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, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _________________ to ______________________
Commission file number: 0-17007
-------
REPUBLIC FIRST BANCORP, INC.
----------------------------
(Exact name of registrant as specified in charter)
Pennsylvania 23-2486815
- -------------------------------------------------- --------------------------
(State or Other Jurisdiction of (I.R.S. Employer
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.
Title of each class Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
-----------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [ X ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------ ------
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average of the bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
The aggregate market value of $65,362,865 was based on the average of the bid
and asked prices on the National Association of Securities Dealers Automated
Quotation System on February 29, 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 6,533,238
- ---------------------------- ----------------------------------------
Title of Class Number of Shares Outstanding
as of February 29, 2004
Documents incorporated by reference:
Part III incorporates certain information by reference from the
Registrant's Proxy Statement for the 2004 Annual Meeting of Shareholders to be
held on April 27, 2004.
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 8 Financial Statements and Supplementary Data......................... 45
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 45
Item 9a Controls and Procedures............................................. 45
PART III
- --------
Item 10 Directors, Executive Officers, Promoters and Control Persons
of the Registrant ........................................... 46
Item 11 Executive Compensation ............................................. 46
Item 12 Security Ownership of Certain Beneficial Owners and Management ..... 46
Item 13 Certain Relationships and Related Transactions ..................... 46
Item 14 Principal Accounting Fees and Services ............................. 46
PART IV
- -------
Item 15 Exhibits, Certifications, Financial Statement Schedules and
Reports on Form 8-K ......................................... 47
REPUBLIC FIRST BANCORP | 4
- --------------------------------------------------------------------------------
PART I
Item 1: Description of Business
Republic First Bancorp, Inc.
Republic First Bancorp, Inc. (the "Company"), is a two-bank holding company
organized and incorporated under the laws of the Commonwealth of Pennsylvania.
Its wholly-owned subsidiaries, Republic First Bank (the "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, 2003, the Company had total assets of approximately
$654.8 million, total shareholder's equity of approximately $56.4 million, total
deposits of approximately $453.6 million and net loans receivable outstanding of
approximately $479.5 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.
The Company and the Banks have a total of 131 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.
As of December 31, 2003, the PA Bank had total assets of approximately
$619.3 million, total shareholder's equity of approximately $52.7 million, total
deposits of approximately $426.3 million and net loans receivable of
approximately $452.5 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. The DE Bank is subject to examination and comprehensive regulation
by the FDIC and the Delaware Department of Banking. 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 short-term loans in Arizona, California, Georgia, Ohio and Texas and
tax refund loans in numerous states.
As of December 31, 2003, the DE Bank had total assets of approximately
$44.5 million, total shareholders' equity of approximately $8.1 million, total
deposits of approximately $33.2 million and net loans receivable of
approximately $27.0 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.
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.
REPUBLIC FIRST BANCORP | 5
- --------------------------------------------------------------------------------
The Banks offer a broad range of loan and credit facilities to the
businesses and residents of their service area, including secured and unsecured
commercial loans including commercial real estate and construction loans,
residential mortgages, automobile loans, home improvement loans, home equity and
overdraft lines of credit, and other products.
The DE Bank also nationally offers short-term consumer loans and tax refund
anticipation loans to the under banked market.
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 within standards of 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, 2003, and 2002,
approximately 72% and 84%, 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 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 County 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,
Georgia, Ohio and Texas. Tax refund loans are made in numerous 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 $10.3 million at December 31, 2003. The Banks are subject to
potential intensified competition from new branches of established banks in the
area as well as new banks that could open in its market area. Several de novo
banks with business strategies similar to those of the Banks have opened since
the Banks' inception. There are banks and other financial institutions, which
serve surrounding areas, and additional out-of-state financial institutions,
which currently, or in the future, may compete in the Banks' market. The Banks
compete to attract deposits and loan applications both from customers of
existing institutions and from customers new to the greater Philadelphia area.
The Banks anticipate a continued increase in competition in their market area.
REPUBLIC FIRST BANCORP | 6
- --------------------------------------------------------------------------------
With regard to competition for the short-term and tax refund anticipation
loans offered nationally by the DE Bank, there are only a limited number of
banks that currently compete for such business. 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
The Company's business banking objective is for the Banks to become the
primary alternative to the large banks that dominate the Greater Philadelphia
market. The Company's management team has developed a business strategy
consisting of the following key elements to achieve this objective:
Providing Attentive and Personalized Service
The Company believes that a very attractive niche exists serving small to
medium-sized business customers not adequately served by the Banks' larger
competitors. The Company believes this segment of the market responds very
positively to the attentive and highly personalized service provided by the
Banks. The Banks offer individuals and small to medium-sized businesses a wide
array of banking products, informed and professional service, extended operating
hours, consistently applied credit policies, and local, timely decision making.
The banking industry is experiencing a period of rapid consolidation, and many
local branches have been acquired by large out-of-market institutions. The
Company is positioned to respond to these dynamics by offering a community
banking alternative and tailoring its product offering to fill voids created as
larger competitors increase the price of products and services or de-emphasize
such products and services.
Attracting and Retaining Highly Experienced Personnel
The Banks' officers and other personnel have substantial experience
acquired at larger banks in the region. Additionally, the Banks extensively
screen and train their staffs to instill a sales and service oriented culture
and maximize cross-selling opportunities and business relationships. The Company
offers meaningful sales-based incentives to certain customer contact employees.
Capitalizing on Market Dynamics
In recent years, banks controlling large amounts of the deposits in the
Banks' primary market areas have been acquired by large and super-regional bank
holding companies. The ensuing cultural changes in these banking institutions
have resulted in a change in their product offerings and the degree of personal
attention they provide. The Company has sought to 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.
Operating Strategy for DE Bank
In addition to pursuing the above strategy for business banking, the DE
bank is following a strategy of diversified expansion of the products it
currently offers nationally to the underbanked. It will add new geographic areas
in which it may make such products available and may also add additional
products.
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
$5,000,000 but customers may borrow significantly larger amounts up to the
Banks' combined legal lending limit of $10.3 million. Individual customers may
have several loans often secured by different collateral. Such relationships in
excess of $5.9 million at December 31, 2003, amounted to $51.5 million. The $5.9
million threshold approximates 10% of total capital and reserves and reflects an
additional internal monitoring guideline.
REPUBLIC FIRST BANCORP | 7
- --------------------------------------------------------------------------------
The Banks attempt to offer a high level of personalized service to both
their commercial and consumer customers. The Banks are members of the STAR(TM)
and PLUS(TM) networks in order to provide customers with access to automated
teller machines worldwide. The Banks currently have eight proprietary automated
teller machines at branch locations.
The Banks' lending activities generally are focused on small and medium
sized businesses within the professional community. Commercial and construction
loans are the most significant category of the Banks outstanding loans,
representing approximately 93.6% of total loans outstanding at December 31,
2003. 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
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 will increase
significantly in 2004 or thereafter.
Short-Term Consumer Loans
In continuing efforts to expand and diversify fee income, the DE Bank began
to offer short-term consumer loans. Similar in some respects to the tax refund
products previously discussed, loan terms are relatively short (approximately 2
weeks) and have principal amounts of $1,000 or less. At December 31, 2003, there
were approximately $1.4 million of short-term consumer loans outstanding, which
were originated in Georgia. The DE Bank also originates loans in Texas,
California, Arizona and Ohio, which are sold to third parties. At December 31,
2003, there were approximately $16.2 million of such loans outstanding.
Legislation eliminating, or limiting interest rates upon short-term consumer
loans has from time to time been proposed, primarily as a result of fee levels
which approximate 17% per $100 borrowed, for two week terms. If such proposals
cease, a larger number of competitors may begin offering the product, and
increased competition could result in lower fees. Further, the 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
The Company has not made any specific commitments for expansion of its
branch network, but may add up to three business banking centers in the PA Bank,
and one business banking center in the DE Bank.
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 Bank Holding Company Act of 1956, as
amended. As a bank holding company, the Company's activities and those of the
Banks are limited to the business of banking and activities closely related or
incidental to banking, and the Company may not directly or indirectly acquire
the ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the FRB.
REPUBLIC FIRST BANCORP | 8
- --------------------------------------------------------------------------------
The Banks are subject to supervision and examination by applicable federal
and state banking agencies. 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 the supervision and
regulation by the FDIC and the Delaware Department of Banking.
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 interest rates and the
economy.
Holding Company Structure
The Banks are subject to restrictions under federal law which limit their
ability to transfer funds to the Company, whether in the form of loans, other
extensions of credit, investments or asset purchases. Such transfers by the
Banks to the Company are generally limited in amount to 10% of the Banks'
capital and surplus. Furthermore, such loans and extensions of credit are
required to be secured in specific amounts, and all transactions are required to
be on an arm's length basis. The Banks have never made any loan or extension of
credit to the Company nor have they purchased any assets from the Company.
Under regulatory policy, the Company is expected to act as a source of
financial strength to the Banks and to commit resources to support the Banks,
i.e., to downstream funds to the Banks. This support may be required at times
when, absent such policy, the Company might not otherwise provide such support.
Any capital loans by the Company to the Banks are subordinate in right of
payment to deposits and to certain other indebtedness of the Banks. In the event
of the Company's bankruptcy, any commitment by the Company to a federal bank
regulatory agency to maintain the capital of the Banks will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Gramm-Leach Bliley Act
On November 12, 1999, the GLB Act was passed into law. The GLB Act does
three fundamental things:
(a) The GLB Act repeals the key provisions of the Glass Steagall Act to
permit commercial banks to affiliate with investment banks (securities
firms).
(b) The GLB Act amends the BHCA to permit qualifying bank holding
companies to engage in any type of financial activities that are not
permitted for banks themselves.
(c) The GLB Act permits subsidiaries of banks to engage in a broad range
of financial activities that are not permitted for banks themselves.
The result is that banking companies will generally be able to offer a
wider range of financial products and services and will be more readily able to
combine with other types of financial companies, such as securities and
insurance companies.
The GLB Act creates a new kind of bank holding company called a "financial
holding company" (an "FHC"). An FHC is authorized to engage in any activity that
is "financial in nature or incidental to financial activities" and any activity
that the Federal Reserve determines is "complementary to financial activities"
and does not pose undue risks to the financial system. Among other things,
"financial in nature" activities include securities underwriting and dealing,
insurance underwriting and sales, and certain merchant banking activities. A
bank holding company qualifies to become an FHC if each of its depository
institution subsidiaries is "well capitalized," "well managed," and CRA-rated
"satisfactory" or better. A qualifying bank holding company becomes an FHC by
filing with the Federal Reserve an election to become an FHC. If an FHC at any
time fails to remain "well capitalized" or "well managed," the consequences can
be severe. Such an FHC must enter into a written agreement with the Federal
Reserve to restore compliance. If compliance is not restored within 180 days,
the Federal Reserve can require the FHC to cease all its newly authorized
activities or even to divest itself of its depository institutions. On the other
hand, a failure to maintain a CR rating of "satisfactory" will not jeopardize
any then existing newly authorized activities; rather, the FJC cannot engage in
any additional newly authorized activities until a "satisfactory" CRA rating is
restored.
In addition to activities currently permitted by law and regulation for
bank holding companies, an FHC may engage in virtually any other kind of
financial activity. Under limited circumstances, an FHC may even be authorized
to engage in certain non-financial activities. The most important newly
authorized activities are as follows:
REPUBLIC FIRST BANCORP | 9
- --------------------------------------------------------------------------------
(a) Securities underwriting and dealing;
(b) Insurance underwriting and sales;
(c) Merchant banking activities;
(d) Activities determined by the Federal Reserve to be "financial in
nature" and incidental activities; and
(e) "Complimentary: financial activities, as determined by the Federal
Reserve.
Bank holding companies that do not qualify or elect to become FHCs will be
limited in their activities to those currently permitted by law and regulation.
As of the date of this Report of Form 10-K, the Company has not elected to
become a FHC.
The GLB Act also authorizes national banks to create "financial
subsidiaries." This is in addition to the present authority of national banks to
create "operating subsidiaries: A "financial subsidiary" is a direct subsidiary
of a national bank that satisfies the same conditions as an FHC, plus certain
other conditions, and is approved in advance by the OCC. A "financial
subsidiary" can engage in most, but not all, of the newly authorized activities.
In addition, the GLB Act also provides significant new protections for the
privacy of customer information. These provisions apply to any company "the
business of which" is engaging in activities permitted for an FHC, even if it is
not itself an FHC. Basically, the GLB Act subjects a financial institution to
four new requirements regarding non-public information about a customer. The
financial institution must (1) adopt and disclose a privacy policy; (2) give
customers the right to "opt out" of disclosures to non-affiliated parties; (3)
not disclose any account information to third party marketers; and (4) follow
regulatory standards (to be adopted in the future) to protect the security and
confidentiality of customer information.
Although the long-range effects of the GLB Act cannot be predicted with
reasonable certainty, most probably it will further narrow the differences and
intensify competition between and among commercial banks, investment banks,
insurance firms and other financial service companies.
Regulatory Restrictions on Dividends
Dividend payments by the PA Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Codeand 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 $26.5 million of dividends plus an additional
amount equal to its net profit for 2004, 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 Department of Banking. Dividends for that Bank would be
limited to $2.9 million plus an additional amount equal to its net profit for
2004. 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 2004.
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 2004.
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.
REPUBLIC FIRST BANCORP | 10
- --------------------------------------------------------------------------------
Capital Adequacy
The FRB adopted risk-based capital guidelines for bank holding companies,
such as the Company. The required minimum ratio of total capital to
risk-weighted assets (including off-balance sheet activities, such as standby
letters of credit) is 8.0%. At least half of the total capital is required to be
Tier 1 capital, consisting principally of common shareholders' equity,
non-cumulative perpetual preferred stock and minority interests in the equity
accounts of consolidated subsidiaries, less goodwill. The remainder, Tier 2
capital, may consist of a limited amount of subordinated debt and
intermediate-term preferred stock, certain hybrid capital instruments and other
debt securities, perpetual preferred stock, and a limited amount of the general
loan loss allowance.
In addition to the risk-based capital guidelines, the FRB established
minimum leverage ratio (Tier 1 capital to average total assets) guidelines for
bank holding companies. These guidelines provide for a minimum leverage ratio of
3% for those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a leverage
ratio of at least 1% to 2% above the 3% stated minimum. The Company is in
compliance with these guidelines. The 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 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 such
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
Department of Banking, the FRB and the FDIC. An important function of the FRB is
to regulate the supply of money and other credit conditions in order to manage
interest rates. The monetary policies and regulations of the FRB have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. The effects of such policies
upon the future business, earnings and growth of the Bank cannot be determined.
See "Management's Discussion and Analysis of Financial Condition" and "Results
of Operations".
REPUBLIC FIRST BANCORP | 11
- --------------------------------------------------------------------------------
Item 2: Description of Properties
The PA Bank leases approximately 26,961 square feet on the second, tenth
and eleventh floors of 1608 Walnut Street, Philadelphia, Pennsylvania, as its
headquarter facilities. The space is occupied by 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 its present
space is adequate but that future staffing needs may require the PA Bank to
secure additional space. The current term of the lease on its headquarter
facilities expires on July 31, 2007 with annual rent expense of $376,068 payable
monthly. In addition to the base rent and building operation expenses, the
Company is required to pay its proportional share of all real estate taxes,
assessments, and sewer costs, water charges, excess levies, license and permit
fees under its lease and to maintain insurance on the premises.
The 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 Banks' main office. The initial ten year
term of the lease expires 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 an approximately 4,500 square foot building at 75 East
Germantown Avenue, East Norriton, Pennsylvania. The space contains a banking
area and business development office. The initial ten year term contains two
five year renewal options and the initial lease term expires in December 2006.
The annual rent for such location is $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.
The DE Bank has a land lease on approximately 2,000 sq. feet of ground at
Concord Pike and Rocky Run Pkwy, Brandywine Hundred, Delaware for its branch
operations and headquarters. The 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 3,640 sq. feet on the ground floor of a
building at 824 Market Street, Wilmington, Delaware. The space contains a loan
production office, administrative offices and a branch that opened in November
of 2000. The initial five year term of the lease expires in October 2004. The
annual rent for such location is $66,200, payable in monthly installments.
REPUBLIC FIRST BANCORP | 12
- --------------------------------------------------------------------------------
Item 3: Legal Proceedings
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
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
Exchange Commission in connection with the Company's 2004 annual meeting of
shareholders scheduled for April 27, 2004.
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 traded in the over-the-counter market and
are quoted on Nasdaq under the symbol "FRBK." The table below presents the range
of high and low trade prices reported for the Common Stock on Nasdaq for the
periods indicated. Market quotations reflect inter-dealer prices, without retail
mark-up, markdown, or commission, and may not necessarily reflect actual
transactions. As of December 31, 2003, there were approximately 1,733 holders of
record of the Common Stock. On February 29, 2004, the closing price of a share
of Common Stock on Nasdaq was $12.69
Year Quarter High Low
------ ---------- -------- --------
2003.................... 4th $14.00 $10.25
3rd 11.81 7.96
2nd 8.39 7.56
1st 7.83 6.34
2002.................... 4th $6.53 $5.25
3rd 6.15 5.05
2nd 6.80 6.00
1st 7.00 5.13
2001.................... 4th $5.29 $4.83
3rd 5.97 4.82
2nd 5.95 4.88
1st 5.94 4.06
Dividend Policy
The Company has not paid any cash dividends on its Common Stock. The
Company may consider dividend payments in 2004. The payment of dividends in the
future, if any, will depend upon earnings, capital levels, cash requirements,
the financial condition of the Company and the Banks, applicable government
regulations and policies and other factors deemed relevant by the Company's
Board of Directors, including the amount of cash dividends payable to the
Company by the Banks. The principal source of income and cash flow for the
Company, including cash flow to pay cash dividends on the Common Stock, is
dividends from the Banks. Various federal and state laws, regulations and
policies limit the ability of the Banks to pay cash dividends to the Company.
For certain limitations on the Banks' ability to pay cash dividends to the
Company, see "Supervision and Regulation".
