC FIRST BANCORP | 52
Loans and Allowance for Loan Losses:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned income and an allowance for loan losses.
Interest on loans is calculated based upon the principal amounts outstanding.
The Company defers and amortizes certain origination and commitment fees, and
certain direct loan origination costs over the contractual life of the related
loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of
discounts related to loans purchased and investment securities based upon the
effective interest method. If a loan prepays in full before the contractual
maturity date, any unamortized premiums, discounts or fees are recognized
immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well-secured and in the process of collection. Loans that
are on a current payment status or past due less than 90 days may also be
classified as non-accrual if repayment in full of principal and/or interest is
in doubt. Loans may be returned to accrual status when all principal and
interest amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance of interest and principal by the borrower, in accordance with the
contractual terms. Generally, in the case of non-accrual loans, cash received is
applied to reduce the principal outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loans are charged against the allowance when
management believes that the collectibility of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the allowance.
The allowance is an amount that represents management's best estimate of
known and inherent loan losses. Management's evaluations of the allowance for
loan losses consider such factors as an examination of the portfolio, past loss
experience, the results of the most recent regulatory examination, current
economic conditions and other relevant factors.
The Company accounts for its impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
The Company considers residential mortgage loans with balances less than
$250,000 and consumer loans, including home equity lines of credit, to be small
balance homogeneous loans. These loan categories are collectively evaluated for
impairment. Jumbo mortgage loans, those with balances greater than $250,000,
commercial business loans and commercial real estate loans are individually
measured for impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all collateral
dependent loans are measured for impairment based on the fair market value of
the collateral.
The Company accounts for the transfers and servicing financial assets in
accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS No. 140 revises the
standards for accounting for the securitizations and other transfers of
financial assets and collateral.
Fees earned on short-term loans which are not sold are recorded as interest
income. At December 31, 2004, there were approximately $1.6 million of these
loans outstanding.
The majority of short-term loans are now sold to third parties effective in
the third quarter of 2003. The DE Bank records fees for on sold loans as
non-interest income. The DE Bank had total short-term loan participations sold
of $26.0 million at December 31, 2004. The Company evaluated these sales and
determined that they qualified as such under FASB 140.
The Company adopted FIN 45 Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others on January 1, 2003. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. The Company has financial and performance letters of credit.
Financial letters of credit require the Company to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Company to make payments if the
customer fails to perform certain non-financial contractual obligation. The
Company previously did not record a liability, except for the initial fees
received, when guaranteeing obligations unless it
REPUBLIC FIRST BANCORP | 53
became probable that the Company would have to perform under the guarantee. FIN
45 applies prospectively to guarantees the Company issues or modifies subsequent
to December 31, 2002. The maximum potential undiscounted amount of future
payments of these letters of credit as of December 31, 2004 are $8.0 million and
they expire as follows $6.6 million in 2005, $1.3 million in 2006 and $40,000
after 2008. Amounts due under these letters of credit would be reduced by any
proceeds that the Company would be able to obtain in liquidating the collateral
for the loans, which varies depending on the customer.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future Adoption of FAS 149 did not have a material impact
on the Company's financial statements.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation of furniture and equipment is calculated over the
estimated useful life of the asset using the straight-line method. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
terms of their respective leases, using the straight-line method. Repairs and
maintenance are charged to current operations as incurred, and renewals and
betterments are capitalized.
The Company adopted SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets on January 1, 2002. SFAS No. 144 retains the existing
requirements to recognize and measure the impairment of long-lived assets to be
held and used or to be disposed of by sale. SFAS No. 144 changes the
requirements relating to reporting the effects of a disposal or discontinuation
of a segment of a business. The adoption of this statement did not have a
material impact on the Companies financial condition or results of operations.
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, 2004, the Company had retail stores
classified as other real estate owned with a value of $137,000.
Bank Owned Life Insurance:
The Company utilizes bank owned life insurance (BOLI) to purchase life
insurance on certain employees. The Company is the owner of the policies, which
provide certain tax benefits. At December 31, 2004 and 2003, the Company owned
$12.2 million and $11.8 million, respectively in BOLI. In 2004 and 2003, the
Company respectively recognized $421,000 and $263,000 in related income.
Advertising Costs:
It is the Company's policy to expense advertising costs in the period in
which they are incurred.
Income Taxes:
The Company accounts for income taxes under the liability method of
accounting. Deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at the tax rates expected to be in effect
when the temporary differences are realized or settled. In addition, a deferred
tax asset is recorded to reflect the future benefit of net operating loss
carryforwards. The deferred tax assets may be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
REPUBLIC FIRST BANCORP | 54
Earnings Per Share:
Earnings per share ("EPS") consists of two separate components, basic EPS
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents ("CSE"). Common
stock equivalents consist of dilutive stock options granted through the
Company's stock option plan. The following table is a reconciliation of the
numerator and denominator used in calculating basic and diluted EPS. Common
stock equivalents, which are antidilutive are not included for purposes of this
calculation. At December 31, 2004, 2003 and 2002, there were 0, 0, and 75,724 at
$6.02 to $8.26 per share of stock options to purchase common stock, which were
not included in the computation of earnings per share because the option price
is greater than the average market price, respectively.
(In thousands, except per share data) 2004 2003 2002
-------- --------- ---------
Income (numerator for basic and diluted earnings per share) $8,940 $4,914 $2,200
======== ========= =========
2004 2003 2002
------------------------ ---------------------- ---------------------
Per Per Per
Shares Share Shares Share Shares Share
------------------------ ---------------------- ---------------------
Weighted average shares outstanding for the period
(denominator for basic earnings per share)... 7,216,067 7,075,849 6,825,860
Earnings per share -- basic....................... $1.24 $0.69 $0.32
Effect of dilutive stock options................. 356,431 325,645 280,367
--------------- ------------ ------------
Effect on basic earnings per share of CSE........ (0.06) (0.03) (0.01)
--------- ---------- ---------
Weighted average shares outstanding- diluted 7,572,498 7,401,494 7,106,227
=============== ============ ============
Earnings per share -- diluted..................... $1.18 $0.66 $0.31
========= ========== =========
REPUBLIC FIRST BANCORP | 55
Stock Based Compensation:
The company accounts for stock options under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which
contains a fair valued-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees. Entities that continue to account for stock options
using APB Opinion 25 are required to make pro forma disclosures of net income
and earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The FASB recently published SFAS 123 (Revised
2004), Share-Based Payment ("SFAS 123R"). SFAS 123R, which is effective from the
first interim period that begins after June 15, 2005, will require that
compensation cost related to share-based payment transactions, including stock
options, be recognized in the financial statements. Management is currently
evaluating the provisions of SFAS 123R.
