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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%
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Total................. 259,159 26,746 17,951 163,237 27,171 7,546 26,917 4,022 532,749 529,633
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Cumulative Totals..... $ 259,159 $285,905 $ 303,856 $ 467,093 $494,264 $501,810 $528,727 $532,749
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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