REPUBLIC FIRST BANCORP | 14
- --------------------------------------------------------------------------------
Item 6: Selected Financial Data
As of or for the Years Ended December 31,
--------------------------------------------------------------
(Dollars in thousands, except per share data) 2003 2002 2001 2000 1999
INCOME STATEMENT DATA:
Total interest income........................................... $ 42,404 $ 44,123 $ 49,014 $ 46,887 $ 39,448
Total interest expense.......................................... 16,653 20,162 28,659 29,792 24,512
-------- -------- -------- -------- --------
Net interest income............................................. 25,751 23,961 20,355 17,095 14,936
Provision for loan losses....................................... 6,764 5,303 3,964 666 880
Non-interest income............................................. 7,136 3,282 2,944 1,724 3,805
Non-interest expenses........................................... 18,725 18,586 16,180 13,132 10,956
Federal income taxes............................................ 2,484 1,154 1,041 1,657 2,271
-------- -------- -------- -------- --------
Net income...................................................... $ 4,914 $ 2,200 $ 2,114 $ 3,364 $ 4,634
======== ======== ======== ======== ========
PER SHARE DATA (1)
Basic earnings per share........................................ $ 0.76 $ 0.35 $ 0.34 $ 0.54 $ 0.77
Diluted earnings per share...................................... 0.73 0.34 0.33 0.54 0.74
Book value per share............................................ 8.64 8.23 7.58 6.96 5.68
BALANCE SHEET DATA
Total assets.................................................... $654,792 $647,692 $652,329 $655,637 $586,330
Total loans, net (2)............................................ 479,523 457,047 463,888 418,313 359,606
Total investment securities..................................... 69,946 96,561 125,442 169,841 187,308
Total deposits.................................................. 453,605 456,302 447,217 425,551 305,793
FHLB & overnight advances ..................................... 127,852 125,000 142,500 176,442 236,640
Trust preferred securities...................................... 6,000 6,000 6,000 - -
Total shareholders' equity...................................... 56,376 51,276 46,843 43,030 35,040
PERFORMANCE RATIOS
Return on average assets........................................ 0.75% 0.34% 0.33% 0.55% 0.85%
Return on average shareholders' equity.......................... 9.20 4.52 4.59 7.73 10.94
Net interest margin............................................. 4.24 3.85 3.25 2.91 2.85
Total non-interest expenses as a percentage of average assets (3) 2.86 2.63 2.49 2.16 2.02
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of loans (2).......... 1.78% 1.43% 1.16% 0.96% 0.88%
Allowance for loan losses as a percentage of non-performing loans 101.00 94.57 124.89 118.96 151.97
Non-performing loans as a percentage of total loans (2)......... 1.76 1.51 0.93 0.81 0.58
Non-performing assets as a percentage of total assets........... 1.35 1.24 0.95 0.52 0.47
Net charge-offs (recoveries) as a percentage of average loans, 1.00 0.87 0.58 (0.05) 0.02
net (2).........................................................
LIQUIDITY AND CAPITAL RATIOS
Average equity to average assets................................ 8.16% 7.57% 7.02% 6.12% 6.70%
Leverage ratio.................................................. 9.64 8.56 8.07 6.91 7.23
Tier 1 capital to risk-weighted assets.......................... 12.66 13.24 12.73 11.99 12.37
Total capital to risk-weighted assets........................... 13.92 14.49 13.98 13.08 13.33
<FN>
- ----------
(1) Adjusted to reflect a 10% Stock Dividend paid on March 18, 1999.
(2) Includes loans held for sale.
(3) Excluding other real estate owned expenses of $1.5 million in 2002.
</FN>
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", "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, 2003, Quarterly Reports on Form 10-Q
filed by the Company in 2003, and any Current Reports on Form 8-K filed by the
Company, as well as similar filings in 2003.
Critical Accounting Policies
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 collectibility of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the allowance.
The allowance is an amount that represents management's best estimate of
known and inherent loan losses. Management's evaluations of the allowance for
loan losses consider such factors as an examination of the portfolio, past loss
experience, the results of the most recent regulatory examination, current
economic conditions and other relevant factors.
The Company accounts for income taxes under the liability method of
accounting. Deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at the tax rates expected to be in effect
when the temporary differences are realized or settled. In addition, a deferred
tax asset is recorded to reflect the future benefit of net operating loss
carryforwards. The deferred tax assets may be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax
assets will not be realized
Fees earned on short-term loans which are not sold, are recorded as
interest income. At December 31, 2003, there were approximately $1.4 million of
these loans outstanding.
REPUBLIC FIRST BANCORP | 16
- --------------------------------------------------------------------------------
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 $16.2 million at December 31, 2003. The Company evaluated these sales and
determined that they qualified as such under FASB 140.
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
$0.73 per diluted share for the year ended December 31, 2003, compared to $2.2
million, or $0.34 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
$0.14 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 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.
REPUBLIC FIRST BANCORP | 17
- --------------------------------------------------------------------------------
Interest Interest Yield/ Interest
Average Income/ Yield/ Average Income/ Rate Average Income/ Yield/
Balance Expense Rate (1) Balance Expense (1) Balance Expense Rate (1)
-------- --------- --------- -------- --------- -------- -------- ---------- ---------
(Dollars in thousands) For the Year For the Year For the Year
Ended Ended Ended
December 31, 2003 December 31, 2002 December 31, 2001
---------------------------- ---------------------------- -----------------------------
Interest-earning assets:
Federal funds sold and other
interest-earning assets....... $72,761 $895 1.23% $42,835 $759 1.77% $30,540 $1,304 4.27%
Investment securities.......... 64,590 2,858 4.42% 111,486 6,284 5.64% 147,971 9,124 6.17%
Loans receivable .............. 470,237 38,651 8.22% 468,239 37,080 7.92% 448,397 38,586 8.61%
------- -------- -------- ------- -------- ------- ------- --------- --------
Total interest-earning assets..... 607,588 42,404 6.98% 622,560 44,123 7.09% 626,908 49,014 7.82%
Other assets................... 46,909 29,180 22,302
-------- -------- --------
Total assets...................... $654,497 $651,740 $649,210
======== ======== ========
Interest-bearing liabilities:
Demand - non-interest
Bearing....................... $75,469 $- N/A $58,338 $- N/A $50,179 $- N/A
Demand - interest-bearing...... 59,274 448 0.76% 47,019 497 1.06% 37,214 636 1.71%
Money market & savings......... 127,685 1,708 1.34% 112,321 1,907 1.70% 93,447 2,948 3.15%
Time deposits.................. 192,735 6,243 3.24% 240,230 9,290 3.87% 261,281 15,767 6.03%
------- -------- -------- ------- -------- ------- ------- --------- --------
Total deposits ................... 455,163 8,399 1.85% 457,908 11,694 2.55% 442,121 19,351 4.38%
------- -------- ------- -------- ------- ---------
Total interest-
bearing deposits............... 379,694 8,399 2.21% 399,570 11,694 2.93% 391,942 19,351 4.94%
------- -------- ------- -------- ------- ---------
Other borrowings.................. 134,057 8,254 6.16% 135,505 8,468 6.25% 151,610 9,308 6.14%
------- -------- ------- -------- ------- ---------
Total interest-bearing
liabilities ................... 513,751 16,653 3.24% 535,075 20,162 3.77% 543,552 28,659 5.27%
------- -------- -------- ------- -------- ------- ------- --------- --------
Total deposits and
other borrowings............... 589,220 16,653 2.83% 593,413 20,162 3.40% 593,731 28,659 4.83%
------- -------- -------- ------- -------- ------- ------- --------- --------
Non-interest-bearing
Other liabilities.............. 11,890 8,958 9,907
Shareholders' equity.............. 53,387 49,369 45,572
------- ------- -------
Total liabilities and
Shareholders' equity........... $654,497 $651,740 $649,210
======== ======== ========
Net interest income............... $25,751 $23,961 $20,355
======= ======= =======
Net interest spread............... 4.15% 3.69% 2.99%
======== ======= ========
Net interest margin (2)........... 4.24% 3.85% 3.25%
======== ======= ========
<FN>
- ----------
(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.
</FN>
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,
2003 vs. 2002 2002 vs. 2001
------------------------------------ ------------------------------------
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.............. $ 368 $ (232) $ 136 $ 218 $ (763) $ (545)
Securities........................... (2,075) (1,351) (3,426) (2,056) (784) (2,840)
Loans................................ 163 1,408 1,571 1,570 (3,076) (1,506)
--------- --------- -------- --------- --------- ---------
Total interest earning assets........... $(1,544) $(175) $(1,719) $(268) $(4,623) $(4,891)
--------- --------- -------- --------- --------- ---------
Interest expense of
Deposits
Interest-bearing demand deposits.... $(92) $ 141 $ 49 $(104) $ 243 $ 139
Money market and savings............ (205) 404 199 (321) 1,362 1,041
Time deposits ...................... 1,539 1,508 3,047 815 5,662 6,477
--------- --------- -------- --------- --------- ---------
Total deposit interest expense.......... 1,242 2,053 3,295 390 7,267 7,657
--------- --------- -------- --------- --------- ---------
Other borrowings..................... 88 126 214 1,007 (167) 840
--------- --------- -------- --------- --------- ---------
Total interest expense.................. 1,330 2,179 3,509 1,397 7,100 8,497
--------- --------- -------- --------- --------- ---------
Net interest income.................. $(214) $2,004 $1,790 $1,129 $2,477 $3,606
========= ========= ======== ========= ========= =========
Net Interest Income
The Company's net interest margin increased 39 basis points to 4.24% for
the year ended December 31, 2003, versus the prior year. The improvement
reflected increased revenue from the short-term loan and tax refund products,
the 21% increase in average lower cost core deposits (demand, money market and
savings accounts), and the repricing of certificates of deposit and other
deposits in the lower interest rate environment all of which more than offset
the impact of prepayments in the mortgage-backed security and residential
mortgage portfolios. Fees on short-term consumer loans and tax refund
anticipation loans for 2003 contributed $9.3 million to net interest income in
2003 and 153 basis points to the margin versus $4.5 million and 75 basis points
for 2002. The increase reflected the expansion of the portfolio as the DE Bank
added two marketers and four additional states compared to the prior year. This
increased the volume of loans made and lead to the revenue increases mentioned
above. Excluding the impact of those products, margins decreased to 2.71% in
2003 from 3.10% in the prior year. That decrease reflected the impact of the
historically high residential mortgage and mortgage-backed security prepayments.
While management could replace significant amounts of such prepayments, it has
deferred comparable long term security purchases in light of the lower interest
rate environment. A total of $125.0 million of Federal Home loan Bank ("FHLB")
advances which carry an average interest rate of 6.19% mature beginning the
third quarter of 2004 through the first quarter of 2005. These advances would be
repriceable to a significantly lower rate in the current interest rate
environment. The average yield on interest-earning assets declined 11 basis
points to 6.98% for 2003, from 7.09% for the prior year reflecting the impact of
the prepayments in residential mortgages and investment securities.
Additionally, and also as a result of the lower rate environment, new loan
originations are generally being priced at lower rates than existing loans.
Accordingly, yields on the loan portfolios are declining. Partially offsetting
such declines are continuing reductions in the repricing of maturing
certificates of deposit. Overall, the average rate paid on interest-bearing
liabilities decreased 53 basis points to 3.24% for 2003, from 3.77% in the prior
year, as the Company continued to reprice its deposits to the lower rate
environment.
The Company's net interest income increased $1.8 million, or 7.5%, to
$25.8 million for year ended December 31, 2003, from $24.0 million for the prior
year. As shown in the Rate Volume table above, the increase in net interest
income reflected the positive effect of relatively higher short-term consumer
loan and tax refund anticipation loan fees as well as the impact of lower
REPUBLIC FIRST BANCORP | 19
- --------------------------------------------------------------------------------
amounts of certificates of deposit and lower rates paid there on. The decrease
in securities income in that table, primarily reflects the prepayment of
relatively higher rate mortgage backed securities.
The Company's total interest income decreased $1.7 million, or 3.9%, to
$42.4 million for the year ended December 31, 2003, from $44.1 million for the
prior year. Interest and fees on loans increased $1.6 million, or 4.2% to $38.7
million for 2003, from $37.1 million for 2002. Prepayments in the residential
mortgage portfolio which reduced interest income were more than offset by a
$34.9 million or 9% increase in average commercial and construction loans
outstanding and the short-term consumer loan and tax refund loan increases noted
above. The increases in interest income for short-term and tax refund loans are
the principal factors in the increase in yield on loans of 30 basis points to
8.22%. Interest and dividend income on investment securities decreased $3.4
million, or 54.5% to $2.9 million for 2003, from $6.3 million for the prior
year. This decline was due principally to the $46.9 million, or 42.1%, decrease
in average investment securities outstanding to $64.6 million at December 31,
2003 from $111.5 million for the prior year. In addition, the average rate
earned on investment securities declined 122 basis points to 4.42% as higher
coupon investments prepaid more rapidly than lower coupons and the rates earned
on variable rate securities declined due to the lower interest rate environment.
Interest income on federal funds sold and other interest-earning assets
increased $136,000 as average federal funds sold outstanding increased $29.9
million to $72.8 million. Proceeds from securities and residential mortgage
prepayments were temporarily invested in federal funds sold, and the impact of
the resulting increased average balances more than offset the lower market rates
available for such investments.
The Company's total interest expense decreased $3.5 million, or 17.4%, to
$16.7 million for the year ended December 31, 2003, from $20.2 million for the
prior year, as the Company repriced certificates of deposit and other core
deposits to the lower rate environment. The decrease also reflected a 21% growth
in 2003 of lower cost average core deposits. The Company also increased
non-interest bearing accounts further reducing expense. Interest-bearing
liabilities averaged $513.8 million for the year ended December 31, 2003, versus
$535.1 million for the prior year reflecting lower amounts of higher cost
certificates of deposit. The average rate paid on interest-bearing liabilities
decreased 53 basis points to 3.24% for, 2003, due primarily to the decrease in
average rates paid on deposit products resulting from the lower interest rate
environment.
Interest expense on time deposits (certificates of deposit) decreased $3.0
million, or 32.8%, to $6.2 million for 2003, from $9.3 million for the prior
year. This decline reflected the lower interest rate environment as the average
rate declined 63 basis points to 3.24%. In addition, average certificates of
deposit outstanding decreased $47.5 million, or 19.8%, to $192.7 million, for
2003, from $240.2 million in the prior year, as higher cost time deposits
matured and were not replaced due to the 21% growth in core deposits.
Interest expense on other borrowings, primarily FHLB advances, decreased
$214,000 or 2.5% to $8.3 million for 2003, compared to $8.5 million for the
prior year. This decrease resulted from a $1.5 million decline in average other
borrowings to $134.1 million at December 31, 2003, versus $135.5 million for
2002. The decline in average other borrowings reflected increase deposit
generation and securities maturities and prepayments which were used to pay down
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 $372,000 for 2003 versus $392,000 for 2002.
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
the known and estimated inherent losses in the portfolio. The provision for loan
losses increased $1.5 million to $6.8 million for the year ended December 31,
2003, from $5.3 million for the prior year. This increase reflected
approximately $4.7 million of additional provisions for the short-term consumer
and tax refund anticipation loan products that were more than offset by related
increases in net interest and non-interest income. Partially offsetting the
increased short-term loan provisions were lower loan loss provisions in the
commercial loan portfolio.
Non-Interest Income
Total non-interest income increased $3.9 million, or 117%, to $7.1 million
for the year ended December 31, 2003, versus $3.3 million for the prior year
comparable period 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. That increased volume reflects additional loans
generated and sold in Texas, Arizona, California and Ohio in 2003. Increases in
related income were partially offset by unrelated decreases in loan advisory
fees and tax refund product related revenue which decreased as a result of
volume. Service fees on deposit accounts increased $219,000 reflecting increases
in the customer base on which charges were assessed. In addition, the Company
purchased $11.5 million of business owned life insurance in May of 2003 for
which it earned $263,000 in
REPUBLIC FIRST BANCORP | 20
- --------------------------------------------------------------------------------
2003, accounting for the majority of the $292,000 increase in other income. The
Company also sold one OREO property at a gain of $224,000 in the four quarter of
2003.
Non-Interest Expenses
Total non-interest expenses increased $139,000, or 1.0% to $18.7 million
for the year ended December 31, 2003, from $18.6 million for the prior year. The
prior year period included an OREO write down of $1.4 million. Salaries and
employee benefits increased $1.3 million or 15.5%, to $9.8 million for the year
ended December 31, 2003, from $8.5 million for the prior year comparable period.
The increase primarily reflected increased incentives for loan and deposit
business development efforts. It also reflected normal merit and promotional
increases which ranged from 2-5%.
Occupancy expense increased $107,000, or 7.5%, to $1.5 million for the
year ended December 31, 2003, due primarily to increased rent and repairs and
maintenance expense.
Depreciation expense increased $371,000, or 35.5% to $1.4 million for the
year ended December 31, 2003, versus $1.0 million for the prior year reflecting
higher depreciation on computer equipment and software purchases required for
various loan and deposit applications and for the tax refund anticipation loan
product. The Company also expensed approximately $175,000 of software and
hardware items that were obsolete.
Legal fees decreased $735,000, or 42.7% to $986,000 for the year ended
December 31, 2003, from $1.7 million for the prior year. This decrease reflected
lower legal expenses related to loan collections. In particular, the legal
expense on two specific loans in 2002, was largely reduced in 2003.
Advertising expense declined $223,000, or 54.0%, to $190,000 as the
Company reduced the number of advertisements during the period.
Other real estate owned expense declined $1.2 million to $240,000. The
prior year included a write down on one property of $1,357,000.
Other operating expenses increased $516,000, or 12.8% to $4.6 million for
the year ended December 31, 2003, from $4.0 million for the prior year. The
majority of that increase reflected a second quarter charge of $200,000 for
severance costs related to the consolidation of staff positions in several
departments. The increase also reflected higher data processing costs related to
support for the short-term loan products, higher audit fees and increased
franchise tax expense. The prior year included a charge of $195,000 for the
write down of a receivable.
Provision for Income Taxes
The provision for income taxes increased $1.3 million to $2.5 million for
the year ended December 31, 2003, from $1.2 million for the prior year. This
increase was primarily the result of the increase in pre-tax income. The
effective tax rate declined to 33.6% for the year ended December 31, 2003 from
34.4% for the prior year comparable period due primarily to the impact of
business owned life insurance income, a portion of which is not taxable.
Results of Operations for the years ended December 31, 2002 and 2001
The Company's net interest margin increased 60 basis points to 3.85% for
the year ended December 31, 2002 from 3.25% for the year ended December 31,
2001. The improvement reflected the 7.4% average growth in commercial and
construction loans, the 16.5% increase in average lower cost core deposits
(non-public demand, money market and savings accounts), an increase in
short-term consumer loan program fees and the repricing of core deposits and
certificates of deposit due to the lower interest rate environment. Fees on
short-term consumer loans contributed $4.8 million to interest income in 2002
and 77 basis points to the margin versus $3.0 million and 49 basis points for
the year ended December 31, 2001. The margin was reduced by prepayments in both
the investment securities and residential portfolios, also reflecting the impact
of the lower interest rate environment. The average yield on interest-earning
assets declined 73 basis points to 7.09% for the year ended December 31, 2002,
from 7.82% for the year ended December 31, 2001, due principally to the decline
in the prime rate partially offset by higher yielding short-term consumer loans.
The average rate paid on interest-bearing liabilities decreased 150 basis points
from 5.27% from the year ended December 31, 2001 to 3.77% for the year ended
December 31, 2002, reflecting the lower interest rate environment.
The Company's net interest income increased $3.6 million, or 17.7%, to
$24.0 million for the year ended December 31, 2002, from $20.4 million for the
year ended December 31, 2001. As shown in the Rate/Volume table above, the
increase in net
REPUBLIC FIRST BANCORP | 21
- --------------------------------------------------------------------------------
interest income was due to the positive effect of volume changes of
approximately $1.1 million, and the repricing of deposits, which contributed
$2.5 million to net interest income. The positive impact of volume changes
reflected a decrease in higher cost time deposits and other borrowed funds,
which decreased 8.1% and 10.6% on average, respectively, from year to year.