At December 31, 2004, the Company had a stock-based employee compensation
plan, which is more fully described in note 16. The Company accounts for that
plan under the recognition and measurement principles of APB No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Stock-based employee
compensation costs are not reflected in net income, as all options granted under
the plan had an exercise price equal to the market vale of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based employee compensation (in
thousands, except per share amounts).
Stock Based Compensation
----------------------------------------
(Dollars in thousands)
2004 2003 2002
------------ ------------ --------------
Net income as reported.............................. $8,940 $4,914 $2,200
Less : Stock based compensation costs determined under fair value
based method for all awards...................... 210 366 418
------------ ------------ --------------
Net income, pro-forma............................... $8,730 $4,548 $1,782
------------ ------------ --------------
Earnings per common share- basic: As reported $ 1.24 $ 0.69 $ 0.32
============ ============ ==============
Pro-forma $ 1.21 $ 0.64 $ 0.26
------------ ------------ --------------
Earnings per common share- diluted: As reported $ 1.18 $ 0.66 $ 0.31
------------ ------------ --------------
Pro-forma $ 1.16 $ 0.61 $ 0.25
============ ============ ==============
The proforma compensation expense is based upon the fair value of the
option at grant date. The fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 2004, 2003 and 2002, respectively;
dividend yields of 0% for all three periods; expected volatility of 35% for
2004, 34% for 2003, and 31% for 2002; risk-free interest rates of 3.48%, 3.48%
and 4.0% respectively and an expected life of 5.0 years for all periods.
Reclassifications and Restatement for 10% Stock Dividend:
Certain items in the 2003 and 2002 financial statements and accompanying
notes have been reclassified to conform to the 2004 presentation format. There
was no effect on net income for the periods presented herein as a result of
reclassifications. All applicable amounts in these financial statements have
been restated for a 10% stock dividend paid on August 24, 2004.
REPUBLIC FIRST BANCORP | 56
Comprehensive Income:
The tax effects allocated to each component of "Comprehensive Income" are
as follows:
For the year ended December 31, 2004
(Dollars in thousands)
Before Tax Net of
Unrealized losses on securities: Tax Amount Expense Tax Amount
Unrealized holding losses arising during ------- ------- -------
the period .......................................................... $ (676) $ 229 $ (447)
Less: Reclassification adjustment for gains
Included in net income .............................................. (5) 2 (3)
------- ------- -------
Other comprehensive losses ................................................... $ (681) $ 231 $ (450)
======= ======= =======
For the year ended December 31, 2003
(Dollars in thousands)
Unrealized losses on securities:
Unrealized holding losses arising during
the period .......................................................... $(1,374) $ 466 $ (908)
Less: Reclassification adjustment for gains
Included in net income .............................................. -- -- --
------- ------- -------
Other comprehensive loss ..................................................... $(1,374) $ 466 $ (908)
======= ======= =======
For the year ended December 31, 2002
(Dollars in thousands)
Before Tax Net of
Tax Amount Expense Tax Amount
------- ------- -------
Unrealized gains on securities:
Unrealized holding gains arising during
the period .......................................................... $ 3,097 $(1,053) $ 2,044
Less: Reclassification adjustment for gains
Included in net income .............................................. -- -- --
------- ------- -------
Other comprehensive income ................................................... $ 3,097 $(1,053) $ 2,044
======= ======= =======
Variable Interest Entity:
Management has determined that Republic First Capital Trust I ("RFCT"),
utilized for the Company's $6,000,000 of pooled preferred securities issuance,
qualifies as a variable interest entity under FIN 46, as revised RFCT issued
mandatorily redeemable preferred stock to investors and loaned the proceeds to
the Company. RFCT is included in the Company's consolidated balance sheet and
statements of income as of and for the year ended December 31, 2003. Subsequent
to the issuance of FIN 46 in January 2003, the FASB issued a revised
interpretation, FIN 46(R) Consolidation of Variable Interest Entities, the
provisions of which were required to be applied to certain variable interest
entities by March 31, 2004.
The Company adopted the provisions under the revised interpretation in the
first quarter of 2004. Accordingly, the Company no longer consolidates RFCT as
of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded
in the preferred stock when determining if the Company has the right to a
majority of RFCT's expected residual returns. The deconsolidation resulted in
the investment in the common stock of RFCT to be included in other assets as of
September 30, 2004 and the corresponding increase in outstanding debt of
$186,000. In addition, the income received on the Company's common stock
investment is included in other income. The adoption of FIN 46R did not have a
material impact on the financial position
REPUBLIC FIRST BANCORP | 57
or results of operations. The Federal Reserve has issued final guidance on the
regulatory capital treatment for the trust-preferred securities issued by RFCT
as a result of the adoption of FIN 46(R). The final rule would retain the
current maximum percentage of total capital permitted for trust preferred
securities at 25%, but would enact other changes to the rules governing trust
preferred securities that affect their use as part of the collection of entities
known as "restricted core capital elements". The rule would take effect March
31, 2009; however, a five-year transition period starting March 31, 2004 and
leading up to that date would allow bank holding companies to continue to count
trust preferred securities as Tier 1 Capital after applying FIN-46(R).
Management has evaluated the effects of the final rule and does not anticipate a
material impact on its capital ratios.
Recent Accounting Pronouncements:
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with evidence
of deterioration of credit quality since origination acquired in a transfer for
which it is probable that at acquisition, the Company will be unable to collect
all contractually required payments receivable. SOP 03-3 requires that the
Company recognize the excess of all cash flows expected at acquisition over the
investor's initial investment in the loan as interest income on a level yield
basis over the life of the loan as the accretable yield. The loan's contractual
required payments receivable in excess of the amount of its cash flows excepted
at acquisition (nonaccretable difference) should not be recognized as an
adjustment to yield, a loss accrual or a valuation allowance for credit risk.
SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 31, 2004. Early adoption is permitted. Management is currently
evaluating the provisions of SOP 03-3.