The Company's total interest income decreased $4.9 million, or 10.0%, to
$44.1 million for the year ended December 31, 2002, from $49.0 million for the
year ended December 31, 2001. That decrease reflected a $4.6 million decline due
to the lower interest rate environment with the remaining decline of $268,000
reflecting lower volume, primarily in securities. Interest and fees on loans
decreased $1.5 million to $37.1 million for the year ended December 31, 2002
versus $38.6 million for the prior year comparable period. The decline reflected
the lower interest rate environment and average prime rate during 2002. It also
reflects the prepayments in the mortgage portfolios, which declined $11.1
million or 15.3% on average, from year to year. These declines were partially
offset by volume increases in average commercial and construction loans of $26.5
million, or 7.4%. The full year impact of the short-term loan program also
contributed to the positive volume variance. The impact of the lower prime rate
was the principal factor reducing the yield on loans 69 basis points to 7.92%.
Interest and dividend income on securities decreased $2.8 million, or 31.1% to
$6.3 million for the year ended December 31, 2002, from $9.1 million for the
year ended December 31, 2001. This decline was due principally to the $36.5
million decrease in average securities outstanding to $111.5 million at December
31, 2002 from $148.0 million at the prior year end. In addition, the average
rate earned on securities declined 53 basis points to 5.64% as higher coupon
investments prepaid more rapidly than lower coupon investments and the rates
earned on variable rate securities declined due to the lower interest rate
environment. The Company made $18.8 million of securities purchases in 2002, and
did not replace the majority of maturities and prepayments. Instead, related
proceeds were utilized to fund commercial loan growth and reduce FHLB
borrowings. Interest income on federal funds sold and other interest-earning
assets decreased $545,000, reflecting the lower interest rate environment.
Total interest expense decreased $8.5 million, or 29.7%, to $20.2 million
for the year ended December 31, 2002, from $28.7 million for the year ended
December 31, 2001, due principally to the lower rate environment as the Company
repriced deposits, particularly certificates of deposit and was able to increase
lower cost core deposits. Interest-bearing liabilities averaged $535.1 million
for the year ended December 31, 2002, a decrease of $8.5 million, or 1.6%, from
$543.6 million for the year ended December 31, 2001. Average higher cost
certificates of deposit and other borrowings decreased $21.1 million and $16.1
million, respectively, while lower cost core deposits increased $29.8 million or
16.5%. The average rate paid on interest-bearing liabilities decreased 150 basis
points to 3.77% for the year ended December 31, 2002, due to the decrease in
average rates paid on all deposit products as a result of the lower interest
rate environment.
Interest expense on time deposits (certificates of deposit) decreased $6.5
million or 41.1% to $9.3 million at December 31, 2002, from $15.8 million at
December 31, 2001. This decline reflected the lower interest rate environment
and the ability of the Banks to reprice certificates at lower average rates
which declined 216 basis points to 3.87%. In addition, average certificates of
deposit outstanding declined $21.1 million, or 8.1% to $240.2 million, for the
year ended December 31, 2002, from $261.3 million for the prior year comparable
period as the Company was able to increase its lower cost core deposits.
Interest expense on other borrowings, primarily FHLB advances, decreased
$840,000 or 9.0% to $8.5 million for the year ended December 31, 2002, compared
to $9.3 million for the year ended December 31, 2001. This decrease resulted
from a $16.1 million, or 10.6%, decline in average other borrowings during 2002
to $135.5 million from $151.6 million for 2001. This decline in average
borrowings resulted in a $1.0 million decline in interest expense. The decline
in average other borrowings reflected increased deposit generation and
securities maturities and prepayments. The decline in average volume was
partially offset by a 11 basis point increase in the average rate paid on other
borrowings to 6.25%, resulting from the maturity of lower cost borrowings. The
Company issued $6.0 million of trust preferred securities in November 2001, the
expense for which is included in other borrowings expense. (See "Capital
Resources"). Such expenses for 2002 were $392,000 versus $33,000 in 2001.
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
the known and estimated inherent losses in the portfolio. The provision for loan
losses increased $1.3 million to $5.3 million for the year ended December 31,
2002, from $4.0 million for the year ended December 31, 2001. This increase
reflects a $900,000 change in the economic component of the Company's loan loss
methodology in 2002, an increase of $600,000 in provisions relating to the first
full year for the short-term loan product and additional provisions based on
regulatory classifications. The additional methodology provisions were not
necessitated by any specific problem loans but were effected to enhance the
economic portion of the reserve. (See "Allowance for Loan Losses".)
REPUBLIC FIRST BANCORP | 22
- --------------------------------------------------------------------------------
Non-Interest Income
Total non-interest income increased $351,000, or 11.5%, to $3.3 million for
the year ended December 31, 2002, from $2.9 million for the year ended December
31, 2001. This increased reflected increased revenue resulting from a greater
volume of tax refund products, which offset a decline in loan advisory and
servicing fees. Loan advisory and servicing fees declined $140,000, or 10.3%,
reflecting a decrease in advisory activity.
Non-Interest Expenses
Total non-interest expenses increased $2.4 million, or 14.9% to $18.6
million for the year ended December 31, 2002, from $16.2 million at December 31,
2001. This increase includes a write down of one OREO property totaling $1.4
million. Excluding the OREO write down, expenses increased $1.0 million or 5.9%
to $17.2 million. Salaries and employee benefits increased $87,000 to $8.5
million for the year ended December 31, 2002, from $8.4 million for the year
ended December 31, 2001.
Occupancy expense increased $62,000, or 4.5%, to $1.4 million for the year
ended December 31, 2002 from $1.3 million for the year ended December 31, 2001.
The increase reflected higher rent and maintenance expenses.
Depreciation expense increased $91,000, or 9.5% to $1.0 million in 2002,
reflecting higher depreciation on computer equipment purchases required for
various loan and deposit applications.
Legal fees increased $825,000, to $1.7 million for the year ended December
31, 2002, from $826,000 for the year ended December 31, 2001. This increase
reflected legal expenses related to loan collections.
Advertising expense declined $148,000, or 26.4% to $413,000, as the Company
reduced the number of advertisements placed during the year.
OREO expense was $1.5 million in 2002, reflecting the write down of one
property by $1.4 million to $500,000.
Other operating expenses decreased $14,000 to $4.0 million for the year
ended December 31, 2002, from $4.1 million in 2001.
Provision for Income Taxes
The provision for income taxes increased $113,000, or 10.9%, to $1.2
million for the year ended December 31, 2002, from $1.0 million for the year
ended December 31, 2001 reflecting higher net income and a higher effective tax
rate. The effective tax rate was 34.4% for 2002 and 33.0% for 2001. The increase
reflected state tax expense which is not deductible for federal tax purposes.
Financial Condition
December 31, 2003 Compared to December 31, 2002
Total assets increased $7.1 million to $654.8 million at December 31,
2003, versus $647.7 million at December 31, 2002. This net increase reflected
higher commercial loan outstandings, 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 $24.5 million or 5.3%, to
$488.2 million at December 31, 2003, versus $463.7 million at December 31, 2002.
The increase reflected $64.6 million, or 16.4% of growth in commercial and
construction loans versus a $36.4 million, or 71.0% 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 $10.3 million at December 31,
2003. Individual customers may have several loans that are secured by different
collateral. The aggregate amount of those relationships that exceeded $5.9
million at December 31, 2003, was $51.5 million. The $5.9 million
REPUBLIC FIRST BANCORP | 23
- --------------------------------------------------------------------------------
threshold approximates 10% of total capital and reserves and reflects an
additional internal monitoring guideline. At December 31, 2003, the Company
through the DE Bank had $1.4 million in short-term consumer loans outstanding
versus $5.0 million at December 31, 2002. The decrease resulted from the DE
Bank's sale of the majority of such loans beginning in the third quarter of
2003, as requested by the Bank's regulators.
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
$61.7 million at December 31, 2003, a decrease of $25.6 million or 29.3%, from
year-end 2002. This decrease resulted primarily from historically high principal
repayments on mortgage backed securities which temporarily served to increase
liquidity. During the fourth quarter of 2003, the Company purchased $23.2
million of 12 to 24 month agency securities to replace a limited amount of the
mortgage backed prepayments. Long term securities purchase continued to be
deferred in light of the low interest rate environment. At December 31, 2003,
and December 31, 2002, the portfolio had net unrealized gains of $1.2 million
and $2.6 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
Federal Home Loan Bank ("FHLB") securities. At December 31, 2003, securities
held to maturity totaled $8.3 million, a decrease of $1.0 million, or 10.9% from
$9.3 million at year-end 2002. The decline reflected redemption of Federal
Reserve Bank stock as both Banks are now regulated by the FDIC. 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 $2.2 million, to $70.6
million at December 31, 2003, from $72.8 million at December 31, 2002. Federal
funds sold decreased by $12.2 million to $39.0 million from $51.1 million,
respectively, reflecting the net increase in commercial loan growth.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. At December 31, 2003,
the balance was $3.5 million versus $4.2 million at December 31, 2002.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$588,000, or 11.8%, to $4.4 million at December 31, 2003, from $5.0 million at
December 31, 2002. The decrease reflected depreciation of equipment and
software.
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.
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.
Deposits:
Deposits, which include non-interest and interest-bearing demand deposits,
money market, savings and time deposits including 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 decreased by $2.7 million to $453.6 million at December 31,
2003, from $456.3 million at December 31, 2002. However, average core deposits
increased 20.6%, or $44.7 million more than the prior year end to $262.4 million
in, 2003. The increased lower cost core deposit balances were used to replace
higher cost maturing time deposits (certificates of deposit).
REPUBLIC FIRST BANCORP | 24
- --------------------------------------------------------------------------------
Time deposits decreased $35.7 million, or 16.0% to $187.6 million at December
31, 2003, versus $223.2 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 borrowings by the PA Bank totaled $125.0 million at December
31, 2003 and December 31, 2002, respectively. The Company's borrowings primarily
mature beginning in the third quarter of 2004 through the first quarter of 2005.
The PA Bank also had short-term borrowings (overnight) of $2.8 million at
December 31, 2003 versus $0 at prior year end.
Shareholders' Equity:
Total shareholders' equity increased $5.1 million to $56.4 million at
December 31, 2003, versus $51.3 million at December 31, 2002. This increase was
primarily the result of 2003 net income of $4.9 million and proceeds from stock
option exercises of $1.1 million. These increases were partially offset by a
$908,000 reduction in the market value of securities.
Risks and Uncertainties and Certain Significant Estimates
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Prepayments on residential real estate mortgages and other fixed rate loans
and mortgage backed securities may cause significant fluctuations in interest
margins.
Short-term consumer loans were first offered through the DE Bank in 2001.
At December 31, 2003, there was approximately $1.4 million of short-term
consumer loans outstanding, which were originated in Georgia. The DE Bank also
originates loans in Texas, California, Arizona and Ohio which are sold to third
parties. The participations sold at December 31, 2003 were $16.2 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 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.
REPUBLIC FIRST BANCORP | 25
- --------------------------------------------------------------------------------
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 $94.8 million and $52.3
million and standby letters of credit of approximately $4.0 million and $7.2
million at December 31, 2003 and 2002, respectively. The increase in commitments
reflects an increase in construction lending. However, commitments may often
expire without being drawn upon. The $94.8 million of commitments to extend
credit at December 31, 2003, 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 | 26
- --------------------------------------------------------------------------------
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,
2003:
One to Four to After
Less than Four Five Five
(dollars in thousands) Total One Year Years Years Years
-------- -------- -------- -------- -------
Minimum annual rentals or noncancellable
Operating leases $ 3,342 $ 958 $ 2,186 $ 198 $ --
Remaining contractual maturities of time
deposits 187,590 128,889 50,960 7,731 10
Contingent liabilities on equipment 122 107 15 -- --
Benefit plans 656 656 --
Loan commitments 94,754 75,767 14,241 -- 4,746
Long-term borrowed funds 125,000 100,000 25,000 -- --
Standby letters of credit 3,962 3,833 89 -- 40
-------- -------- -------- -------- --------
Total $415,426 $310,210 $ 92,491 $ 7,929 $ 4,796
======== ======== ======== ======== ========
As of December 31, 2003, the Company had entered into non-cancelable lease
agreements for its main office and operations center, seven PA Bank retail
branch facilities and two DE Bank retail branches, expiring through November 31,
2008. The leases are accounted for as operating leases. The minimum annual
rental payments required under these leases are $3.3 million through the year
2008. Prior to 2001, the Company participated in a joint venture with the
MBM/ATM Group Ltd. Although the Company's participation in the venture was
terminated, the Company remains contingently liable on repayments totaling
$122,000 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, 2003 is approximately $656,000.
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, 2003, 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 $148.3 million, which
represented 30.4% of gross loans receivable at December 31, 2003. 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 | 27
- --------------------------------------------------------------------------------
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, 2003. 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 | 28
- --------------------------------------------------------------------------------
Interest Sensitivity Gap
At December 31, 2003
(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............. $57,112 $8,918 $ 36,623 $8,916 $ 1,783 $ 416 $ 126 $ 2,034 $115,928 $115,968
Average interest
rate............. 1.45% 2.06% 3.29% 4.72% 5.08% 5.11% 4.84% 5.70%
Loans receivable..... 253,455 17,480 48,686 54,773 42,783 29,906 24,999 7,441 479,523 483,300
Average interest
rate............. 5.06% 6.96% 6.77% 6.84% 6.70% 6.71% 6.32% 5.84%
------- ------ -------- ------ ------- ----- ------ ------- -------- --------
Total................ 310,567 26,398 85,309 63,689 44,566 30,322 25,125 9,475 595,451 599,268
------- ------ -------- ------ ------- ----- ------ ------- -------- --------
Cumulative Totals.... $310,567 $336,965 $422,274 $485,963 $530,529 $560,851 $585,976 $595,451
======== ======== ======== ======== ======== ======== ======== ========
Interest Sensitive
Liabilities:
Demand Interest
Bearing.............. $ 45,998 $ 975 $ 1,025 $ 2,050 $ 2,050 $ 2,050 $19,167 $ - $73,315 $73,315
Average interest
rate............. .60% .60% .60% .60% .60% .60% .60%
Savings Accounts..... 9,028 322 338 677 677 677 6,326 - 18,045 18,045
Average interest
rate............. 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75% 1.75%
Money Market Accounts 28,405 2,277 2,474 4,946 4,946 4,946 44,020 330 92,344 92,344
Average interest
rate............. 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Time Deposits........ 61,129 35,124 32,636 36,583 13,051 1,326 7,731 10 187,590 188,005
Average interest
rate............. 1.78% 3.15% 2.62% 3.76% 3.03% 3.97% 2.99% 3.44%
FHLB Advances........ 2,852 - 100,000(1) 25,000(1) - - - - 127,852 131,735
Average interest
rate............. 1.47% - 6.06% 6.71% -
Trust Preferred
Securities........... - 6,000 - - - - - - 6,000 6,000
Average interest
rate............. 4.81%
------- ------ -------- ------ ------- ----- ------ ------- -------- --------
Total................ 147,412 44,698 136,473 69,256 20,724 8,999 77,244 340 505,146 509,444
-------- -------- --------- --------- --------- -------- --------- --------- -------- --------
Cumulative Totals.... $147,412 $192,110 $ 328,583 $ 397,839 $ 418,563 $427,562 $ 504,806 $ 505,146
======== ======== ========= ========= ========= ======== ========= =========
Interest Rate
Sensitivity GAP... $163,155 $(18,300) $ (51,164) $ (5,567) $ 23,842 $ 21,323 $ (52,119) $ 9,135
Cumulative GAP....... $163,155 $144,855 $ 93,691 $ 88,124 $ 111,966 $133,289 $ 81,170 $ 90,305
Interest Sensitive
Assets/
Interest Sensitive
Liabilities....... 210.68% 175.40% 128.51% 122.15% 126.75% 131.17% 116.08% 117.88%
Cumulative GAP/
Total Earning
Assets............ 27% 24% 16% 15% 19% 22% 14% 15%
<FN>
(1) FHLB has the option of calling these advances prior to the scheduled maturity shown in the table, whereupon they might be
replaced by borrowings at then current market rates.
</FN>
In addition to the GAP analysis, the Company utilizes income simulation
modeling in measuring its interest rate risk and managing its interest rate
sensitivity. Income simulation considers not only the impact of changing market
interest rates on forecasted net interest income, but also other factors such a
yield curve relationships, the volume and mix of assets and liabilities and
general market conditions.
Through the use of income simulation modeling the Company has estimated net
interest income for the year ending December 31, 2004, based upon the assets,
liabilities and off-balance sheet financial instruments at December 31, 2003.
The Company has also estimated changes to that estimated net interest income
based upon immediate and sustained changes in interest rates ("rate shocks").
Rate shocks assume that all of the interest rate increases or decreases occur on
the first day of the period modeled and remain at that level for the entire
period. The following table reflects the estimated percentage change in
estimated net interest income for the years ending December 31, excluding the
impact of short-term and tax refund loans:
REPUBLIC FIRST BANCORP | 29
- --------------------------------------------------------------------------------
Percent change
---------------------------
Rate shocks to interest rates 2004 2003
--------------------------------- ----------- ----------
+2% 17.3% 13.6%
+1% 9.3 7.9
-1% (7.4) (6.5)
-2% (18.7) (16.8)
The Company's management believes that the assumptions utilized in
evaluating the Company's estimated net interest income are reasonable; however,
the interest rate sensitivity of the Company's assets, liabilities and
off-balance sheet financial instruments as well as the estimated effect of
changes in interest rates on estimated net interest income could vary
substantially if different assumptions are used or actual experience differs
from the experience on which the assumptions were based. Prepayments on
residential mortgage loans and mortgage backed securities have increased over
historical levels due to the lower interest rate environment, and may result in
reductions in margins.
Capital Resources
The Company is required to comply with certain "risk-based" capital
adequacy guidelines issued by the FRB and the FDIC. The risk-based capital
guidelines assign varying risk weights to the individual assets held by a bank.
The guidelines also assign weights to the "credit-equivalent" amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts. Under these guidelines, banks are expected to meet a
minimum target ratio for "qualifying total capital" to weighted risk assets of
8%, at least one-half of which is to be in the form of "Tier 1 capital".
Qualifying total capital is divided into two separate categories or "tiers".
"Tier 1 capital" includes common stockholders' equity, certain qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill, "Tier 2 capital" components (limited
in the aggregate to one-half of total qualifying capital) includes allowances
for credit losses (within limits), certain excess levels of perpetual preferred
stock and certain types of "hybrid" capital instruments, subordinated debt and
other preferred stock. Applying the federal guidelines, the ratio of qualifying
total capital to weighted-risk assets, was 13.92% and 14.49% at December 31,
2003, and 2002, respectively, and as required by the guidelines, at least
one-half of the qualifying total capital consisted of Tier l capital elements.
Tier l risk-based capital ratios on December 31, 2003 and 2002 were 12.66% and
13.24%, respectively. At December 31, 2003, and 2002, the Company exceeded the
requirements for risk-based capital adequacy under both federal and Pennsylvania
state guidelines.
Under FRB and FDIC regulations, a bank and a holding company are deemed to
be "well capitalized" when it has a "leverage ratio" ("Tier l capital to total
assets") of at least 5%, a Tier l capital to weighted-risk assets ratio of at
least 6%, and a total capital to weighted-risk assets ratio of at least 10%. At
December 31, 2003, and 2002, the Company's leverage ratio was 9.64% and 8.56%,
respectively. Accordingly, at December 31, 2003 and 2002, the Company was
considered "well capitalized" under FRB and FDIC regulations.
On November 28, 2001, Republic First Bancorp, Inc., through a pooled
offering with Sandler O' Neill & Partners, issued $6.0 million of
corporation-obligated mandatorily redeemable capital securities of the
subsidiary trust holding solely junior subordinated debentures of the
corporation more commonly known as Trust Preferred Securities. The purpose of
the issuance was to increase capital as a result of the Company's continued loan
and core deposit growth. The trust preferred securities qualify as Tier 1
capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
The Company may call the securities on any interest payment date after five
years, without a prepayment penalty, notwithstanding their final 30 year
maturity. The interest rate is variable and adjustable semi-annually at 3.75%
over the 6 month London Interbank Offered Rate ("Libor").
The shareholders' equity of the Company as of December 31, 2003, totaled
approximately $56.4 million compared to approximately $51.3 million as of
December 31, 2002. This increase of $5.1 million reflected 2003 net income of
$4.9 million and proceeds from stock option exercises of $1.1 million, which
more than offset a $908,000 decline in market value of available for sale
securities. These factors also increased the book value per share of the
Company's common stock, which increased from $8.23 as of December 31, 2002,
based upon 6,230,420 shares outstanding, to $8.64 as of December 31, 2003, based
upon 6,522,488 shares outstanding at December 31, 2003.
REPUBLIC FIRST BANCORP | 30
- --------------------------------------------------------------------------------
Regulatory Capital Requirements
Federal banking agencies impose three minimum capital requirements on the
Company's risk-based capital ratios based on total capital, Tier 1 capital, and
a leverage capital ratio. The risk-based capital ratios measure the adequacy of
a bank's capital against the riskiness of its assets and off-balance sheet
activities. Failure to maintain adequate capital is a basis for "prompt
corrective action" or other regulatory enforcement action. In assessing a bank's
capital adequacy, regulators also consider other factors such as interest rate
risk exposure; liquidity, funding and market risks; quality and level or
earnings; concentrations of credit, quality of loans and investments; risks of
any nontraditional activities; effectiveness of bank policies; and management's
overall ability to monitor and control risks.
The following table presents the Company's regulatory capital ratios at
December 31, 2003, and 2002:
To be well
capitalized under
For Capital regulatory capital
Actual Adequacy Purposes guidelines
------------------------ ------------------------ ------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ----------- --------- ----------- ----------
At December 31, 2003
Total risk based capital
Republic First Bank.......... $57,417 12.57% $36,534 8.00% $45,667 10.00%
First Bank of DE............. 8,399 29.06% 2,312 8.00% 2,891 10.00%
Republic First Bancorp, Inc.. 67,436 13.92% 38,765 8.00% -- --
Tier one risk based capital
Republic First Bank.......... 51,689 11.32% 18,267 4.00% 27,475 6.00%
First Bank of DE............. 8,025 27.76% 1,156 4.00% 1,734 6.00%
Republic First Bancorp, Inc.. 61,346 12.66% 19,382 4.00% -- --
Tier one leverage capital
Republic First Bank.......... 51,689 8.77% 29,475 5.00% 29,475 5.00%
First Bank of DE............. 8,025 16.55% 2,410 5.00% 2,410 5.00%
Republic First Bancorp, Inc.. 61,346 9.64% 31,817 5.00% -- --
At December 31, 2002
Total risk based capital
Republic First Bank.......... $52,400 13.39% $31,308 8.00% $39,135 10.00%
First Bank of DE............. 6,144 22.59% 2,176 8.00% 2,720 10.00%
Republic First Bancorp, Inc.. 60,581 14.49% 33,447 8.00% -- --
Tier one risk based capital
Republic First Bank.......... 47,493 12.14% 15,654 4.00% 23,481 6.00%
First Bank of DE............. 5,801 21.33% 1,088 4.00% 1,632 6.00%
Republic First Bancorp, Inc.. 55,337 13.24% 16,724 4.00% -- --
Tier one leverage capital
Republic First Bank.......... 47,493 7.82% 30,377 5.00% 30,377 5.00%
First Bank of DE............. 5,801 13.94% 2,081 5.00% 2,081 5.00%
Republic First Bancorp, Inc.. 55,337 8.56% 32,231 5.00% -- --
Management believes that the Company and Banks meet as of December 31,
2003, and 2002, all capital adequacy requirements to which they are subject. As
of December 31, 2003, the FDIC categorized the Banks as well capitalized under
the regulatory framework for prompt corrective action provisions of the Federal
Deposit Insurance Act. There are no calculations or events since that
notification, which management believes would have changed the Banks' category.
The Company and the Banks' ability to maintain the required levels of
capital is substantially dependent upon the success of their capital and
business plans, the impact of future economic events on the Banks' loan
customers and the Banks' ability to manage their interest rate risk, growth and
other operating expenses.
REPUBLIC FIRST BANCORP | 31
- --------------------------------------------------------------------------------
In addition to the above minimum capital requirements, the Federal Reserve
Bank approved a rule that became effective on December 19, 1992, implementing a
statutory requirement that federal banking regulators take specified "prompt
corrective action" when an insured institution's capital level falls below
certain levels. The rule defines five capital categories based on several of the
above capital ratios. The Banks currently exceed the levels required for a bank
to be classified as "well capitalized". However, the Federal Reserve Bank may
consider other criteria when determining such classifications, which criteria
could result in a downgrading in such classifications.
The Company's equity to assets ratio increased from 7.92% as of December
31, 2002, to 8.61% as of December 31, 2003. The increase at year-end 2003 was a
result of the improvement in net income. The Company's average equity to assets
ratio for 2003, 2002 and 2001 was 8.16%, 7.57% and 7.02%, respectively. The
Company's average return on equity for 2003, 2002 and 2001 was 9.20%, 4.52%, and
4.59%, respectively; and its average return on assets for 2003, 2002, and 2001,
was 0.75%, 0.34%, and 0.33%, respectively.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, time investment purchases to market
conditions and provide a cushion against unforeseen needs. Liquidity needs can
be met by either reducing assets or increasing liabilities. The most liquid
assets consist of cash, amounts due from banks and federal funds sold.
Regulatory authorities require the Company to maintain certain liquidity
ratios such that the Banks maintain available funds, or can obtain available
funds at reasonable rates, in order to satisfy commitments to borrowers and the
demands of depositors. In response to these requirements, the Company has formed
an Asset/Liability Committee (ALCO), comprised of certain members of the Banks'
board of directors and senior management, which monitors such ratios. The
purpose of the committee is, in part, to monitor the Banks' liquidity and
adherence to the ratios in addition to managing relative interest rate risk. The
ALCO meets at least quarterly.
The Company's most liquid assets, comprised of cash and cash equivalents on
the balance sheet, totaled $70.6 million at December 31, 2003, compared to $72.8
million at December 31, 2003. Loan maturities and repayments are another source
of asset liquidity. At December 31, 2003, the PA Bank estimated that in excess
of $50.0 million of loans would mature or repay in the six-month period ended
June 30, 2004. Additionally, the majority of its securities are available to
satisfy liquidity requirements through pledges to the FHLB to access the PA
Banks' line of credit.
Funding requirements have historically been satisfied by generating core
deposits and certificates of deposit with competitive rates, buying federal
funds or utilizing the facilities of the Federal Home Loan Bank System ("FHLB").
At December 31, 2003, the PA Bank had $67.0 million in unused lines of credit
available under arrangements with the FHLB and with correspondent banks,
compared to $109.0 million at December 31, 2002. The reduction in available
lines resulted from prepayments of the PA Bank's mortgage backed securities and
residential mortgage loan portfolio pledged as collateral against those lines.
Notwithstanding these reductions, management believes it satisfactorily exceeds
regulatory liquidity guidelines. These lines of credit enable the PA Bank to
purchase funds for short to long-term needs at rates often lower than other
sources and require pledging of securities or loan collateral.
At December 31, 2003, the Company had outstanding commitments (including
unused lines of credit and letters of credit) of $98.4 million. Certificates of
deposit scheduled to mature in one year totaled $128.9 million at December 31,
2003. The PA Bank has $125.0 million in term FHLB borrowings at December 31,
2003. Of this amount, $100.0 million will mature in 2004. These term borrowings
are expected to be replaced by overnight borrowings. The Company anticipates
that it will have sufficient funds available to meet its current commitments. In
addition, the Company can use term borrowings to replace these borrowed funds.
The Banks' target and actual liquidity levels are determined by comparisons
of the estimated repayment and marketability of the Banks' interest-earning
assets with projected future outflows of deposits and other liabilities. The PA
Bank has established a line of credit with a correspondent bank to assist in
managing the PA Banks' liquidity position. That line of credit totaled $10.0
million at December 31, 2003. The PA Bank had drawn down $2.9 million on this
line at December 31, 2003. Additionally, the PA Bank has established a line of
credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing
capacity of approximately $184.8 million. As of December 31, 2003, and 2002, the
PA Bank had borrowed $125.0 million from FHLB. Investment securities represent a
primary source of liquidity for the PA Bank. Accordingly, investment decisions
generally reflect liquidity over other considerations.
REPUBLIC FIRST BANCORP | 32
- --------------------------------------------------------------------------------
Operating cash flows are primarily derived from cash provided from net
income during the year and are another source of liquidity. In 2003, significant
cash flows were provided from the maturities and principal paydowns of
securities.
The Company's primary short-term funding sources are certificates of
deposit and its securities portfolio. The circumstances that are reasonably
likely to affect those sources are as follows. The PA Bank has historically been
able to generate certificates of deposit by matching Philadelphia market rates
or paying a premium rate of 25 to 50 basis points over those market rates. It is
anticipated that this source of liquidity will continue to be available;
however, the incremental cost may vary depending on market conditions. The
Company's securities portfolio is also available for liquidity, most likely as
collateral for FHLB advances. Because of the FHLB's AAA rating, it is unlikely
those advances would not be available. But even if they are not, numerous
investment companies would likely provide repurchase agreements up to the amount
of the market value of the securities.
The ALCO committee is responsible for managing the liquidity position and
interest sensitivity of the Banks. That committee's primary objective is to
maximize net interest income while configuring the Banks' interest-sensitive
assets and liabilities to manage interest rate risk and provide adequate
liquidity for projected needs.
Investment Securities Portfolio
The Banks' investment securities portfolio is intended to provide liquidity
and contribute to earnings while diversifying credit risk. The Company attempts
to maximize earnings while minimizing its exposure to interest rate risk. The
securities portfolio consists primarily of U.S. Government agency securities,
mortgage backed securities, corporate bonds, trust preferred securities and FHLB
stock. The Company's ALCO monitors and approves all security purchases. The
decline in securities in 2003 was a result of the Company's strategy to reduce
the amount of the investment securities by not replacing mortgage backed
securities prepayments in the lower interest rate environment. The Company
instead was able to increase its commercial loan balances, through increased
loan production.
A summary of investment securities available-for-sale and investment
securities held-to-maturity at December 31, 2003 and 2002 follows.
Investment Securities Available for Sale at
December 31,
-----------------------------------------------
(Dollars in thousands)
2003 2002 2001
----------- ----------- ------------
U.S. Government Agencies............................ $24,425 $ 5,759 $ 897
Mortgage backed Securities/CMOs (1)................. 24,235 71,623 113,511
Other debt securities (3)........................... 11,843 7,352 --
----------- ----------- ------------
Total amortized cost of securities.................. $60,503 $84,734 $114,408
----------- ----------- ------------
Total fair value of investment securities........... $61,686 $87,291 $113,868
----------- ----------- ------------
Investment Securities Held to Maturity at
December 31,
-----------------------------------------------
(Dollars in thousands)
2003 2002 2001
----------- ----------- ------------
U.S. Government Agencies............................ $ 68 $ 122 $ 997
Mortgage backed Securities/CMOs (1)................. 265 760 1,399
Other securities (2)................................ 7,927 8,388 9,178
----------- ----------- ------------
Total amortized cost of investment securities....... $ 8,260 $ 9,270 $ 11,574
----------- ----------- ------------
Total fair value of investment securities........... $ 8,300 $ 9,297 $ 11,601
----------- ----------- ------------
<FN>
- ----------
(1) Substantially all of these obligations consist of U.S. Government Agency
issued securities.
(2) Comprised primarily of FHLB stock.
(3) Comprised primarily of corporate bonds and trust preferred securities.
</FN>
REPUBLIC FIRST BANCORP | 33
- --------------------------------------------------------------------------------
The following table presents the contractual maturity distribution and
weighted average yield of the securities portfolio of the Company at December
31, 2003. Mortgage backed securities are presented without consideration of
amortization or prepayments.
Investment Securities Available for Sale at December 31, 2003
------------------------------------------------------------------------------------------------
One to Five Five to Ten
Within One Year Years Years Past 10 Years Total
--------------- ------------- --------------- --------------- --------------------------
Amount Yield Amount Yield Amount Yield Amount Yield Fair value Cost Yield
------ ----- ------ ----- ------ ----- ------ ----- ---------- ----- -----
(Dollars in thousands)
U.S. Government Agencies $1,214 1.35% $23,221 2.25% $ - -% $ - -% $24,435 $24,425 2.21%
Other debt securities (1) 2,053 4.75 - - - - 9,912 2.85 11,965 11,843 3.18%
Mortgage backed
securities............. - - - - 1,285 6.06 24,001 5.62 25,286 24,235 5.64%
------ ---- ------- ---- ------ ---- ------- ---- ------- ------- ----
Total AFS securities.... $3,267 3.49% $23,221 2.25% $1,285 6.06% $33,913 4.81% $61,686 $60,503 3.80%
====== ==== ======= ==== ====== ==== ======= ==== ======= ======= ====
Investment Securities Held to Maturity at December 31, 2003
-------------------------------------------------------------------------------------
One to Five Five to Ten
Within One Year Years Years Past 10 Years Total
--------------- ------------- --------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
U.S. Government Agencies... $68 1.73% $ -- --% $ -- --% $ -- -% $ 68 1.73%
Mortgage backed securities. -- -- -- -- -- -- 265 7.33% 265 7.33%
Other securities........... 25 4.50 280 6.98 102 6.34% 7,520(2) 2.09% 7,927 2.33%
---- ----- ---- ----- ----- ------ ------ ----- ------ -----
Total HTM securities....... $93 2.47 $280 6.98% $102 6.34% $7,785 3.63% $8,260 2.49%
==== ===== ==== ===== ===== ====== ====== ===== ====== =====
<FN>
(1) Variable rate instruments
(2) Primarily comprised of FHLB stock, which is targeted by the FHLB to yield a
variable rate tied to market indices; however, the yield is wholly
dependent on dividends paid
</FN>
Loan Portfolio
The Company's loan portfolio consists of secured and unsecured commercial
loans including commercial real estate loans, loans secured by one-to-four
family residential property, commercial construction and residential
construction loans as well as residential mortgages, home equity loans,
short-term consumer and other consumer loans. Commercial loans are primarily
secured term loans made to small to medium-sized businesses and professionals
for working capital, asset acquisition and other purposes. Commercial loans are
originated as either fixed or variable rate loans with typical terms of 1 to 5
years. The Banks' commercial loans typically range between $250,000 and
$5,000,000 but customers may borrow significantly larger amounts up to the
Banks' combined legal lending limit of $10.3 million at December 31, 2003.
Individual customers may have several loans often secured by different
collateral. Such relationships in excess of $5.9 million (an internal monitoring
guideline which approximates 10% of capital and reserves) at December 31, 2003,
amounted to $51.5 million. There were no loans in excess of the combined legal
lending limit at December 31, 2003.
The Company's total loans increased $24.5 million, or 5.3%, to $488.2
million at December 31, 2003, from $463.7 million at December 31, 2002. The
increase reflected a $56.5 million or 16.4% increase in construction loans, a
category which the Company had targeted for growth. This increase more than
offset a $36.4 million or 71.0% decline in residential mortgages reflecting
rapid repayments due to the lower rate environment in 2003. The $4.0 million
decrease in consumer loans resulted primarily from a reduction in short-term
loans retained, with the majority of such loans sold beginning third quarter
2003.
REPUBLIC FIRST BANCORP | 34
- --------------------------------------------------------------------------------
The following table sets forth the Company's gross loans by major
categories for the periods indicated:
At December 31,
------------------------------------------------------------------
(Dollars in thousands)
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Commercial:
Real estate secured (1).................... $302,618 $297,193 $286,583 $271,222 $224,072
Construction and land development.......... 88,850 32,377 34,996 12,860 9,630
Non real estate secured.................... 52,041 54,163 53,388 39,016 36,600
Non real estate unsecured.................. 13,688 8,513 7,229 10,543 4,467
-------- -------- -------- -------- --------
Total commercial......................... 457,197 392,246 382,196 333,641 274,769
Residential real estate (2)................... 14,875 51,265 67,821 74,825 76,975
Consumer and other............................ 16,147 20,178 19,302 13,919 11,069
-------- -------- -------- -------- --------
Total loans, net of unearned income...... $488,219 $463,689 $469,319 $422,385 $362,813
======== ======== ======== ======== ========
<FN>
- ----------
(1) Includes loans held for sale.
(2) Residential real estate secured is comprised of jumbo residential first
mortgage loans for all years presented.
</FN>
Loan Maturity and Interest Rate Sensitivity
The amount of loans outstanding by category as of the dates indicated,
which are due in (i) one year or less, (ii) more than one year through five
years and (iii) over five years, is shown in the following table. Loan balances
are also categorized according to their sensitivity to changes in interest
rates: (dollars in thousands).
At December 31, 2003
-------------------------------------------------------------
(Dollars in thousands)
One Year More Than One Year Over Total
or Less Through Five Years Five Years Loans
---------- ------------------ ---------- --------
Commercial and Commercial Real Estate................ $66,080 $200,732 $101,535 $368,347
Construction and Land Development.................... 47,834 38,067 2,949 88,850
Residential Real Estate.............................. 737 -- 14,138 14,875
Consumer and Other................................... 4,724 2,256 9,167 16,147
-------- -------- -------- --------
Total........................................... $119,375 $241,055 $127,789 $488,219
-------- -------- -------- --------
Loans with Fixed Rates............................... 37,885 165,109 44,909 247,903
Loans with Floating Rates............................ 81,490 75,946 82,880 240,316
-------- -------- -------- --------
Total........................................... $119,375 $241,055 $127,789 $488,219
======== ======== ======== ========
Percent Composition by Maturity...................... 24.45% 49.37% 26.18% 100.00%
Fixed Rate Loans as Percent of Total................. 31.74 68.49 35.14 50.78
Floating Rate Loans as Percent of Total.............. 68.26 31.51 64.86 49.22
In the ordinary course of business, loans maturing within one year may be
renewed, in whole or in part, as to principal amount, at interest rates
prevailing at the date of renewal.