The SEC recently released Staff Accounting Bulletin No. 105, Application of
Accounting Principles to Loan Commitments. SAB 105 provides guidance about the
measurement of loan commitments recognized at fair value under FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105
also requires companies to disclose their accounting policy for those loan
commitments including methods and assumptions used to estimate fair value and
associated hedging strategies. SAB 105 is effective for all loan commitments
accounted for as derivatives that are entered into after September 30, 2004. The
adoption of SAB 105 is not expected to have a material effect on the Company's
financial statements.
In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued
EITF Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure provisions of EITF 03-1 were effective for years ending after
December 15, 2003 and were included in the Company's 2003 Form 10-K. In March
2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of
EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to
investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a
three-step approach for determining whether an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss. The Company adopted EITF 03-1, The Meaning of Other than
Temporary Impairment and Its Application to Certain Investments as of December
31, 2003. EITF 03-1 includes certain disclosures regarding quantitative and
qualitative disclosures for investment securities accounted for under FAS 115,
Accounting for Certain Investments in Debt and Equity Securities that are
impaired at the balance sheet date, but an other-than-temporary impairment has
not been recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements. In September 2004, the FASB issued a proposed Staff
Position, EITF Issue 03-1-a, Implementation Guidance for the Application of
Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF 03-1. In September
2004, the FASB issued a Staff Position, EITF Issue 03-1-1, Effective Date of
Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP EITF Issue No.
03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, `The Meaning
of Other-Than-Temporary Impairment and Its Application to Certain Investments
delays the effective date of certain provisions of EITF Issue 03-1, including
steps two and three of the Issue's three-step approach for determining whether
an investment is other-than-temporarily impaired. However, step one of that
approach must still be initially applied for impairment evaluations in reporting
periods beginning after June 15, 2004. The delay of the effective date for
paragraphs 10-20 of EITF Issue 03-1 will be superseded with the final issuance
of proposed FSP EITF Issue 03-1-a, Implementation Guidance for the Application
of Paragraph 16 of EITF Issue No. 03-1, `'The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The Company is in the
process of determining the impact that this EITF will have on its financial
statements.
The company accounts for stock options under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which
contains a fair valued-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees. Entities that continue to account for stock options
using APB Opinion 25 are required to make pro
REPUBLIC FIRST BANCORP | 58
forma disclosures of net income and earnings per share, as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied. The
FASB recently published SFAS 123 (Revised 2004), Share-Based Payment ("SFAS
123R"). SFAS 123R, which is effective from the first interim period that begins
after June 15, 2005, will require that compensation cost related to share-based
payment transactions, including stock options, be recognized in the financial
statements. Management is currently evaluating the provisions of SFAS 123R.
3. Investment Securities:
Investment securities available for sale as of December 31, 2004 are as
follows:
Gross Gross
(Dollars in thousands) Amortized Cost Unrealized Unrealized Fair
Gains Losses Value
----------------- -------------- ------------ -----------
U.S. Government Agencies.................................. $ 20,258 $ - $ - $20,102
(156)
Mortgage Backed Securities................................ 13,675 600 (9) 14,266
Other Debt Securities.................................... 10,506 101 (34) 10,573
---------------- -------------- ------------ -----------
Total................................................ $ 44,439 $ 701 $(199) $44,941
================ ============== ============ ===========
Investment securities held to maturity as of December 31, 2004 are as
follows:
(Dollars in thousands) Gross Gross
Amortized Cost Unrealized Unrealized Fair
Gains Losses Value
----------------- -------------- ------------ -----------
U.S. Government Agencies.................................. $ 3 $ - $ - $ 3
Mortgage Backed Securities................................ 108 7 - 115
Other Securities.......................................... 5,316 14 - 5,330
---------------- -------------- ------------ -----------
Total................................................ $ 5,427 $ 21 $ - $ 5,448
================ ============== ============ ===========
Investment securities available for sale as of December 31, 2003 are as
follows:
Gross Gross
(Dollars in thousands) Amortized Cost Unrealized Unrealized Fair
Gains Losses Value
----------------- -------------- ------------ -----------
U.S. Government Agencies.................................. $ 24,425 $ 10 $ - $24,435
Mortgage Backed Securities and CMOs....................... 24,235 1,067 (16) 25,286
Other Debt Securities.................................... 11,843 142 (20) 11,965
---------------- -------------- ------------ -----------
Total................................................ $ 60,503 $1,219 $ (36) $61,686
================ ============== ============ ===========
Investment securities held to maturity as of December 31, 2003 are as
follows:
Gross Gross
(Dollars in thousands) Amortized Cost Unrealized Unrealized Fair
Gains Losses Value
----------------- -------------- ------------ -----------
U.S. Government Agencies.................................. $ 68 $ - $ - $ 68
Mortgage Backed Securities and CMOs....................... 265 18 - 283
Other Securities.......................................... 7,927 22 - 7,949
---------------- -------------- ------------ -----------
Total................................................ $ 8,260 $ 40 $ - $ 8,300
================ ============== ============ ===========
The securities portfolio consists primarily of U.S government agency
securities, mortgage backed securities, corporate bonds, trust preferred
securities and FHLB stock. The Company's ALCO reviews all security purchases to
ensure compliance with security policy guidelines. Included in other securities
are investments in the stock of the Federal Home Loan Bank of Pittsburgh of $4.6
million and $7.2 million at December 31, 2004 and 2003, respectively. The
Federal Home Loan Bank stocks are recorded at cost, which approximates
liquidation value.
REPUBLIC FIRST BANCORP | 59
The maturity distribution of the amortized cost and estimated market value
of investment securities by contractual maturity at December 31, 2004, 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..................................... $20,107 $19,950 $ 150 $ 150
After 1 year to 5 years................................... 151 152 155 155
After 5 years to 10 years................................. 781 825 103 103
After 10 years............................................ 23,400 24,014 201 222
No stated maturity........................................ - - 4,818 4,818
---------------- ---------------- ------------ -----------
Total................................................ $44,439 $44,941 $5,427 $5,448
================ ================ ============ ===========
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without
prepayment penalties.
The Company did not realize any material gains or losses on the sale of
securities during 2004 or 2003.
At December 31, 2004 and 2003, investment securities in the amount of
approximately $ 4.0 million and $21.6 million respectively, were pledged as
collateral for public deposits and certain other deposits as required by law.
Temporarily impaired securities as of December 31, 2004 are as follows:
(Dollars in thousands) Less than 12 months 12 Months or more Total
------------------------- -------------------- ---------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
------- ------- ------- ------- ------- -------
US Government Agencies $ 3,086 $ 24 $16,864 $ 132 $19,950 $ 156
Mortgage Backed Securities 993 7 2,996 27 3,989 34
Other Debt Securities 132 1 268 8 400 9
------- ------- ------- ------- ------- -------
Total Temporarily Impaired Securities $ 4,211 $ 32 $20,128 $ 167 $24,339 $ 199
======= ======= ======= ======= ======= =======
The impairment of the investment portfolio at December 31, 2004 totaled
$199,000 in 13 securities totaling $24.3 million at December 31, 2004. The
unrealized loss is due to changes in market value resulting from changes in
market interest rates and is considered temporary.
Temporarily impaired securities as of December 31, 2003 are as follows:
(Dollars in thousands) Less than 12 months 12 Months or more Total
------------------------ -------------------------- -- -------------------------
Description of Securities Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
--------- ----------- ----------- ----------- -- ---------- -----------
Mortgage Backed Securities $- $- $3,290 $36 $3,290 $36
--------- ----------- ----------- ----------- ---------- -----------
Total Temporarily Impaired Securities $- $- $3,290 $36 $3,290 $36
========= =========== =========== =========== ========== ===========
The impairment of the investment portfolio at December 31, 2003 totaled
$36,000 in 6 securities totaling $3.3 million at December 31, 2003. The
unrealized loss is due to changes in market value resulting from changes in
market interest rates and is considered temporary.
REPUBLIC FIRST BANCORP | 60
4. Loans Receivable:
Loans receivable consist of the following at December 31,
(Dollars in thousands) 2004 2003
----------------- ----------------
Commercial and Industrial................................. $ 70,914 $ 65,729
Real Estate - commercial.................................. 375,861 303,603
Construction and land development......................... 117,388 88,850
Real Estate - residential (1)............................. 8,219 14,875
Consumer and other........................................ 18,890 16,147
----------------- ----------------
Loans receivable.......................................... 591,272 489,204
Less deferred loan fees................................... (620) (985)
Less allowance for loan losses............................ (7,733) (8,696)
----------------- ----------------
Total loans receivable, net .............................. $582,919 $479,523
================= ================
- ----------
(1) Real estate - residential is comprised of jumbo residential first mortgage
loans for both years presented.
The recorded investment in loans which are impaired in accordance with SFAS
114, totaled $5.0 million, $5.5 million and $3.0 million at December 31, 2004,
2003 and 2002 respectively. The amounts of related valuation allowances were $
1.2 million, $1.4 million and $665,000 respectively at those dates. For the
years ended December 31, 2004, 2003 and 2002, the average recorded investment in
impaired loans was approximately $5.3 million, $3.6 million and $3.4 million
respectively. The Banks did not realize any interest on impaired loans during
2004, 2003 or 2002. 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, 2004, 2003 and 2002, there were loans of approximately
$5.0 million, $5.5 million and $3.0 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 $399,000,
$285,000 and $241,000 for 2004, 2003 and 2002 respectively. Loans past due 90
days and accruing totaled $0, and $3.1 million, respectively, at December 31,
2004 and December 31, 2003.
The majority of loans outstanding 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, commercial and income-producing properties. At
December 31, 2004, 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 $163.5 million, which
represented 27.7% of gross loans receivable at December 31, 2004. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and others. Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that management
believes would cause them to be similarly impacted by economic or other
conditions.
Included in loans are loans due from directors and other related parties of
$20.8 million and $8.0 million at December 31, 2004 and 2003, 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, 2004.
(Dollars in thousands) 2004 2003
---- ----
Balance at beginning of year.................... $ 8,013 $ 4,395
Additions....................................... 13,760 4,510
Repayments...................................... (956) (892)
---------- -----------
Balance at end of year.......................... $ 20,817 $ 8,013
========== ===========
REPUBLIC FIRST BANCORP | 61
Harry D. Madonna is of counsel to Spector Gadon and Rosen effective January
2, 2002. In 2004, 2003 and 2002 the Company paid $1,250,432, $1,044,000 and
$1,338,000, respectively, in legal fees to that firm which were primarily for
loan workout and collection matters.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
(Dollars in thousands) 2004 2003 2002
------------ ----------- -----------
Balance at beginning of year...................................... $8,696 $6,642 $5,431
Charge-offs....................................................... (3,703) (6,110) (4,215)
Recoveries........................................................ 1,591 1,400 123
Provision for loan losses......................................... 1,149 6,764 5,303
------------ ----------- -----------
Balance at end of year............................................ $7,733 $8,696 $6,642
============ =========== ===========
6. Premises and Equipment:
A summary of premises and equipment is as follows:
(Dollars in thousands) Useful lives 2004 2003
------------ ---------------------------
Furniture and equipment......................................... 3 to 10 years $7,895 $6,810
Bank building................................................... 40 years 1,926 1,921
Leasehold improvements.......................................... 20 years 2,786 1,924
---------------------------
12,607 10,655
Less accumulated depreciation................................... (7,581) (6,243)
---------------------------
Net premises and equipment...................................... $5,026 $4,412
===========================
Depreciation expense on premises, equipment and leasehold improvements
amounted to $1.3 million, $1.4 million and $1.0 million in 2004, 2003 and 2002
respectively.
7. Borrowings:
The PA Bank has a line of credit for $10.0 million available for the
purchase of federal funds from a correspondent bank. At December 31, 2004, the
PA Bank had $0 outstanding on this line.
The PA Bank has a collateralized line of credit with the Federal Home Loan
Bank of Pittsburgh with a maximum borrowing capacity of $186.7 million as of
December 31, 2004. This maximum borrowing capacity is subject to change on a
monthly basis. As of December 31, 2004 and 2003, there were $25.0 million and
$125.0 million respectively of term advances, outstanding on these lines of
credit. As of December 31, 2004 and 2003, there were $61.1 million and $2.8
million of overnight advances outstanding against these lines. The remaining
$25.0 million borrowing matures February 2005. The Federal Home Loan Bank has
the option to convert terms borrowings from a fixed rate to a variable rate.