At December 31, 2003, 50.8% of total loans were fixed rate compared to
60.1% at December 31, 2002.
REPUBLIC FIRST BANCORP | 35
- --------------------------------------------------------------------------------
Credit Quality
The Banks' written lending policies require specified underwriting, loan
documentation and credit analysis standards to be met prior to funding, with
independent credit department approval for the majority of new loan balances. A
committee of the Board of Directors oversees the loan approval process to
monitor that proper standards are maintained, while approving the majority of
commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of interest or principal for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. For non-accrual
loans which have been partially charged off, recognition of interest on a cash
basis is limited to that which would have been recognized on the recorded loan
balance at the contractual interest rate. Cash interest receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
REPUBLIC FIRST BANCORP | 36
- --------------------------------------------------------------------------------
The following summary shows information concerning loan delinquency and
non-performing assets at the dates indicated.
At December 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars in thousands)
Loans accruing, but past due 90 days or more.................. $3,084 $4,051 $ 518 $ 91 $ 333
Restructured loans............................................ - - - 1,982 -
Non-accrual loans............................................. 5,527 2,972 3,830 1,350 1,778
------ ------ ------ ------ ------
Total non-performing loans.................................... 8,611 7,023 4,348 3,423 2,111
Other real estate owned....................................... 207 1,015 1,858 - 643
------ ------ ------ ------ ------
Total non-performing assets(1)................................ $8,818 $8,038 $6,206 $3,423 $2,754
====== ====== ====== ====== ======
Non-performing loans as a percentage of total
loans, net of unearned income (1)(2)....................... 1.76% 1.51% 0.93% 0.81% 0.58%
Non-performing assets as a percentage of total assets......... 1.35% 1.24% 0.95% 0.52% 0.47%
<FN>
- ----------
(1) Non-performing loans are comprised of (i) loans that are on a non-accrual
basis, (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans. Non-performing assets are composed of non-performing
loans and other real estate owned.
(2) Includes loans held for sale.
</FN>
Problem loans consist of loans that are included in performing loans, but
for which potential credit problems of the borrowers have caused management to
have serious doubts as to the ability of such borrowers to continue to comply
with present repayment terms. The increase in non-accrual loans reflects a $1.9
million loan secured by an office complex that is in the process of collection.
The Company has established $578,000 of reserves against this loan within the
allowance for loan losses. The increase also reflects a $1.2 million loan
secured by a single residential property that has a ratio of loan principal to
the estimated value of the property of approximately 65%. Related reserves of
$180,000 for that loan have been established within the allowance for loan
losses. At December 31, 2003, all identified problem loans are included in the
preceding table, or are classified as substandard or doubtful, with a reserve
allocation in the allowance for loan losses (see "Allowance For Loan Losses").
Management believes that the appraisals and other estimates of the value of the
collateral pledged against the non-accrual loans generally exceed the amount of
related balances.
The following summary shows the impact on interest income of non-accrual
loans for the periods indicated:
For the Year Ended December 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Interest income that would have been
recorded had the loans been in accordance
with their original terms........................ $285,000 $241,000 $203,000 $125,000 $189,000
Interest income included in net income............. $ - $ - $ - $171,000 $ -
At December 31, 2003, 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 $148.3 million, which
represented 30.4% of gross loans receivable at December 31, 2003. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and others. Loan
concentrations are considered to exist when multiple number of borrowers are
engaged in similar activities that management believes would cause them to be
similarly impacted by economic or other conditions. The Banks had no credit
exposure to "highly leveraged transactions" at December 31, 2003 as defined by
the FRB.
REPUBLIC FIRST BANCORP | 37
- --------------------------------------------------------------------------------
Allowance for Loan Losses
A detailed analysis of the Company's allowance for loan losses for the
years ended December 31, 2003, 2002, 2001, 2000, and 1999 is as follows:
(dollars in thousands)
For the Year Ended December 31,
----------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
Balance at beginning of period ....... $ 6,642 $ 5,431 $ 4,072 $ 3,208 $ 2,395
Charge-offs:
Commercial ......................... 365 2,542 2,077 66 91
Tax refund loans .................... 1,393 -- -- -- --
Consumer ........................... 53 3 -- 90 117
Short-term loans ................... 4,299 1,670 802 -- --
--------- --------- --------- --------- ---------
Total charge-offs ................ 6,110 4,215 2,879 156 208
--------- --------- --------- --------- ---------
Recoveries:
Commercial ......................... 1,066 123 257 340 124
Tax refund loans ................... 334 -- -- -- --
Consumer ........................... -- -- 17 14 17
--------- --------- --------- --------- ---------
Total recoveries ................. 1,400 123 274 354 141
--------- --------- --------- --------- ---------
Net charge-offs (recoveries) ......... 4,710 4,092 2,605 (198) 67
--------- --------- --------- --------- ---------
Provision for loan losses ............ 6,764 5,303 3,964 666 880
--------- --------- --------- --------- ---------
Balance at end of period ........... $ 8,696 $ 6,642 $ 5,431 $ 4,072 $ 3,208
========= ========= ========= ========= =========
Average loans outstanding (1) ...... $ 470,237 $ 468,239 $ 448,397 $ 389,156 $ 325,544
As a percent of average loans (1):
Net charge-offs (recoveries) (2) ... 1.00% 0.87% 0.58% (0.05)% 0.02%
Provision for loan losses .......... 1.44 1.13 0.88 0.17 0.27
Allowance for loan losses .......... 1.85 1.42 1.21 1.05 0.99
Allowance for loan losses to:
Total loans, net of unearned income. 1.78% 1.43% 1.16% 0.96% 0.88%
Total non-performing loans ......... 101.00% 94.57% 124.89% 118.96% 151.97%
<FN>
- ----------
(1) Includes non-accruing loans.
(2) Excluding short-term and tax refund loan charge-offs, ratios were (.14%),
0.52% and .40% in 2003, 2002 and 2001, respectively.
</FN>
The Company had two large commercial loan recoveries in 2003. Approximately
$700,000 was collected on a $2.7 million loan, the majority of which was charged
off in 2002 and additional recoveries on that charge-off are anticipated in the
future. The Company also recovered $268,000 in 2003 related to another borrower,
the majority of whose loan was charged off in 2001. There were no significant
commercial loan charge offs in 2003. The increase in short-term loan charge offs
reflected greater amounts of loans generated in 2003. However, since the vast
majority of such loans are now sold, lower levels of charge-offs are expected in
2004. Additional net interest and non-interest income more than offset the
increased short-term loan charge offs. Management makes at least a quarterly
determination as to an appropriate provision from earnings to maintain an
allowance for loan losses that is management's best estimate of known and
inherent losses. The Company's Board of Directors periodically reviews the
status of all non-accrual and impaired loans and loans classified by the Banks'
regulators or internal loan review officer, who reviews both the loan portfolio
and overall adequacy of the allowance for loan losses. The Board of Directors
also considers specific loans, pools of similar loans, historical charge-off
activity, economic conditions and other relevant factors in reviewing the
adequacy of the loan loss reserve. Any additions deemed necessary to the
allowance for loan losses are charged to operating expenses.
REPUBLIC FIRST BANCORP | 38
- --------------------------------------------------------------------------------
The Company has an existing loan review program, which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
who reports quarterly, directly to the Board of Directors.
Estimating the appropriate level of the allowance for loan losses at any
given date is difficult, particularly in a continually changing economy. In
Management's opinion, the allowance for loan losses was appropriate at December
31, 2003. However, there can be no assurance that, if asset quality deteriorates
in future periods, additions to the allowance for loan losses will not be
required.
The Banks' management is unable to determine in which loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for loan losses among various categories. The
allocation is accordingly based upon historical experience. The entire allowance
for loan losses is available to absorb loan losses in any loan category:
At December 31,
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Allocation of the
allowance % of % of % of % of % of
for loan losses: (1),(2) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Commercial................. $5,531 75.5% $5,336 77.5% $4,540 73.9% $3,048 76.0% $2,047 73.0%
Construction............... 1,133 18.1 359 7.0 274 7.5 96 3.0 72 2.7
Residential real estate.... 60 3.1 205 11.1 203 14.5 224 17.7 423 21.2
Consumer and other......... 96 3.2 104 3.3 104 2.6 110 3.3 84 3.1
Short-term loans........... 883 0.1 97 1.1 78 1.5 47 -- -- --
Unallocated................ 993 -- 541 -- 232 --% 547 -- 582 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total................... $8,696 100% $6,642 100% $5,431 100% $4,072 100% $3,208 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
<FN>
- ----------
(1) Gross loans net of unearned income. (2) Includes loans held for sale.
</FN>
The methodology utilized to estimate the amount of the allowance for loan
losses is as follows: The Company first applies an estimated loss percentage
against all loan categories outstanding. In 2003, excluding short-term and tax
refund loans, the Company experienced net recoveries of approximately .14%. Net
charge-offs, excluding short-term loans, to average loans were .52% and .40%,
respectively, in 2002 and 2001. Substantially all of the charge-offs in those
years, related to two borrowers. In the previous three years, that ratio did not
exceed .21%. In the absence of sustained charge-off history, management
estimates loss percentages based upon the purpose and/or collateral of various
commercial loan categories. While such loss percentages exceed the percentages
suggested by historical experience, the Company maintained those percentages in
2003. The Company applied historical loss percentages for short-term consumer
loans and added additional reserves based on industry experience, which in some
cases is greater than the Company's experience. The Company will continue to
evaluate these percentages and may adjust these estimates on the basis of
charge-off history, economic conditions or other relevant factors. The Company
also provides specific reserves for impaired loans to the extent the estimated
realizable value of the underlying collateral is less than the loan balance,
when the collateral is the only source of repayment. Further, the Company
attempts to classify any applicable loans according to regulatory definitions,
for loans that may have characteristics that may decrease the probability of
full compliance with original loan terms. Consistent with regulatory reserve
allocations the classifications and percentage of principal which are allocated
to the allowance for loan losses are as follows: special mention-3%,
substandard-15%, and doubtful-50. Also, the Company may estimate and recognize
reserve allocations above these regulatory reserve percentages based upon any
factor that might impact the loss estimates. Those factors include but are not
limited to the impact of economic conditions on the borrower and management's
potential alternative strategies for loan or collateral disposition. In 2003,
the unallocated component increased $452,000 to $993,000, primarily for economic
reasons. The unallocated allowance is established for losses that have not been
identified through the formulaic and other specific components of the allowance
as described above. The unallocated portion is more subjective and requires a
high degree of management judgment and experience. Management has identified
several factors that impact credit losses that are not considered in either the
formula or the specific allowance segments. These factors consist of macro and
micro economic conditions, industry and geographic loan concentrations, changes
in the composition of the loan portfolio, changes in underwriting processes and
trends in problem loan and loss recovery rates. The impact of the above is
considered in light of management's conclusions as to the overall adequacy of
underlying collateral and other factors.
The majority of the Company's loan portfolio represents loans made for
commercial purposes, while significant amounts of residential property may serve
as collateral for such loans. The Company attempts to evaluate larger loans
individually, on the
REPUBLIC FIRST BANCORP | 39
- --------------------------------------------------------------------------------
basis of its loan review process, which scrutinizes loans on a selective basis;
and other available information. Even if all commercial purpose loans could be
reviewed, there is no assurance that information on potential problems would be
available. The Company's portfolios of loans made for purposes of financing
residential mortgages and consumer loans are evaluated in groups. At December
31, 2003, loans made for commercial and construction, residential mortgage and
consumer purposes, respectively, amounted to $457.2 million, $14.9 million and
$16.2 million.
The recorded investment in loans that are impaired in accordance with SFAS
114 totaled $5.5 million, $3.0 million and $4.3 million at December 31, 2003,
2002, and 2001 respectively. The amounts of related valuation allowances were
$1.4 million, $665,000 and $288,000 respectively at those dates. The increase in
2003 reflected impairment of $578,000 on the $1.9 million loan discussed under
"Credit Quality". For the years ended December 31, 2003, 2002, and 2001 the
average recorded investment in impaired loans was approximately $3.6 million,
$3.4 million, and $4.2 million, respectively. The Company did not recognize any
interest income on impaired loans during 2003 or 2002. There were no commitments
to extend credit to any borrowers with impaired loans as of the end of the
periods presented herein.
At December 31, 2003, and 2002, accruing substandard loans totaled
approximately $11.2 million and $12.9 million respectively; and doubtful loans
totaled approximately $895,000 and $493,000, respectively. The Banks had
delinquent loans as follows: (i) 30 to 59 days past due, at December 31, 2003,
and 2002, in the aggregate principal amount of $2.6 million and $1.2 million
respectively; and (ii) 60 to 89 days past due, at December 31, 2003, and 2002 in
the aggregate principal amount of $2.1 million and $2.6 million respectively.
The following table is an analysis of the change in Other Real Estate Owned for
the years ended December 31, 2003 and 2002.
Dollars in thousands
2003 2002
------------- -------------
Balance at January 1,......................................... $1,015 $1,858
Additions, net................................................ 207 515
Sales......................................................... 1,015 --
Write downs................................................... -- 1,358
------------- -------------
Balance at December 31,....................................... $207 $1,015
============= =============
REPUBLIC FIRST BANCORP | 40
- --------------------------------------------------------------------------------
Deposit Structure
Of the total daily average deposits of approximately $455.2 million held by
the Banks during the year ended December 31, 2003, approximately $75.5 million,
or 16.6%, represented non-interest bearing demand deposits, compared to
approximately $58.3 million, or 12.7%, of total daily average deposits during
2002. Total deposits at December 31, 2003, consisted of $82.3 million in
non-interest-bearing demand deposits, $73.3 million in interest-bearing demand
deposits, $110.4 million in savings and money market accounts, $102.5 million in
time deposits under $100,000 and $85.1 million in time deposits greater than
$100,000. In general, the Banks pay higher interest rates on time deposits
compared to other deposit categories. The Banks various deposit liabilities may
fluctuate from period-to-period, reflecting customer behavior and strategies to
optimize net interest income.
The following table is a distribution of the average balances of the Banks'
deposits and the average rates paid thereon, for the twelve months periods ended
December 31, 2003, 2002 and 2001.
For the Years Ended December 31,
---------------------------------------------------------------------------------
(Dollars in thousands)
2003 2002 2001
---------------------- ----------------------- --------------------------
Average Average Average
Balance Rate Balance Rate Balance Rate
--------- -------- ---------- -------- ------------ --------
Demand deposits,
non-interest-bearing ................. $ 75,469 --% $ 58,338 --% $ 50,179 --%
Demand deposits, interest-bearing .... 59,274 0.76% 47,019 1.06% 37,214 1.71%
Money market & savings deposits ...... 127,685 1.34% 112,321 1.70% 93,447 3.15%
Time deposits ........................ 192,735 3.24% 240,230 3.87% 261,281 6.03%
-------- ---- -------- ---- -------- ----
Total deposits ....................... $455,163 1.85% $457,908 2.55% $442,121 4.38%
======== ==== ======== ==== ======== ====
The following is a breakdown by contractual maturity, of the Company's
time certificates of deposit issued in denominations of $100,000 or more as of
December 31, 2003.
Certificates of Deposit
------------------------
(Dollars in thousands)
2003
-------------
Maturing in:
Three months or less............................... $42,282
Over three months through six months............... 16,138
Over six months through twelve months.............. 8,845
Over twelve months................................. 17,817
------------
Total............................................ $85,082
============
The following is a breakdown, by contractual maturities of the Company's
time certificates of deposit for the years 2004 through 2008 and beyond (dollars
in thousands).
2004 2005 2006 2007 2008 Thereafter Totals
---- ---- ---- ---- ---- ---------- ------
(Dollars in thousands)
Time certificates of deposit $128,889 $ 36,583 $ 13,051 $ 1,326 $ 7,731 $ 10 $187,590
======== ======== ======== ======== ======== ======== ========
REPUBLIC FIRST BANCORP | 41
- --------------------------------------------------------------------------------
Recent Accounting Pronouncements
The Company adopted FIN 45 Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others on January 1, 2003. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. The Company has financial and performance letters of credit.
Financial letters of credit require the Company to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Company to make payments if the
customer fails to perform certain non-financial contractual obligation. The
Company previously did not record a liability, except for the initial fees
received, when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002.
The maximum potential undiscounted amount of future payments of these letters of
credit as of December 31, 2003 is $4.0 million and they expire as follows $3.8
million in 2004, $89,000 in 2005 and $40,000 after 2008. Amounts due under these
letters of credit would be reduced by any proceeds that the Company would be
able to obtain in liquidating the collateral for the loans, which varies
depending on the customer.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, to certain
entities in which voting rights are not effective in identifying the investor
with the controlling financial interest. An entity is subject to consolidation
under FIN 46 if the investors either do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support, are unable to direct the entity's activities, or are not exposed to the
entity's losses or entitled to its residual returns ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both.
Management has determined that Republic First Capital Trust I, utilized
for the Company's $6,000,000 of pooled trust preferred securities issuance,
qualifies as a variable interest entity under FIN 46. Republic First Capital
Trust I issued mandatorily redeemable preferred stock to investors and loaned
the proceeds to the Company. Republic First Capital Trust I holds, as its sole
asset, subordinated debentures issued by the Company in 2001. Republic First
Capital Trust I is currently included in the Company's consolidated balance
sheet and statements of income. The Company has evaluated the impact of FIN 46
and concluded it should continue to consolidate Republic First Capital Trust I
as of December 31, 2003, in part due to its ability to call the preferred stock
prior to the mandatory redemption date and thereby benefit from a decline in
required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to certain
variable interest entities by March 31, 2004. The Company plans to adopt the
provisions under the revised interpretation in the first quarter of 2004. FIN
46(R) will require deconsolidation of Republic First Capital Trust I as of March
31, 2004 for public companies. FIN 46(R) precludes consideration of the call
option embedded in the preferred stock when determining if the Company has the
right to a majority of Republic First Capital Trust I's expected residual
returns. Accordingly, the Company will deconsolidate Republic First Capital
Trust I at the end of the first quarter, which will result in an increase in
outstanding debt by $186,000. The banking regulatory agencies have not issued
any guidance that would change the regulatory capital treatment for the trust
preferred securities issued by Republic First Capital Trust I based on the
adoption of FIN 46(R). However, as additional interpretations from the banking
regulators related to entities such as Republic First Capital Trust I become
available, management will reevaluate its potential impact to its Tier I capital
calculation under such interpretations, if any.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future. Management does not anticipate the adoption of
SFAS No. 149 to have a material impact on the Company's financial position or
results of operations. Adoption of FAS 149 did not have a material impact on the
Company's financial statements.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No.