The contractual maturity of the Company's borrowings at December 31, 2004,
is as follows:
Weighted
(Dollars in thousands) Amount Average Rate
------------- ---------------
Maturing in:
2005................................. $25,000 6.71%
------------- ------------
Subordinated debt and 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, 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
REPUBLIC FIRST BANCORP | 62
five years, without a prepayment penalty, notwithstanding their final 30 year
maturity. The interest rate is variable and adjustable semi-annually at 3.75%
over the 6 month London Interbank Offered Rate ("Libor"). The interest rates at
December 31, 2004 and 2003 were 5.61% and 4.81%, respectively. The interest rate
cap of 11% is effective through the initial 5-year call date.
8. Deposits:
The following is a breakdown, by contractual maturities of the Company's
time certificate of deposits for the years 2005 through 2009 and beyond, which
includes brokered certificates of deposit of approximately $45.0 million with
original terms of three months.
(Dollars in thousands) 2005 2006 2007 2008 2009 Thereafter Total
---------------------- ---------- -------- ----------- ------------ ------------
Time Certificates of Deposit....... $86,838 $38,495 $27,170 $7,547 $26,917 $4,022 $190,989
====================== ========== ======== =========== ============ ============
9. Income Taxes:
The following represents the components of income tax expense (benefit) for
the years ended December 31, 2004, 2003 and 2002, respectively.
(Dollars in thousands) 2004 2003 2002
---------- ----------- -----------
Current provision
Federal:
Current....................................................... $4,082 $3,063 $1,675
Deferred ..................................................... 323 (579) (521)
---------- ----------- -----------
Total provision for income taxes................................... $4,405 $2,484 $1,154
========== =========== ===========
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,
2004, 2003 and 2002.
(Dollars in thousands) 2004 2003 2002
------------ ------------ ------------
Tax provision computed at statutory rate.......................... $4,538 $2,515 $1,143
Amortization of negative goodwill................................. - - -
State tax, net of federal benefit................................. - - -
Other............................................................. (133) (31) 11
------------ ------------ ------------
Total provision for income taxes............................. $4,405 $2,484 $1,154
============ ============ ============
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, 2004 and 2003 are as follows:
2004 2003
------------ ------------
Allowance for loan losses......................................... $2,630 $2,958
Deferred compensation............................................. 642 606
Unrealized gain on securities available for sale ................. (172) (403)
Depreciation...................................................... (45) (61)
Deferred loan costs............................................... (589) (541)
Prepaid expenses.................................................. (17) (18)
------------ ------------
Net deferred tax asset............................................ $2,449 $2,541
============ ============
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.
REPUBLIC FIRST BANCORP | 63
10. Financial Instruments with Off-Balance Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same underwriting
standards and policies in making credit commitments as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit
risk are commitments to extend credit of approximately $156.6 million and $94.8
million and standby letters of credit of approximately $8.0 million and $4.0
million at December 31, 2004 and 2003, respectively. The increase in commitments
reflects increases in commercial lending. However, commitments may often expire
without being drawn upon. Of the $156.6 million of commitments to extend credit
at December 31, 2004, substantially all were variable rate commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee
the performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
11. Commitments:
Lease Arrangements:
As of December 31, 2004, the Company had entered into non-cancelable leases
expiring through September 30, 2011. 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
------------ ----------
2005.............................................. $ 1,056
2006.............................................. 1,010
2007.............................................. 636
2008.............................................. 307
2009 ............................................. 106
thereafter ....................................... 137
----------
Total............................................. $ 3,252
==========
The Company incurred rent expense of $1,029,000, $968,000 and $936,000 for
the years ended December 31, 2004, 2003 and 2002, respectively.
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
------------ ---------
2005............................................... $ 15
=========
REPUBLIC FIRST BANCORP | 64
The Company did not incur rent and expense on these machines during 2004,
2003 and 2002, respectively.
Employment Agreements:
The Company has entered into employment agreements with the President of
the Company and the President of the Bank, which provide for the payment of base
salary and certain benefits through the year 2007. The aggregate commitment for
future salaries and benefits under these employment agreements at December 31,
2004, is approximately $ 1.4 million.
Other:
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
12. Regulatory Capital:
Dividend payments by the PA Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code 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
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 PA Bank would be limited to $32.2 million of dividends plus an additional
amount equal to its net profit for 2005, up to the date of any such dividend
declaration. Dividend payments by the DE Bank are similarly limited by the FDIC
and the Delaware Bank Commissioner to $6.2 million plus an additional amount
equal to its net profit for 2005. However, dividends would be further limited in
order to maintain capital ratios. The Company may consider dividend payments in
2005.
During 2003 the Boards of Directors of the Banks filed applications with
the Federal Reserve Board to withdraw their memberships in the Federal Reserve
Bank System and filed applications with the FDIC to continue deposit insurance.
The applications were accepted by both regulators, such that the Banks are now
insured and regulated by the FDIC.
As part of the transition, the DE Bank entered into a Memorandum of
Understanding with the FDIC and the Office of the State Bank Commissioner
("Delaware Commissioner") which Memorandum of Understanding requires, among
other things, that in the event the FDIC and the Delaware Commissioner determine
that the short-term loan (payday loans) program of the DE Bank is not operated
in a safe and sound manner and request in writing that the DE Bank cease making
such short-term loans, the DE Bank will provide a strategy for exiting the
short-term loan program. After management discussions with the FDIC and the
Delaware Commissioner, the Board of Directors of the DE Bank determined to
continue the short-term loan program in accordance with the provisions of the
guidelines issued by the FDIC and the laws and regulations of the State of
Delaware. As of December 31, 2004 the Memoranda of Understanding was still in
effect.
State and Federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Federal banking agencies
impose three minimum capital requirements on the Company's risk-based capital
ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The
risk-based capital ratios measure the adequacy of a bank's capital against the
riskiness of its assets and off-balance sheet activities. Failure to maintain
adequate capital is a basis for "prompt corrective action" or other regulatory
enforcement action. In assessing a bank's capital adequacy, regulators also
consider other factors such as interest rate risk exposure; liquidity, funding
and market risks; quality and level or earnings; concentrations of credit;
quality of loans and investments; risks of any nontraditional activities;
effectiveness of bank policies; and management's overall ability to monitor and
control risks.