150 changes the classification in the statement of financial position of certain
common
REPUBLIC FIRST BANCORP | 42
- --------------------------------------------------------------------------------
financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. The Company
currently classifies its Corporation -obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior obligations of the
corporation as a liability. As a result, management does not anticipate the
adoption of SFAS No. 150 to have a material impact on the Company's financial
position or results of operations.
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with the
evidence of deterioration of credit quality since origination acquired by
completion of a transfer for which it is probable at acquisition, that the
Company will be unable to collect all contractually required payments
receivable. SOP 03-3 required that the Company recognize the excess of all cash
flows expected at acquisition over the investor's initial investment in the loan
as interest income on a level yield basis over the life of the loan as the
accretable yield. The loan's contractual required payments receivable in excess
of the amount of its cash flows excepted at acquisition (nonaccretable
difference) should not be recognized as an adjustment to yield, a loss accrual
or a valuation allowance for credit risk. SOP 03-3 is effective for loans
acquired in fiscal years beginning after December 31, 2004. Early adoption is
permitted. Management is currently evaluating the provisions of SOP 03-3.
The Company adopted EITF 03-1, The Meaning of Other than Temporary
Impairment and Its Application to Certain Investments as of December 31, 2003.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under FAS 115, Accounting
for Certain Investments in Debt and Equity Securities that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's need and ability to react to
changes in interest rates. As discussed previously, Management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest income
from being affected by wide interest rate fluctuations.
REPUBLIC FIRST BANCORP | 43
- --------------------------------------------------------------------------------
The following tables are summary unaudited income statement information for
each of the quarters ended during 2003 and 2002.
Summary of Selected Quarterly Consolidated Financial Data
For the Quarter Ended, 2003
---------------------------------------------------
(Dollars in thousands,
except per share data) Fourth Third Second First
------- ------- ------- -------
Income Statement Data:
Total interest income (1) $ 8,124 $ 8,167 $12,554 $13,559
Total interest expense 3,847 4,086 4,260 4,460
------- ------- ------- -------
Net interest income 4,277 4,081 8,294 9,099
Provision for loan losses 419 647 2,286 3,412
Non-interest income (1) 2,918 2,826 497 895
Non-interest expense 4,928 4,421 4,771 4,605
Federal income tax expense 611 606 583 684
------- ------- ------- -------
Net income $ 1,237 $ 1,233 $ 1,151 $ 1,293
======= ======= ======= =======
Per Share Data:
Basic:
Net income $ 0.19 $ 0.19 $ 0.18 $ 0.21
======= ======= ======= =======
Diluted:
Net income $ 0.18 $ 0.18 $ 0.17 $ 0.20
======= ======= ======= =======
For the Quarter Ended, 2002
----------------------------------------------------
Fourth Third Second First
------- ------- ------- -------
Income Statement Data:
Total interest income $10,505 $10,934 $11,236 $11,448
Total interest expense 4,694 4,925 5,094 5,449
------- ------- ------- -------
Net interest income 5,811 6,009 6,142 5,999
Provision for loan losses (2) 1,810 965 1,248 1,280
Non-interest income 554 724 1,069 935
Non-interest expense (3) 4,071 5,653 4,557 4,305
Federal income tax expense 159 49 485 461
------- ------- ------- -------
Net income $ 325 $ 66 $ 921 $ 888
======= ======= ======= =======
Per Share Data:
Basic:
Net income $ 0.05 $ 0.01 $ 0.15 $ 0.14
======= ======= ======= =======
Diluted:
Net income $ 0.05 $ 0.01 $ 0.14 $ 0.14
======= ======= ======= =======
- ------------------------------------------------------------------------------------------
<FN>
(1) The decreases in interest income and increases in non-interest income
beginning in the third quarter of 2003, resulted primarily from the sale of the
majority of short-term loans, beginning in that quarter. Previously, larger
amounts of such loans were retained by the Company.
(2) The Company reserved $900,000 in the fourth quarter of 2002 due to a change
resulting from loan loss methodology.
(3) The Company wrote down the value of a single other real estate owned
property by $1.4 million during the third quarter of 2002.
</FN>
REPUBLIC FIRST BANCORP | 44
- --------------------------------------------------------------------------------
Item 8: Financial Statements and Supplementary Data
The financial statements of the Company begin on Page 49.
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
KPMG LLP was previously the principal accountants for Republic First
Bancorp, Inc. and subsidiaries. On April 5, 2002, that firm was dismissed and
Grant Thornton LLP was engaged as principal accountants. The decision to change
accountants was approved by the board of directors.
In connection with the audits of the fiscal year ended December 31, 2001,
and the subsequent interim period through April 5, 2002, there were no
disagreements with KPMG LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.
The audit reports of KPMG LLP on the consolidated financial statements of
Republic First Bancorp, Inc. and subsidiaries as of and for the year ended
December 31, 2001 did not contain any adverse opinion or disclaimer of opinion,
nor were they qualified or modified as to uncertainty, audit scope, or
accounting principles.
Item 9a: Controls and Procedures
An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by us under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Based upon that
evaluation, our CEO and CFO concluded that, as of the end of the period covered
by this Annual Report, our disclosure controls and procedures were effective to
provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms. There has been no change in our internal
control over financial reporting identified in connection with that evaluation
that occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
REPUBLIC FIRST BANCORP | 45
- --------------------------------------------------------------------------------
PART III
Item 10: Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities
Exchange Commission in connection with the Company's 2004 annual meeting of
shareholders scheduled for April 27, 2004.
Item 11: Executive Compensation
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities
Exchange Commission in connection with the Company's 2004 annual meeting of
shareholders scheduled for April 27, 2004.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities remaining available
be issued upon exercise exercise price of for future issuance under equity
of outstanding options, outstanding options, compensation plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
Equity compensation
plans approved by
security holders 744,135 $5.70 0
Equity compensation
plans not approved by
security holders:
Incentives to acquire new 46,000 10.70 0
employees ------- ----- --
Total 790,135 $5.99 0
------- ----- --
Item 13: Certain Relationships and Related Transactions
Certain of the directors of the Company and/or their affiliates have loans
outstanding from the Banks. All such loans were made in the ordinary course of
the Banks' business; were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons; and, in the opinion of management, do not
involve more than the normal risk of collectibility or present other unfavorable
features.
Harry D. Madonna is of counsel to Spector Gadon and Rosen effective January
2, 2002. In 2003, the Company paid $1,044,000 in legal fees to that firm,
primarily for loan workout and collection matters.
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities
Exchange Commission in connection with the Company's 2004 annual meeting of
shareholders scheduled for April 27, 2004.
REPUBLIC FIRST BANCORP | 46
- --------------------------------------------------------------------------------
PART IV
-------
Item 15: Exhibits, Financial Statements and Reports on Form 8-K
A. Financial Statements Page 49
(1) Independent Auditors Report-Grant Thornton LLP
(2) Independent Auditors Report-KPMG LLP
(3) Consolidated Balance Sheets as of December 31, 2003 and 2002.
(4) Consolidated Statements of Income for the years ended December
31, 2003, 2002, and 2001.
(5) Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002, and 2001.
(6) Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 2003, 2002, and 2001.
(7) Notes to Consolidated Financial Statements.
B. Exhibits
The following Exhibits are filed as part of this report. (Exhibit numbers
correspond to the exhibits required by Item 601 of Regulation S-K for an annual
report on Form 10-K)
Exhibit No.
-----------
21 Subsidiaries of the Company.
Republic First Bank (the "PA Bank"), a wholly-owned subsidiary,
commenced operations on November 3, 1988. The PA Bank is a commercial
bank chartered pursuant to the laws of the Commonwealth of
Pennsylvania. First Bank of Delaware ("DE Bank") is also a
wholly-owned subsidiary of the Company, and commenced operations June
1, 1999. The DE Bank is a commercial bank chartered pursuant to the
laws of the State of Delaware. The PA Bank and the DE Bank are
primarily regulated by the FDIC.
23.1 Consent of Grant Thornton LLP
(a) Consent of KPMG LLP
31.1 Certification of Chairman and Chief Executive Officer of Republic
First Bancorp, Inc., pursuant to Commission Rule 13a-14(a) and Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Executive Vice President and Chief Financial
Officer of Republic First Bancorp, Inc., pursuant to Commission Rule
13a-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications under Section 906 of the Sarbanes Oxley-Act
32.1 Harry D. Madonna
32.2 Paul Frenkiel
All other schedules and exhibits are omitted because they are not applicable or
because the required information is set out in the financial statements or the
notes thereto.
Reports on Form 8-K
Filed April 17,2003
Filed June 27,2003
Filed July 21, 2003
Filed October 2, 2003
Filed October 23, 2003
REPUBLIC FIRST BANCORP | 47
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania.
REPUBLIC FIRST BANCORP, INC. [registrant]
Date: March 25, 2004 By:/s/ Harry D. Madonna
---------------------------------
Harry D. Madonna
President and
Chief Executive Officer
Date: March 25, 2004 By:/s/ Paul Frenkiel
---------------------------------
Paul Frenkiel,
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Date: March 25, 2004 /s/ Harris Wildstein, Esq.
-----------------------------------
Harris Wildstein, Esq., Director
/s/ Neal I. Rodin
-----------------------------------
Neal I. Rodin, Director
/s/ Steven J. Shotz
-----------------------------------
Steven J. Shotz, Director
/s/ Harry D. Madonna
-----------------------------------
Harry D. Madonna, Director and
Chairman of the Board
/s/ Kenneth Adelberg
-----------------------------------
Kenneth Adelberg, Director
/s/ William Batoff
-----------------------------------
William Batoff, Director
/s/ Robert Coleman
-----------------------------------
Robert Coleman, Director
REPUBLIC FIRST BANCORP | 48
- --------------------------------------------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
REPUBLIC FIRST BANCORP, INC.
Page
----
Independent Auditors Reports 50
Consolidated Balance Sheets as of December 31, 2003 and 2002 52
Consolidated Statements of Income
for the years ended December 31, 2003, 2002, and 2001 53
Consolidated Statements of Cash Flows
for the years ended December 31, 2003, 2002, and 2001 54
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2003, 2002, and 2001 55
Notes to Consolidated Financial Statements 56
REPUBLIC FIRST BANCORP | 49
- --------------------------------------------------------------------------------
Report of Independent Certified Public Accountants
Board of Directors
Republic First Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of
Republic First Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Republic First Bancorp, Inc. and Subsidiaries as of December 31, 2003 and 2002,
and the consolidated results of their operations and their consolidated cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
January 16, 2004
REPUBLIC FIRST BANCORP | 50
- --------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Directors
Republic First Bancorp, Inc.:
We have audited the accompanying consolidated statements of income,
changes in shareholders' equity and comprehensive income/(loss), and cash flows
for the year ended December 31, 2001. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of their operations and
their cash flows for the year ended December 31, 2001 of Republic First Bancorp,
Inc. in conformity with accounting principles generally accepted in the United
States of America.
/s/KPMG LLP
January 22, 2002
REPUBLIC FIRST BANCORP | 51
- --------------------------------------------------------------------------------
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(dollars in thousands, except per share data)
2003 2002
----------- ------------
ASSETS:
Cash and due from banks........................................................... $ 28,103 $ 18,114
Interest bearing deposits with banks.............................................. 3,547 3,570
Federal funds sold................................................................ 38,952 51,126
----------- ------------
Total cash and cash equivalents.............................................. 70,602 72,810
Other interest-earning restricted cash............................................ 3,483 4,228
Investment securities available for sale, at fair value........................... 61,686 87,291
Investment securities held to maturity, at amortized cost
(fair value of $8,300 and $9,297 respectively)............................... 8,260 9,270
Loans receivable, (net of allowance for loan losses of $8,696 and
$6,642, respectively)........................................................ 479,523 457,047
Premises and equipment, net....................................................... 4,412 5,000
Other real estate owned, net...................................................... 207 1,015
Accrued interest receivable....................................................... 3,710 3,777
Business owned life insurance..................................................... 11,763 --
Other assets...................................................................... 11,146 7,254
----------- ------------
Total Assets................................................................. $654,792 $647,692
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand-- non-interest-bearing..................................................... $ 82,311 $ 59,194
Demand-- interest-bearing......................................................... 73,315 54,653
Money market and savings.......................................................... 110,389 119,213
Time less than $100,000........................................................... 102,508 139,356
Time over $100,000................................................................ 85,082 83,886
----------- ------------
Total Deposits............................................................... 453,605 456,302
Short-term borrowings............................................................. 2,852 --
FHLB advances..................................................................... 125,000 125,000
Accrued interest payable.......................................................... 2,841 3,596
Other liabilities................................................................. 8,118 5,518
Corporation-obligated mandatorily redeemable capital securities of subsidiary
trust holding solely junior obligations of the corporation .................. 6,000 6,000
----------- ------------
Total Liabilities............................................................ $598,416 $596,416
----------- ------------
Commitments and contingencies
Shareholders' Equity:
Common stock, par value $0.01 per share; 20,000,000 shares authorized; shares
issued 6,697,660 as of December 31, 2003 and
6,405,592 as of December 31, 2002............................................ 67 64
Additional paid in capital........................................................ 33,396 32,305
Retained earnings................................................................. 23,674 18,760
Treasury stock at cost (175,172 shares)........................................... (1,541) (1,541)
Accumulated other comprehensive income............................................ 780 1,688
----------- ------------
Total Shareholders' Equity................................................... 56,376 51,276
----------- ------------
Total Liabilities and Shareholders' Equity................................... $654,792 $647,692
=========== ============
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 52
- --------------------------------------------------------------------------------
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2003, 2002 and 2001
(dollars in thousands, except per share data)
2003 2002 2001
----------- ----------- -----------
Interest income:
Interest and fees on loans................................................. $38,651 $37,080 $38,586
Interest on federal funds sold and other interest-earning assets........... 895 759 1,304
Interest and dividends on investment securities............................ 2,858 6,284 9,124
----------- ----------- -----------
42,404 44,123 49,014
----------- ----------- -----------
Interest expense:
Demand - interest bearing.................................................. 448 497 636
Money market and savings................................................... 1,708 1,907 2,948
Time less than $100,000.................................................... 4,088 5,963 10,245
Time over $100,000......................................................... 2,155 3,327 5,522
Other borrowings........................................................... 8,254 8,468 9,308
----------- ----------- -----------
16,653 20,162 28,659
----------- ----------- -----------
Net interest income............................................................. 25,751 23,961 20,355
Provision for loan losses....................................................... 6,764 5,303 3,964
----------- ----------- -----------
Net interest income after provision for loan losses............................. 18,987 18,658 16,391
----------- ----------- -----------
Non-interest income:
Loan advisory and servicing fees........................................... 585 1,218 1,358
Service fees on deposit accounts........................................... 1,446 1,227 1,188
Gains on investment securities sold........................................ - - 13
Gain on sale of other real estate owned.................................... 224 - -
Short-term loan fee income................................................. 4,026 - -
Tax refund products........................................................ 487 761 283
Other income............................................................... 368 76 102
----------- ----------- -----------
7,136 3,282 2,944
----------- ----------- -----------
Non-interest expenses:
Salaries and employee benefits............................................. 9,798 8,483 8,396
Occupancy ................................................................. 1,536 1,429 1,367
Depreciation............................................................... 1,416 1,045 954
Legal...................................................................... 986 1,721 826
Other real estate ......................................................... 240 1,452 19
Advertising ............................................................... 190 413 561
Other operating expenses................................................... 4,559 4,043 4,057
----------- ----------- -----------
18,725 18,586 16,180
----------- ----------- -----------
Income before income taxes...................................................... 7,398 3,354 3,155
----------- ----------- -----------
Provision for income taxes...................................................... 2,484 1,154 1,041
----------- ----------- -----------
Net Income...................................................................... $ 4,914 $ 2,200 $ 2,114
=========== =========== ===========
Net income per share:
Basic .......................................................................... $ 0.76 $ 0.35 $ 0.34
----------- ----------- -----------
Diluted......................................................................... $ 0.73 $ 0.34 $ 0.33
=========== =========== ===========
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 53
- --------------------------------------------------------------------------------
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS of CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
(dollars in thousands)
2003 2002 2001
---------- ---------- -----------
Cash flows from operating activities:
Net income............................................................. $ 4,914 $ 2,200 $ 2,114
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.......................................... 6,764 5,303 3,964
Write down or loss of other real estate owned...................... 56 1,358 -
Gain on sale of other real estate owned............................ (224) - -
Depreciation ...................................................... 1,416 1,045 954
Gains on sales of securities sold.................................. - - 13
Amortization of securities......................................... 192 317 348
Increase in value of business owned life insurance................. (263) - -
Decrease in accrued interest receivable and other assets........... (3,190) (2,487) 1,199
Increase (decrease) in accrued expenses and other liabilities...... 1,845 (655) (845)
---------- ---------- -----------
Net cash provided by operating activities.............................. 11,510 7,081 7,747
---------- ---------- -----------
Cash flows from investing activities:
Purchase of securities:
Available for sale................................................. (31,894) (17,507) -
Held to maturity................................................... (2,571) (1,273) (4,638)
Proceeds from maturities and calls of securities:
Available for sale................................................. 6,500 4,500 1,000
Held to maturity................................................... 35 2,765 10,446
Proceeds from sale of securities:
Available for sale................................................. 1,003 - 7,842
Principal collected on MBS's and CMO's:
Available for sale................................................. 48,429 42,364 31,631
Held to maturity................................................... 3,546 812 334
Net decrease (increase) in loans....................................... (29,447) 1,023 (51,397)
Net proceeds from sale of real estate owned............................ 1,015 - -
Purchase of business owned life insurance.............................. (11,500) - -
Decrease (increase) in other interest-earning restricted cash.......... 745 685 (4,913)
Premises and equipment expenditures.................................... (828) (834) (1,012)
---------- ---------- -----------
Net cash provided by (used in) investing activities.................... (14,967) 32,535 (10,707)
---------- ---------- -----------
Cash flows from financing activities:
Net proceeds from exercise of stock options............................ 1,094 189 -
Net increase in demand, money market and savings....................... 32,955 36,113 46,371
Net decrease in time deposits.......................................... (35,652) (27,028) (24,706)
Proceeds from issuance of trust preferred securities.................. - - 6,000
Net increase ( decrease) in other borrowings less than 90 days......... 2,852 - (16,442)
Repayment of other borrowings greater than 90 days..................... - (17,500) (17,500)
---------- ---------- -----------
Net cash provided by (used in) financing activities.................... 1,249 (8,226) (6,277)
---------- ---------- -----------
Increase (decrease) in cash and cash equivalents........................... (2,208) 31,390 (9,237)
Cash and cash equivalents, beginning of year............................... 72,810 41,420 50,657
---------- ---------- -----------
Cash and cash equivalents, end of year..................................... $70,602 $72,810 $41,420
========== ========== ===========
Supplemental disclosures:
Interest paid.......................................................... 17,408 20,913 31,403
Income taxes paid...................................................... 2,650 4,025 2,100
Non-monetary transfers from loans to other real estate owned........... $ 207 $ 515 $ 1,858
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 54
- --------------------------------------------------------------------------------
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(dollars in thousands)
Accumulated
Additional Other Total
Comprehensive Common Paid in Retained Treasury Comprehensive Shareholders'
Income/(loss) Stock Capital Earnings Stock Income (loss) Equity
-------------- -------- ---------- -------- -------- ------------- -------------
Balance January 1, 2001................ $63 $32,117 $14,446 $(1,541) $(2,055) $43,030
--------- ---------- ------- -------- ------------ ----------
Total other comprehensive income, net
of reclassification adjustments and 1,699 - - - - 1,699 1,699
taxes
Net income for the year................ 2,114 - - 2,114 - 2,114
-----------
Total comprehensive income............. $ 3,813
===========
--------- ---------- ------- -------- ------------ ----------
Balance December 31, 2001.............. 63 32,117 16,560 (1,541) (356) 46,843
--------- ---------- ------- -------- ------------ ----------
- ---------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income, net
of reclassification adjustments and 2,044 - - - - 2,044 2,044
taxes
Net income for the year................ 2,200 - - 2,200 - - 2,200
-----------
Total comprehensive income............. $ 4,244 - - - - - -
===========
Options exercised...................... 1 188 - - - 189
--------- ---------- ------- -------- ------------ ----------
Balance December 31, 2002................. 64 32,305 18,760 (1,541) 1,688 51,276
- ---------------------------------------------------------------------------------------------------------------------------
Total other comprehensive loss, net of
reclassification adjustments and taxes. (908) - - - - (908) (908)
Net income for the year................ 4,914 - - 4,914 - - 4,914
-----------
Total comprehensive income............. $ 4,006 - - - - - -
===========
Options exercised...................... 3 1,091 - - - 1,094
--------- ---------- ------- -------- ------------ ----------
Balance December 31, 2003................. $67 $33,396 $23,674 $(1,541) $ 780 $56,376
========= ========== ======= ======== ============ ==========
(See notes to consolidated financial statements)
REPUBLIC FIRST BANCORP | 55
- --------------------------------------------------------------------------------
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization:
Republic First Bancorp, Inc. is a two-bank holding company organized and
incorporated under the laws of the Commonwealth of Pennsylvania. Its
wholly-owned subsidiary, Republic First Bank (the PA Bank"), offers a variety of
banking services to individuals and businesses throughout the Greater
Philadelphia and South Jersey area through its offices and branches in
Philadelphia and Montgomery Counties.
Its other wholly-owned subsidiary, First Bank of Delaware ("DE Bank"), a
Delaware State chartered Bank is located at Brandywine Commons II, Concord Pike
and Rocky Run Parkway in Brandywine, New Castle County Delaware. The DE Bank
offers many of the same services and financial products as the PA Bank, and
additionally offers nationally, short-term consumer loans and other loan
products not offered by the PA Bank.
The Company and the Banks encounter vigorous competition for market share
from bank holding companies, other community banks, thrift institutions and
other non-bank financial organizations, such as mutual fund companies, insurance
companies and brokerage companies.
The Company and the Banks are subject to regulations of certain state and
federal agencies. These regulatory agencies periodically examine the Company and
its subsidiaries for adherence to laws and regulations. As a consequence, the
cost of doing business may be affected.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements of the Company include the accounts
of Republic First Bancorp, Inc. and its wholly-owned subsidiaries, Republic
First Bank and First Bank of Delaware, (together, the "Banks"). Such statements
have been presented in accordance with accounting principles generally accepted
in the United States of America or applicable to the banking industry. All
significant inter-company accounts and transactions have been eliminated in the
consolidated financial statements.
Risks and Uncertainties and Certain Significant Estimates:
The earnings of the Company depend on the earnings of the Banks. The Banks
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of the Banks are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Prepayments on residential real estate mortgage and other fixed rate loans
and mortgage backed securities vary significantly and may cause significant
fluctuations in interest margins.
Short-term consumer loans were first offered through the DE Bank in 2001.
At December 31, 2003, there was approximately $1.4 million of short-term
consumer loans outstanding, which were originated in Georgia. The DE Bank also
originates loans in Texas, California, Arizona and Ohio which are sold to third
parties. Legislation eliminating, or limiting interest rates upon short-term
consumer loans has from time to time been proposed, primarily as a result of fee
levels which approximate 17% per $100 borrowed, for two week terms. If such
proposals cease, a larger number of competitors may begin offering the product,
and increased competition could result in lower fees. Further, the 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.
In 2001, the DE Bank began offering two tax refund products with Liberty
Tax Service. Liberty Tax Service is a nationwide tax service provider that
prepares and electronically files federal and state income tax returns ("Tax
Refund Products"). Tax Refund Products consist of accelerated check refunds
("ACRs"), and refund anticipation loans ("RALs"). There can be no assurance that
revenue levels will increase significantly in future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make significant estimates and assumptions that affect the
reported amounts of assets and
REPUBLIC FIRST BANCORP | 56
- --------------------------------------------------------------------------------
liabilities and disclosures of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Since the allowance for loan losses and carrying value of other real estate
owned are dependent, to a great extent, on the general economy and other
conditions that may be beyond the Banks' control, it is at least reasonably
possible that the estimates of the allowance for loan losses and the carrying
values of other real estate owned could differ materially in the near term.
The Company and its subsidiaries are subject to federal and state
regulations governing virtually all aspects of their activities, including but
not limited to, lines of business, liquidity, investments, the payment of
dividends, and others. Such regulation and the cost of adherence to such
regulations can have a significant impact on earnings and financial condition.
Cash and Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all
cash and due from banks, interest-bearing deposits with an original maturity of
ninety days or less and federal funds sold to be cash and cash equivalents.
Restrictions on Cash and Due From Banks:
The Banks are required to maintain certain average reserve balances as
established by the Federal Reserve Board. The amounts of those balances for the
reserve computation periods that include December 31, 2003, and 2002, were $7.8
million and $6.6 million, respectively. These requirements were satisfied
through the restriction of vault cash and a balance at the Federal Reserve Bank
of Philadelphia.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. These funds are not
considered cash equivalents because the Company is contractually obligated to
provide these funds and are not immediately able to withdraw the funds.
Investment Securities:
Debt and equity investment securities are classified in one of three
categories, as applicable, and accounted for as follows: debt securities which
the Company has the positive intent and ability to hold to maturity are
classified as "securities held to maturity" and are reported at amortized cost;
debt and equity securities that are bought and sold in the near term are
classified as "trading" and are reported at fair market value with unrealized
gains and losses included in earnings; and debt and equity securities not
classified as either held to maturity and/or trading securities are classified
as "investment securities available for sale" and are reported at fair market
value with net unrealized gains and losses, net of tax, reported as a separate
component of shareholders' equity. Gains or losses on disposition are based on
the net proceeds and cost of securities sold, adjusted for amortization of
premiums and accretion of discounts, using the specific identification method.
The Company does not have any investment securities designated as trading as of
December 31, 2003 and 2002.
Loans and Allowance for Loan Losses:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are stated at the amount of
unpaid principal, reduced by unearned income and an allowance for loan losses.
Interest on loans is calculated based upon the principal amounts outstanding.
The Company defers and amortizes certain origination and commitment fees, and
certain direct loan origination costs over the contractual life of the related
loan. This results in an adjustment of the related loans yield.
The Company accounts for amortization of premiums and accretion of
discounts related to loans purchased and investment securities based upon the
effective interest method. If a loan prepays in full before the contractual
maturity date, any unamortized premiums, discounts or fees are recognized
immediately as an adjustment to interest income.
Loans are generally classified as non-accrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well-secured and in the process of collection. Loans that
are on a current payment status or past due less than 90 days may also be
classified as non-accrual if repayment in full of principal and/or interest is
in doubt. Loans may be returned to accrual status when all principal and
interest amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance of interest and principal
REPUBLIC FIRST BANCORP | 57
- --------------------------------------------------------------------------------
by the borrower, in accordance with the contractual terms. Generally, in the
case of non-accrual loans, cash received is applied to reduce the principal
outstanding.
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loans are charged against the allowance when
management believes that the collectibility of the loan principal is unlikely.
Recoveries on loans previously charged off are credited to the allowance.
The allowance is an amount that represents management's best estimate of
known and inherent loan losses. Management's evaluations of the allowance for
loan losses consider such factors as an examination of the portfolio, past loss
experience, the results of the most recent regulatory examination, current
economic conditions and other relevant factors.
The Company accounts for its impaired loans in accordance with SFAS No.
114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No.
118, Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. This standard requires that a creditor measure impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent. Regardless of the
measurement method, a creditor must measure impairment based on the fair value
of the collateral when the creditor determines that foreclosure is probable.
The Company considers residential mortgage loans with balances less than
$250,000 and consumer loans, including home equity lines of credit, to be small
balance homogeneous loans. These loan categories are collectively evaluated for
impairment. Jumbo mortgage loans, those with balances greater than $250,000,
commercial business loans and commercial real estate loans are individually
measured for impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all collateral
dependent loans are measured for impairment based on the fair market value of
the collateral.
The Company accounts for the transfers and servicing financial assets in
accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. SFAS No. 140 revises the
standards for accounting for the securitizations and other transfers of
financial assets and collateral.
On July 6, 2001, Staff Accounting Bulletin (SAB) No. 102, Selected Loan
Loss Allowance Methodology and Documentation Issues was issued. SAB No. 102
provides guidance on the development, documentation and application of a
systematic methodology for determining the allowance for loans and leases in
accordance with US GAAP and is effective upon issuance. The adoption of SAB No.
102 did not have a material impact on the Company's financial positions or
results of operations.
Fees earned on short-term loans which are not sold are recorded as interest
income. At December 31, 2003, there were approximately $1.4 million of these
loans outstanding.
The majority of short-term loans are now sold to third parties effective
in the third quarter of 2003. The DE Bank records fees for on sold loans as
non-interest income. The DE Bank had total short-term loan participations sold
of $16.2 million at December 31, 2003. The Company evaluated these sales and
determined that they qualified as such under FASB 140.
Premises and Equipment:
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of furniture and equipment is calculated over the
estimated useful life of the asset using the straight-line method. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
terms of their respective leases, using the straight-line method. Repairs and
maintenance are charged to current operations as incurred, and renewals and
betterments are capitalized.
The Company adopted SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets on January 1, 2002. SFAS No. 144 retains the
existing requirements to recognize and measure the impairment of long-lived
assets to be held and used or to be disposed of by sale. SFAS No. 144 changes
the requirements relating to reporting the effects of a disposal or
discontinuation of a segment of a business. The adoption of this statement did
not have a material impact on the Companies financial condition or results of
operations.
Other Real Estate Owned:
Other real estate owned consists of foreclosed assets and is stated at the
lower of cost or estimated fair market value less estimated costs to sell the
property. Costs to maintain other real estate owned, or deterioration in value
of the properties are
REPUBLIC FIRST BANCORP | 58
- --------------------------------------------------------------------------------
recognized as period expenses. There is no valuation allowance associated with
the Company's other real estate portfolio for the periods presented. At December
31, 2003, the Company had retail stores classified as other real estate owned
with a value of $207,000.
Business Owned Life Insurance:
The Company utilizes business owned life insurance (BOLI) to purchase life
insurance on certain employees. The Company is the owner of the policies, which
provide certain tax benefits. At December 31, 2003, the Company owned $11.8
million in BOLI, and previously did not utilize that life insurance. In 2003,
the Company recognized $263,000 in related income.
Advertising Costs:
It is the Company's policy to expense advertising costs in the period in
which they are incurred.
Income Taxes:
The Company accounts for income taxes under the liability method of
accounting. Deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities at the tax rates expected to be in effect
when the temporary differences are realized or settled. In addition, a deferred
tax asset is recorded to reflect the future benefit of net operating loss
carryforwards. The deferred tax assets may be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
Earnings Per Share:
Earnings per share ("EPS") consists of two separate components, basic EPS
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents ("CSE"). Common
stock equivalents consist of dilutive stock options granted through the
Company's stock option plan. The following table is a reconciliation of the
numerator and denominator used in calculating basic and diluted EPS. Common
stock equivalents, which are antidilutive are not included for purposes of this
calculation. At December 31, 2003, 2002, and 2001, there were 0, 68,840 at $6.62
to $9.09 per share, and 114,840 at $5.00 to $9.09 per share of stock options to
purchase common stock, which were not included in the computation of earnings
per share because the option price is greater than the average market price,
respectively.
(In thousands, except per share data) 2003 2002 2001
-------- --------- ---------
Income before cumulative effect of a change in accounting principle
(numerator for basic and diluted earnings per share).............. $4,914 $2,200 $2,114
======= ======== ========
Per Per Per
Shares Share Shares Share Shares Share
------------ ------------ ------------ ------------ ------------ ----------
Weighted average shares outstanding for the
period
(denominator for basic earnings per share).... 6,432,590 6,205,328 6,182,954
Earnings per share-- basic....................... $0.76 $0.35 $0.34
Effect of dilutive stock options................. 296,041 254,879 180,398
------------ ------------ ------------
Effect on basic earnings per share of CSE........ (0.03) (0.01) (0.01)
------------ ------------ ----------
Weighted average shares outstanding- diluted 6,728,631 6,460,207 6,363,352
============ ============ ============
Earnings per share-- diluted..................... $0.73 $0.34 $0.33
============ ============ ==========
REPUBLIC FIRST BANCORP | 59
- --------------------------------------------------------------------------------
Stock Based Compensation:
The company accounts for stock options under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which
contains a fair valued-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees. Entities that continue to account for stock options
using APB Opinion 25 are required to make pro forma disclosures of net income
and earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied.
At December 31, 2003, the Company had a stock-based employee compensation
plan, which is more fully described in note 16. The Company accounts for that
plan under the recognition and measurement principles of APB No. 25, Accounting
for Stock Issued to Employees, and related interpretations. Stock-based employee
compensation costs are not reflected in net income, as all options granted under
the plan had an exercise price equal to the market vale of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share if the company had applied the fair value
recognition provisions of SFAS No. 123, to stock-based employee compensation (in
thousands, except per share amounts).
Stock Based Compensation
----------------------------------------
(Dollars in thousands)
2003 2002 2001
---------- ---------- ---------
Net income as reported.............................. $4,914 $2,200 $2,114
Less : Stock based compensation costs determined
under fair value based method for all awards..... 366 418 294
---------- ---------- ---------
Net income, pro-forma............................... $4,548 $1,782 $1,820
---------- ---------- ---------
Earnings per common share- basic: As reported $0.76 $0.35 $0.34
========== ========== =========
Pro-forma $0.71 $0.28 $0.29
---------- ---------- ---------
Earnings per common share- diluted: As reported $0.73 $0.34 $0.33
---------- ---------- ---------
Pro-forma $0.68 $0.28 $0.29
========== ========== =========
The proforma compensation expense is based upon the fair value of the
option at grant date. The fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 2003, 2002 and 2001, respectively;
dividend yields of 0% for all three periods; expected volatility of 34% for
2003, 31% for 2002 and 35% for 2001; risk-free interest rates of 3.48%, 4.0% and
4.7%, respectively and an expected life of 5.0 years for 2003 and 2002 and 6.3
years for 2001.
Reclassifications:
Certain items in the 2002 and 2001 financial statements and accompanying
notes have been reclassified to conform to the 2003 presentation format. There
was no effect on net income for the periods presented herein as a result of
reclassifications.
REPUBLIC FIRST BANCORP | 60
- --------------------------------------------------------------------------------
Comprehensive Income
The tax effects allocated to each component of "Comprehensive Income" are
as follows:
For the year ended December 31, 2003
(Dollars in thousands)
Before Tax Net of
Tax Amount Benefit Tax Amount
------------- ----------- --------------
Unrealized losses on securities:
Unrealized holding losses arising during
the period............................................ $( 1,374) $466 $(908)
Less: Reclassification adjustment for gains
Included in net income................................ -- -- --
----------- ----------- ----------
Other comprehensive loss....................................... $( 1,374) $466 $(908)
=========== =========== ==========
For the year ended December 31, 2002
(Dollars in thousands)
Before Tax Net of
Tax Amount Expense Tax Amount
------------- ----------- --------------
Unrealized gains on securities:
Unrealized holding gains arising during
the period............................................ $ 3,097 $(1,053) $ 2,044
Less: Reclassification adjustment for gains
Included in net income................................ -- -- --
----------- ----------- ----------
Other comprehensive income..................................... $ 3,097 $(1,053) $ 2,044
=========== =========== ==========
For the year ended December 31, 2001
(Dollars in thousands)
Before Tax Net of
Tax Amount Expense Tax Amount
------------- ----------- --------------
Unrealized gains on securities:
Unrealized holding gains arising during
the period............................................ $ 2,587 $ (879) $ 1,708
Less: Reclassification adjustment for gains
Included in net income................................ (13) 4 (9)
----------- ----------- ----------
Other comprehensive income..................................... $ 2,574 $ (875) $ 1,699
=========== =========== ==========
Recent Accounting Pronouncements:
The Company adopted FIN 45 Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others on January 1, 2003. FIN 45 requires a guarantor entity, at the inception
of a guarantee covered by the measurement provisions of the interpretation, to
record a liability for the fair value of the obligation undertaken in issuing
the guarantee. The Company has financial and performance letters of credit.
Financial letters of credit require the Company to make payment if the
customer's financial condition deteriorates, as defined in the agreements.
Performance letters of credit require the Company to make payments if the
customer fails to perform certain non-financial contractual obligation. The
Company previously did not record a liability, except for the initial fees
received, when guaranteeing obligations unless it became probable that the
Company would have to perform under the guarantee. FIN 45 applies prospectively
to guarantees the Company issues or modifies subsequent to December 31, 2002.
The maximum potential undiscounted amount of future payments of these letters of
credit as of December 31, 2003 are $4.0 million and they expire as follows $3.8
million in 2004, $89,000 in 2005 and $40,000 after 2008. Amounts due under these
letters of credit would be reduced by any proceeds that the Company would be
able to obtain in liquidating the collateral for the loans, which varies
depending on the customer.
REPUBLIC FIRST BANCORP | 61
- --------------------------------------------------------------------------------
In January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application of
Accounting Research Bulletin 51, Consolidated Financial Statements, to certain
entities in which voting rights are not effective in identifying the investor
with the controlling financial interest. An entity is subject to consolidation
under FIN 46 if the investors either do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support, are unable to direct the entity's activities, or are not exposed to the
entity's losses or entitled to its residual returns ("variable interest
entities"). Variable interest entities within the scope of FIN 46 will be
required to be consolidated by their primary beneficiary. The primary
beneficiary of a variable interest entity is determined to be the party that
absorbs a majority of the entity's expected losses, receives a majority of its
expected returns, or both.