Management believes that the Banks meet, as of December 31, 2004, all
capital adequacy requirements to which it is subject. As of December 31, 2004,
the FDIC categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action provisions of the Federal Deposit
Insurance Act. There are no calculations or events since that notification that
management believes have changed the Banks' category.
REPUBLIC FIRST BANCORP | 65
The following table presents the Company's capital regulatory ratios at
December 31, 2004 and 2003:
To be well
capitalized under
For Capital regulatory capital
Actual Adequacy Purposes guidelines
----------------------- -------------------- --------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- --------- ---------
At December 31, 2004
Total risk based capital
Republic First Bank............................. $64,251 12.09% $42,526 8.00% $53,158 10.00%
First Bank of DE................................ 11,948 26.27% 3,638 8.00% 4,548 10.00%
Republic First Bancorp, Inc..................... 78,120 13.53% 46,203 8.00% - -
Tier one risk based capital
Republic First Bank............................. 57,606 10.84% 21,263 4.00% 31,895 6.00%
First Bank of DE................................ 11,374 25.01% 1,819 4.00% 2,729 6.00%
Republic First Bancorp, Inc..................... 70,894 12.28% 23,102 4.00% - -
Tier one leverage capital
Republic First Bank............................. 57,606 9.25% 31,143 5.00% 31,143 5.00%
First Bank of DE................................ 11,374 20.56% 2,766 5.00% 2,766 5.00%
Republic First Bancorp, Inc..................... 70,894 10.43% 33,982 5.00% - -
At December 31, 2003
Total risk based capital
Republic First Bank............................. $57,417 12.57% $36,534 8.00% $45,667 10.00%
First Bank of DE................................ 8,399 29.06% 2,312 8.00% 2,891 10.00%
Republic First Bancorp, Inc..................... 67,436 13.92% 38,765 8.00% - -
Tier one risk based capital
Republic First Bank............................. 51,689 11.32% 18,267 4.00% 27,475 6.00%
First Bank of DE................................ 8,025 27.76% 1,156 4.00% 1,734 6.00%
Republic First Bancorp, Inc..................... 61,346 12.66% 19,382 4.00% - -
Tier one leverage capital
Republic First Bank............................. 51,689 8.77% 29,475 5.00% 29,475 5.00%
First Bank of DE................................ 8,025 16.55% 2,410 5.00% 2,410 5.00%
Republic First Bancorp, Inc..................... 61,346 9.64% 31,817 5.00% - -
REPUBLIC FIRST BANCORP | 66
13. Benefit Plans:
Supplemental Retirement Plan:
The Company maintains a Supplemental Retirement Plan for its former Chief
Executive Officer which provides for payments of approximately $100,000 a year.
At December 31, 2004, approximately $400,000 remained to be paid. A life
insurance contract has been purchased to insure against all of the payments,
which may be required prior to the originally anticipated retirement date of the
officer.
Defined Contribution Plan:
The Company 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 4%. The
total expense relating to the plan was $168,000 in 2004 and $169,000 in 2003 and
2002.
Directors' and Officers' Plans:
The Company 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, 2004, 2004, and 2002 totaled $942,000,
$886,000, and $834,000, respectively. The expense for the years ended December
31, 2004, 2003 and 2002, was $172,000 in each of those years. The Company funded
the plan through the purchase of certain life insurance contracts. The cash
surrender value of these contracts (owned by the Company) aggregated $1.9
million, $1.8 million, and $1.7 million at December 31, 2004, 2003 and 2002,
respectively, which is included in other assets. In 2004, the Company adopted a
deferred compensation plan for certain officers, which provided for deferral of
20% of base salary. For 2004, the Company accrued $313,000 for that plan.
14. Fair Value of Financial Instruments:
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available, fair
values are based on assumptions including future cash flows and discount rates.
Accordingly, the fair value estimates cannot be substantiated, may not be
realized, and do not represent the underlying value of the Company.
The Company uses the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash, Cash Equivalents and Other Interest-Earning Restricted Cash:
The carrying value is a reasonable estimate of fair value.
Investment Securities Held to Maturity and Available for Sale:
For investment securities with a quoted market price, fair value is equal
to quoted market prices. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Loans:
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other categories of
loans such as commercial and industrial loans, real estate mortgage and consumer
loans, fair value is estimated based on the present value of the estimated
future cash flows using the current rates at which similar loans would be made
to borrowers with similar collateral and credit ratings and for similar
remaining maturities.
Bank Owned Life insurance:
The fair value of bank owned life insurance is based on the estimated
realizable market value of the underlying investments and insurance reserves.
REPUBLIC FIRST BANCORP | 67
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
Banks 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.
At December 31, 2004 and December 31, 2003, the carrying amount and the
estimated fair value of the Company's financial instruments are as follows:
December 31, 2004 December 31, 2003
------------------------------- ---------------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
-------------- ---------------- ---------------------------
Balance Sheet Data:
Financial Assets:
Cash and cash equivalents............................ $ 45,006 $ 45,006 $ 70,602 $ 70,602
Other interest-earning restricted cash............... 2,923 2,923 3,483 3,483
Investment securities available for sale............. 44,941 44,941 61,686 61,686
Investment securities held to maturity............... 5,427 5,448 8,260 8,300
Loans receivable, net................................ 582,919 584,010 479,523 483,300
Bank owned life insurance............................ 12,185 12,185 11,763 11,763
Accrued interest receivable.......................... 3,587 3,587 3,710 3,710
Financial Liabilities:
Deposits:
Demand, savings and money market.................. $354,407 $354,407 $266,015 $266,015
Time.............................................. 190,989 187,708 187,590 188,005
Subordinated debt.................................... 6,186 6,186 - -
Corporation-obligated mandatorily
redeemable capital securities of
Subsidiary trust company solely junior
Obligations of the corporation....................... - - 6,000 6,000
Short-term borrowings................................ 61,090 61,090 2,852 2,852
FHLB advances........................................ 25,000 25,165 125,000 128,883
Accrued interest payable............................. 2,146 2,146 2,841 2,841
December 31, 2004 December 31, 2003
------------------------------- ---------------------------
Notional Fair Notional Fair
(Dollars in Thousands) Amount Value Amount Value
-------------- ---------------- ---------------------------
Off Balance Sheet Data:
Commitments to extend credit $156,636 $ 1,566 $ 94,781 $ 947
Letters of credit 7,963 80 3,962 40
REPUBLIC FIRST BANCORP | 68
15. Parent Company Financial Information
The following financial statements for Republic First Bancorp, Inc. should
be read in conjunction with the consolidated financial statements and the other
notes related to the consolidated financial statements.
BALANCE SHEETS
December 31, 2004 and 2003
(Dollars in thousands)
2004 2003
----------- ----------
ASSETS:
Cash................................................................................ $ 962 $ 837
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trust holding junior
obligations of the corporation................................................. 186 -
Investment in subsidiaries.......................................................... 69,311 60,744
Other assets........................................................................ 973 962
----------- ----------
Total Assets..................................................................... $71,432 $62,543
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accrued expenses.................................................................... $ 22 $ 167
Corporation-obligated mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation...................................... 6,186 6,000
----------- ----------
Total Liabilities................................................................ 6,208 6,167
----------- ----------
Shareholders' Equity:
Common stock........................................................................ 74 67
Additional paid in capital.......................................................... 42,494 33,396
Retained earnings................................................................... 23,867 23,674
Treasury stock at cost (192,689 shares)............................................. (1,541) (1,541)
Accumulated other comprehensive income.............................................. 330 780
----------- ----------
Total Shareholders' Equity....................................................... 65,224 56,376
----------- ----------
Total Liabilities and Shareholders' Equity....................................... $71,432 $62,543
=========== ==========
REPUBLIC FIRST BANCORP | 69
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
-------- -------- --------
Interest income ................................................. $ 12 $ 3 $ 3
Dividend income from subsidiaries ............................... 324 372 392
-------- -------- --------
Total income .................................................... 336 375 395
Trust preferred interest expense ................................ 324 372 392
Expenses ........................................................ 128 11 220
-------- -------- --------
Total expenses .................................................. 452 383 612
-------- -------- --------
Net income (loss) before taxes .................................. (116) (8) (217)
-------- -------- --------
Federal income tax benefit ...................................... (39) (3) (201)
-------- -------- --------
Net income (loss) before undistributed income of subsidiary ..... (77) (5) (16)
-------- -------- --------
Equity in undistributed income of subsidiary .................... 9,017 4,919 2,216
-------- -------- --------
Net income ...................................................... $ 8,940 $ 4,914 $ 2,200
======== ======== ========
Shareholders' equity, beginning of year ......................... $ 56,376 $ 51,276 $ 46,843
Exercise of stock options ....................................... 358 1,094 189
Net income ...................................................... 8,940 4,914 2,200
Change in unrealized gain (loss) on securities available for sale (450) (908) 2,044
-------- -------- --------
Shareholders' equity, end of year ............................... $ 65,224 $ 56,376 $ 51,276
======== ======== ========
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
------- ------- -------
Cash flows from operating activities:
Net income ................................................. $ 8,940 $ 4,914 $ 2,200
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in other assets ............................... (11) 61 6
Decrease in other liabilities .......................... (145) 106 26
Equity in undistributed income of subsidiaries ......... (9,017) (4,919) (2,216)
------- ------- -------
Net cash provided by (used in) operating activities (233) 162 16
------- ------- -------
Cash flows from investing activities:
Purchase of subsidiary common stock ........................ -- (1,500) --
------- ------- -------
Net cash used in investing activities ............. -- (1,500) --
------- ------- -------
Cash from Financing Activities:
Exercise of stock options .................................. 358 1,094 189
Proceeds from issuance of trust preferred securities ....... -- -- --
------- ------- -------
Net cash provided by financing activities ......... 358 1,094 189
------- ------- -------
Increase/(decrease) in cash ..................................... 125 (244) 205
Cash, beginning of period ....................................... 837 1,081 876
------- ------- -------
Cash, end of period ............................................. $ 962 $ 837 $ 1,081
======= ======= =======
REPUBLIC FIRST BANCORP | 70
16. Stock Based Compensation:
The Company maintains a Stock Option Plan (the "Plan") under which the
Company grants options to its employees and directors. Under the terms of the
plan, 1.5 million shares of common stock are reserved for such options. The Plan
provides that the exercise price of each option granted equals the market price
of the Company's stock on the date of grant. Any option granted vests within one
to five years and has a maximum term of ten years. All options are granted upon
approval of the Stock Option Committee of the Board of Directors, consisting of
three disinterested members (as defined under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended). Stock Options are issued to promote the
interests of the Company by providing incentives to (i) designated officers and
other employees of the Company or a Subsidiary Corporation (as defined herein),
(ii) non-employee members of the Company's Board of Directors and (iii)
independent contractors and consultants who may perform services for the
Company. The Company believes that the Plan causes participants to contribute
materially to the growth of the Company, thereby benefiting the Company's
shareholders.
For the Years Ended December 31,
-------------------------------------------------------------------------------------
(Dollars in thousands)
2004 2003 2002
-------------------------- ---------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- ------------ -------------- ------------ ------------- ------------
Outstanding, beginning of year 869,148 $ 5.45 988,145 $ 4.02 854,273 $ 3.68
Granted 30,800 11.03 199,833 9.40 204,784 5.32
Exercised (59,125) 5.35 (315,179) 3.47 (51,662) 2.72
Forfeited (14,025) 5.88 (3,651) 5.46 (19,250) 6.70
------------- ------------ -------------- ------------ ------------- ------------
Outstanding, end of year 826,798 5.77 869,148 5.45 988,145 4.02
------------- ------------ -------------- ------------ ------------- ------------
Options exercisable at year-end 793,293 5.55 828,174 5.28 951,249 3.98
------------ ------------ ------------
Weighted average fair value of
options granted during the year $ 4.02 $ 3.38 $ 1.84
------------ ------------ ------------
The following table summarizes information about options outstanding at
December 31, 2004.
-------------------------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------------ ----------------------------
Weighted
Number Average Weighted Weighted
Range of exercise Prices outstanding remaining Average Average
at December contractual exercise Exercise
31, 2004 life (years) price Shares Price
-------------- --------------------------- ------------- --------------
3.24 to 3.86 356,587 4.0 $ 3.49 356,587 $ 3.49
4.41 to 6.02 248,813 5.9 5.01 246,200 5.01
6.36 to 8.25 42,152 5.9 7.04 42,152 7.04
8.26 to 12.05 179,246 9.0 11.09 148,354 10.98
-------------- ------------ ------------- --------------
826,798 $ 5.77 793,293 $ 5.55
-------------- ------------ ------------- --------------
REPUBLIC FIRST BANCORP | 71
17. Segment Reporting:
The Company's reportable segments represent strategic businesses that offer
different products and services. The segments are managed separately because
each segment has unique operating characteristics, management requirements and
marketing strategies. The Company has four reportable segments: two community
banking segments; tax refund products; and short-term consumer loans. The
community banking segments are primarily comprised of the results of operations
and financial condition of the Banks. The Company additionally offers national
consumer products to the underbanked consumer including tax refund products and
short-term consumer loans. Tax refund products are comprised of accelerated
check refunds and refund anticipation loans offered by the DE Bank on a national
basis to customers of Liberty Tax Services an unaffiliated national tax
preparation firm. Short-term consumer loans are loans made to customers offered
by the DE Bank, with principal amounts of $1,000 or less and terms of
approximately two weeks. These loans typically are made in states that are
outside of the Company's normal market area through a small number of marketers
and involve rates and fees significantly different from other loan products
offered by either of the banks.
As a result of the spin off, the First Bank of Delaware and short-term
consumer loan segments will be eliminated from the Company's operations, and
accordingly, segment reporting. With respect to the tax refund products, the
Company plans to continue to purchase tax refund anticipation loans if such
loans are available for purchase. However, net interest income and provision for
loan losses on such loans, which the Company recognized in 2004 and 2003, if
any, cannot be predicted for future periods.
Segment information for the years ended December 31, 2004, 2003 and 2002 is
as follows:
December 31, 2004
(Dollars in thousands)
Republic Short-term
First First Bank of Tax Refund Consumer
Bank Delaware Products Loans Total
------------ --------------- ------------ ------------- -----------
Net interest income.............................. $ 17,910 $ 1,779 $ 1,026 $ 1,884 $ 22,599
Provision for loan losses........................ (1,014) 70 700 1,393 1,149
Non-interest income.............................. 4,231 192 1,174 6,597 12,194
Non-interest expenses............................ 15,088 1,614 894 2,703 20,299
Net income ...................................... $ 5,405 $ 192 $ 406 $ 2,937 $ 8,940
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $661,804 $ 55,081 $ - $ 3,527 $720,412
Total loans, net................................. 549,688 39,355 - 1,609 590,652
Total deposits................................... 507,684 37,712 - - 545,396
REPUBLIC FIRST BANCORP | 72
December 31, 2003
(Dollars in thousands)
Republic First Bank of Tax Refund Short-term
First Delaware Products Consumer Total
Bank Loans
------------ --------------- -------------------------- -----------
Net interest income ............................. $ 14,996 $ 1,499 $ 1,191 $ 8,065 $ 25,751
Provision for loan losses........................ 360 121 1,042 5,241 6,764
Non-interest income.............................. 2,359 264 487 4,026 7,136
Non-interest expenses............................ 14,264 1,572 633 2,256 18,725
Net income....................................... $ 1,931 $ 46 $ 2 $ 2,935 $ 4,914
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $610,255 $ 38,564 $ - $ 5,973 $654,792
Total loans, net................................. 452,491 26,357 - 675 479,523
Total deposits................................... 420,358 33,247 - - 453,605
December 31, 2002
(Dollars in thousands)
Republic First Bank of Tax Refund Short-term
First Delaware Products Consumer Total
Bank Loans
------------ --------------- -------------------------- -----------
Net interest income (loss)....................... $ 17,972 $ 1,468 $ (21) $ 4,542 $ 23,961
Provision for loan losses........................ 3,490 260 - 1,553 5,303
Non-interest income.............................. 2,009 512 761 - 3,282
Non-interest expenses............................ 15,528 1,536 545 977 18,586
Net income....................................... $ 645 $ 120 $ 130 $ 1,305 $ 2,200
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $598,853 $42,260 $ - $ 6,579 $647,692
Total loans, net................................. 424,010 28,169 - 4,868 457,047
Total deposits................................... 421,575 34,727 - - 456,302
REPUBLIC FIRST BANCORP | 73
18. Quarterly Financial Data (Unaudited):
The following tables are summary unaudited income statement information for
each of the quarters ended during 2004 and 2003.
Summary of Selected Quarterly Consolidated Financial Data
For the Quarter Ended, 2004
--------------------------------------
Fourth Third Second First
------- ------- ------- -------
(Dollars in thousands,
except per share data)
Income Statement Data:
Total interest income .... $10,520 $ 9,377 $ 8,536 $ 9,297
Total interest expense ... 3,366 3,863 3,929 3,973
------- ------- ------- -------
Net interest income ...... 7,154 5,514 4,607 5,324
Provision for loan losses 887 (611) 62 811
Non-interest income ...... 2,775 3,842 2,830 2,747
Non-interest expense ..... 5,141 5,346 4,827 4,985
Federal income tax expense 1,238 1,538 865 764
------- ------- ------- -------
Net income ............... $ 2,663 $ 3,083 $ 1,683 $ 1,511
======= ======= ======= =======
Per Share Data:
Basic:
Net income ........... $ 0.37 $ 0.43 $ 0.23 $ 0.21
======= ======= ======= =======
Diluted:
Net income ........... $ 0.35 $ 0.41 $ 0.22 $ 0.20
======= ======= ======= =======
For the Quarter Ended, 2003
--------------------------------------
(Dollars in thousands,
except per share data) Fourth Third Second First
------- ------- ------- -------
Income Statement Data:
Total interest income .... $ 8,124 $ 8,167 $12,554 $13,559
Total interest expense ... 3,847 4,086 4,260 4,460
------- ------- ------- -------
Net interest income ...... 4,277 4,081 8,294 9,099
Provision for loan losses 419 647 2,286 3,412
Non-interest income ...... 2,918 2,826 497 895
Non-interest expense ..... 4,928 4,421 4,771 4,605
Federal income tax expense 611 606 583 684
------- ------- ------- -------
Net income ............... $ 1,237 $ 1,233 $ 1,151 $ 1,293
======= ======= ======= =======
Per Share Data:
Basic:
Net income ........... $ 0.18 $ 0.16 $ 0.16 $ 0.19
======= ======= ======= =======
Diluted:
Net income ........... $ 0.18 $ 0.15 $ 0.15 $ 0.18
======= ======= ======= =======
REPUBLIC FIRST BANCORP | 74