Management has determined that Republic First Capital Trust I, utilized for
the Company's $6,000,000 of pooled trust preferred securities issuance,
qualifies as a variable interest entity under FIN 46. Republic First Capital
Trust I issued mandatorily redeemable preferred stock to investors and loaned
the proceeds to the Company. Republic First Capital Trust I holds, as its sole
asset, subordinated debentures issued by the Company in 2001. Republic First
Capital Trust I is currently included in the Company's consolidated balance
sheet and statements of income. The Company has evaluated the impact of FIN 46
and concluded it should continue to consolidate Republic First Capital Trust I
as of December 31, 2003, in part due to its ability to call the preferred stock
prior to the mandatory redemption date and thereby benefit from a decline in
required dividend yields.
Subsequent to the issuance of FIN 46, the FASB issued a revised
interpretation, FIN 46(R), the provisions of which must be applied to certain
variable interest entities by March 31, 2004. The Company plans to adopt the
provisions under the revised interpretation in the first quarter of 2004. FIN
46(R) will require deconsolidation of Republic First Capital Trust I as of March
31, 2004 for public companies. FIN 46(R) precludes consideration of the call
option embedded in the preferred stock when determining if the Company has the
right to a majority of Republic First Capital Trust I's expected residual
returns. Accordingly, the Company will deconsolidate Republic First Capital
Trust I at the end of the first quarter, which will result in an increase in
outstanding debt by $186,000. The banking regulatory agencies have not issued
any guidance that would change the regulatory capital treatment for the trust
preferred securities issued by Republic First Capital Trust I based on the
adoption of FIN 46(R). However, as additional interpretations from the banking
regulators related to entities such as Republic First Capital Trust I become
available, management will reevaluate its potential impact to its Tier I capital
calculation under such interpretations, if any.
The Company adopted Statement of Financial Accounting Standard 149 (SFAS
No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, on July 1, 2003. SFAS No. 149 clarifies and amends SFAS No. 133 for
implementation issues raised by constituents or includes the conclusions reached
by the FASB on certain FASB Staff Implementation Issues. Statement 149 also
amends SFAS No. 133 to require a lender to account for loan commitments related
to mortgage loans that will be held for sale as derivatives. SFAS No. 149 is
effective for contracts entered into or modified after September 30, 2003. The
Company periodically enters into commitments with its customers, which it
intends to sell in the future Adoption of FAS 149 did not have a material impact
on the Company's financial statements.
The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No.
150 changes the classification in the statement of financial position of certain
common financial instruments from either equity or mezzanine presentation to
liabilities and requires an issuer of those financial statements to recognize
changes in fair value or redemption amount, as applicable, in earnings. SFAS No.
150 is effective for public companies for financial instruments entered into or
modified after May 31, 2003 and is effective at the beginning of the first
interim period beginning after June 15, 2003. Management has not entered into
any financial instruments that would qualify under SFAS No. 150. The Company
currently classifies its Corporation -obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior obligations of the
corporation as a liability. As a result, management does not anticipate the
adoption of SFAS No. 150 to have a material impact on the Company's financial
position or results of operations.
In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain
Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with evidence
of deterioration of credit quality since origination acquired in a transfer for
which it is probable that at acquisition, the Company will be unable to collect
all contractually required payments receivable. SOP 03-3 requires that the
Company recognize the excess of all cash flows expected at acquisition over the
investor's initial investment in the loan as interest income on a level yield
basis over the life of the loan as the accretable yield. The loan's contractual
required payments receivable in excess of the amount of its cash flows excepted
at acquisition (nonaccretable difference) should not be recognized as an
adjustment to yield, a loss accrual or a valuation allowance for credit risk.
SOP 03-3 is effective for loans acquired in fiscal years beginning after
December 31, 2004. Early adoption is permitted. Management is currently
evaluating the provisions of SOP 03-3.
REPUBLIC FIRST BANCORP | 62
- --------------------------------------------------------------------------------
The Company adopted EITF 03-1, The Meaning of Other than Temporary
Impairment and Its Application to Certain Investments as of December 31, 2003.
EITF 03-1 includes certain disclosures regarding quantitative and qualitative
disclosures for investment securities accounted for under FAS 115, Accounting
for Certain Investments in Debt and Equity Securities that are impaired at the
balance sheet date, but an other-than-temporary impairment has not been
recognized. The disclosures under EITF 03-1 are required for financial
statements for years ending after December 15, 2003 and are included in these
financial statements.
3. Investment Securities:
Investment securities available for sale as of December 31, 2003, are as
follows:
Gross Gross
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
-------------- ------------ ------------ ----------
U.S. Government Agencies.................................. $ 24,425 $ 10 $ -- $ 24,435
Mortgage Backed Securities................................ 24,235 1,067 (16) 25,286
Other Debt Securities.................................... 11,843 142 (20) 11,965
------------ ------------ ------------- ----------
Total................................................ $60,503 $1,219 $ (36) $61,686
============ ============ ============= ==========
Investment securities held to maturity as of December 31, 2003, are as
follows:
Gross Gross
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
-------------- ------------ ------------ ----------
U.S. Government Agencies.................................. $ 68 $ -- $ -- $ 68
Mortgage Backed Securities................................ 265 18 -- 283
Other Securities.......................................... 7,927 22 -- 7,949
------------ ------------ ------------- ----------
Total................................................ $8,260 $40 $ -- $ 8,300
============ ============ ============= ==========
Investment securities available for sale as of December 31, 2002, are as
follows:
Gross Gross
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
-------------- ------------ ------------ ----------
U.S. Government Agencies.................................. $ 5,759 $ 20 $ -- $ 5,779
Mortgage Backed Securities and CMOs....................... 71,623 2,438 -- 74,061
Other Debt Securities.................................... 7,352 131 (32) 7,451
------------ ------------ ------------- ----------
Total................................................ $84,734 $2,589 $ (32) $87,291
============ ============ ============= ==========
Investment securities held to maturity as of December 31, 2002, are as
follows:
Gross Gross
Unrealized Unrealized Fair
(Dollars in thousands) Amortized Cost Gains Losses Value
-------------- ------------ ------------ ----------
U.S. Government Agencies.................................. $ 122 $ 1 $-- $ 123
Mortgage Backed Securities and CMOs....................... 760 24 -- 784
Other Securities.......................................... 8,388 2 -- 8,390
------------ ------------ ------------- ----------
Total................................................ $9,270 $27 $-- $9,297
============ ============ ============= ==========
The securities portfolio consists primarily of U.S government agency
securities, mortgage backed securities, corporate bonds, trust preferred
securities and FHLB stock. The Company's ALCO reviews all security purchases to
ensure compliance with security policy guidelines. In accordance with regulatory
requirements, the Company held an investment in stock of the Federal Reserve
Bank with a carrying value of $860,000 of December 31, 2002, which is included
in other securities held to maturity. The Company is no longer required to hold
this stock as of December 31, 2003. Also included in that category are
investments in the stock of the Federal Home Loan Bank of Pittsburgh of $7.2
million and $6.8 million at December 31, 2003 and 2002, respectively. The
Federal Home Loan Bank stocks are recorded at cost, which approximates
liquidation value.
REPUBLIC FIRST BANCORP | 63
- --------------------------------------------------------------------------------
The maturity distribution of the amortized cost and estimated market value
of investment securities by contractual maturity at December 31, 2003, is as
follows:
Available for Sale Held to Maturity
---------------------------------- -------------------------
Amortized Estimated Amortized Estimated
(Dollars in thousands) Cost Fair Value Cost Fair Value
---------------- ---------------- ------------ -----------
Due in 1 year or less..................................... $ 3,123 $ 3,267 $ 93 $ 93
After 1 year to 5 years................................... 23,215 23,221 280 280
After 5 years to 10 years................................. 1,211 1,285 102 102
After 10 years............................................ 32,954 33,913 385 425
No stated maturity........................................ -- -- 7,400 7,400
---------------- ---------------- ------------ -----------
Total................................................ $60,503 $61,686 $8,260 $8,300
================ ================ ============ ===========
Expected maturities will differ from contractual maturities because
borrowers have the right to call or prepay obligations with or without
prepayment penalties.
Realized gains and losses on the sale of investment securities are
recognized using the specific identification method. The Company realized a gain
on the sale of a security of approximately of $13,000 in 2001. The Company did
not realize any material gains or losses on the sale of securities during 2003
or 2002.
At December 31, 2003 and 2002, investment securities in the amount of
approximately $4.4 million and $21.6 million respectively, were pledged as
collateral for public deposits and certain other deposits as required by law.
Temporarily impaired securities as of December 31, 2003, are as follows:
(Dollars in thousands) Less than 12 months 12 Months or more Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
Description of Securities
Mortgage Backed Securities $ -- $ -- $3,290 $ 36 $3,290 $ 36
---- ---- ------ ----- ------ -----
Total Temporarily Impaired
Securities $ -- $ -- $3,290 $ 36 $3,290 $ 36
==== ==== ====== ===== ====== =====
The impairment of the investment portfolio at December 31, 2003 totaled
$3.3 million in 6 securities at December 31, 2003. The unrealized loss is due to
changes in market value resulting from changes in market interest rates and is
considered temporary.
4. Loans Receivable:
Loans receivable consist of the following at December 31,
(Dollars in thousands) 2003 2002
----------------- ----------------
Commercial and Industrial................................. $ 65,729 $ 62,676
Real Estate - commercial.................................. 303,603 302,483
Construction and land development......................... 88,850 27,549
Real Estate - residential (1)............................. 14,875 51,265
Consumer and other........................................ 16,147 20,178
----------------- ----------------
Loans receivable.......................................... 489,204 464,151
Less deferred loan fees................................... (985) (462)
Less allowance for loan losses............................ (8,696) (6,642)
----------------- ----------------
Total loans receivable, net .............................. $479,523 $457,047
================= ================
<FN>
- ----------
(1) Residential real estate secured is comprised of jumbo residential first
mortgage loans for both years presented.
</FN>
The recorded investment in loans which are impaired in accordance with SFAS
114, totaled $5.5 million, $3.0 million and $4.3 million at December 31, 2003,
2002, and 2001 respectively. The amounts of related valuation allowances were
$1.4 million, $665,000, and $288,000 respectively at those dates. For the years
ended December 31, 2003, 2002, and 2001, the average
REPUBLIC FIRST BANCORP | 64
- --------------------------------------------------------------------------------
recorded investment in impaired loans was approximately $3.6 million, $3.4
million and $4.2 million, respectively. The Banks did not realize any interest
on impaired loans during 2003, 2002 or 2001. There were no commitments to extend
credit to any borrowers with impaired loans as of the end of the periods
presented herein.
As of December 31, 2003, 2002 and 2001, there were loans of approximately
$5.5 million, $3.0 million, and $3.8 million respectively, which were classified
as non-accrual. If these loans were performing under their original contractual
rate, interest income on such loans would have increased approximately $285,000,
$241,000 and $203,000, for 2003, 2002, and 2001 respectively. Loans past due 90
days and accruing totaled $3.1 million and $4.1 million respectively, at
December 31, 2003 and December 31, 2002.
The majority of loans outstanding are with borrowers in the Company's
marketplace, Philadelphia and surrounding suburbs, including southern New
Jersey. In addition the Company has loans to customers whose assets and
businesses are concentrated in real estate. Repayment of the Company's loans is
in part dependent upon general economic conditions affecting the Company's
market place and specific industries. The Company evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral varies but
primarily includes residential, commercial and income-producing properties. At
December 31, 2003, 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 $148.3 million, which
represented 30.4% of gross loans receivable at December 31, 2003. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and others. Loan
concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers engaged in similar activities that management
believes would cause them to be similarly impacted by economic or other
conditions.
Included in loans are loans due from directors and other related parties of
$8.0 million and $4.4 million at December 31, 2003, and 2002, respectively. All
loans made to directors have substantially the same terms and interest rates as
other bank borrowers. The Board of Directors approves loans to individual
directors to confirm that collateral requirements, terms and rates are
comparable to other borrowers and are in compliance with underwriting policies.
The following presents the activity in amounts due from directors and other
related parties for the year ended December 31, 2003.
(Dollars in thousands) 2003
---------
Balance at beginning of year................... $4,395
Additions...................................... 4,510
Repayments..................................... (892)
---------
Balance at end of year......................... $8,013
=========
Harry D. Madonna is of counsel to Spector Gadon and Rosen effective January
2, 2002. In 2003 and 2002, the Company paid $1,044,000 and $1,338,000,
respectively in legal fees to that firm which was primarily for loan workout and
collection matters.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses for the years ended December 31,
are as follows:
(Dollars in thousands) 2003 2002 2001
--------- --------- ---------
Balance at beginning of year......................... $6,642 $5,431 $4,072
Charge-offs.......................................... (6,110) (4,215) (2,879)
Recoveries........................................... 1,400 123 274
Provision for loan losses............................ 6,764 5,303 3,964
--------- --------- ---------
Balance at end of year............................... $8,696 $6,642 $5,431
========= ========= =========
REPUBLIC FIRST BANCORP | 65
- --------------------------------------------------------------------------------
6. Premises and Equipment:
A summary of premises and equipment is as follows:
(Dollars in thousands) Useful lives 2003 2002
------------ --------- ---------
Furniture and equipment......................................... 3 to 10 years $6,810 $6,043
Bank building................................................... 40 years 1,921 1,895
Leasehold improvements.......................................... 20 years 1,924 1,889
--------- ---------
10,655 9,827
Less accumulated depreciation................................... (6,243) (4,827)
--------- ---------
Net premises and equipment...................................... $4,412 $5,000
========= =========
Depreciation expense on premises, equipment and leasehold improvements
amounted to $1.4 million, $1.0 million and $954,000 in 2003, 2002 and 2001
respectively.
7. Borrowings:
The PA Bank has a line of credit for $10.0 million available for the
purchase of federal funds from a correspondent bank. At December 31, 2003, the
PA Bank had $2.9 million outstanding on this line with an interest rate of
1.47%.
The PA Bank has a collateralized line of credit with the Federal Home Loan
Bank of Pittsburgh with a maximum borrowing capacity of $184.8 million as of
December 31, 2003. This maximum borrowing capacity is subject to change on a
monthly basis. As of December 31, 2003, and 2002, there were $125.0 million
outstanding on these lines of credit. The contractual maturity of the borrowings
through the Federal Home Loan Bank range from one to two years. The Federal Home
Loan Bank has the option to convert the borrowings from a fixed rate to a
variable rate.
The contractual maturity of the Company's borrowings at December 31, 2003,
is as follows:
Weighted
(Dollars in thousands) Amount Average Rate
------------- ----------------
Maturing in:
2004............................................. $100,000 6.06%
2005............................................. 25,000 6.71%
------------- ------------
Totals................................................ $125,000 6.19%
============= ============
Corporation-obligated-mandatorily redeemable capital securities of
subsidiary trust holding solely junior obligations of the corporation:
On November 28, 2001, Republic First Bancorp, Inc., through a pooled
offering with Sandler O' Neill & Partners, issued $6.0 million of
corporation-obligated mandatorily redeemable capital securities of the
subsidiary trust holding solely junior subordinated debentures of the
corporation more commonly known as Trust Preferred Securities. The purpose of
the issuance was to increase capital as a result of the Company's continued loan
and core deposit growth. The trust preferred securities qualify as Tier 1
capital for regulatory purposes in amounts up to 25% of total Tier 1 capital.
The Company may call the securities on any interest payment date after five
years, without a prepayment penalty, notwithstanding their final 30 year
maturity. The interest rate is variable and adjustable semi-annually at 3.75%
over the 6 month London Interbank Offered Rate ("Libor). The interest rates at
December 31, 2003 and 2002 were 4.81% and 5.78%, respectively. The interest rate
cap of 11% is effective through the initial 5-year call date.
REPUBLIC FIRST BANCORP | 66
- --------------------------------------------------------------------------------
8. Deposits
The following is a breakdown, by contractual maturities of the Company's
time certificate of deposits for the years 2003 through 2008 and beyond, which
includes brokered certificates of deposit of approximately $29.0 million with
original terms of three months.
(Dollars in thousands) 2004 2005 2006 2007 2008 Thereafter Totals
---- ---- ---- ---- ---- ---------- ------
Time Certificates of Deposit...........$128,889 $36,583 $13,051 $1,326 $7,731 $10 $187,590
======== ======= ======= ====== ====== === ========
9. Income Taxes:
The following represents the components of income tax expense (benefit) for
the years ended December 31, 2003, 2002 and 2001, respectively.
(Dollars in thousands) 2003 2002 2001
--------- --------- ---------
Current provision
Federal:
Current....................................................... $3,063 $1,675 $1,784
Deferred ..................................................... (579) (521) (743)
--------- --------- ---------
Total provision for income taxes................................... $2,484 $1,154 $1,041
========= ========= =========
The following table accounts for the difference between the actual tax
provision and the amount obtained by applying the statutory federal income tax
rate of 34.0% to income before income taxes for the years ended December 31,
2003, 2002 and 2001.
(Dollars in thousands) 2003 2002 2001
--------- --------- ----------
Tax provision computed at statutory rate.......................... $2,515 $1,143 $1,073
Amortization of negative goodwill................................. -- -- (103)
State tax, net of federal benefit................................. -- -- 29
Other............................................................. (31) 11 42
--------- --------- ----------
Total provision for income taxes............................. $2,484 $1,154 $1,041
========= ========= =========
The approximate tax effect of each type of temporary difference and
carry-forward that gives rise to net deferred tax assets included in the accrued
income and other assets in the accompanying consolidated balance sheets at
December 31, 2003 and 2002 are as follows:
2003 2002
--------- ---------
Allowance for loan losses......................................... $2,958 $2,259
Deferred compensation............................................. 606 580
Unrealized gain on securities available for sale ................. (403) (869)
Depreciation...................................................... (61) (68)
Deferred loan costs............................................... (541) (384)
Prepaid expenses.................................................. (18) (22)
--------- ---------
Net deferred tax asset............................................ $2,541 $1,496
========= =========
The realizability of the deferred tax asset is dependent upon a variety of
factors, including the generation of future taxable income, the existence of
taxes paid and recoverable, the reversal of deferred tax liabilities and tax
planning strategies. Based upon these and other factors, management believes
that it is more likely than not that the Company will realize the benefits of
these deferred tax assets.
The reverse acquisition of ExecuFirst by Republic on June 7, 1996 generated
negative goodwill of $1,045,000, of which $685,000 was applied against the
deferred tax assets. During 2001, negative goodwill allocated to the deferred
tax assets was
REPUBLIC FIRST BANCORP | 67
- --------------------------------------------------------------------------------
amortized by $103,000 in that year, thereby resulting in a corresponding
reduction to the provision for income taxes. The amortization of negative
goodwill was recorded based upon the estimated reversal period of the underlying
components of the deferred tax assets.
10. Financial Instruments with Off-Balance Sheet Risk:
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
financial statements.
Credit risk is defined as the possibility of sustaining a loss due to the
failure of the other parties to a financial instrument to perform in accordance
with the terms of the contract. The maximum exposure to credit loss under
commitments to extend credit and standby letters of credit is represented by the
contractual amount of these instruments. The Company uses the same underwriting
standards and policies in making credit commitments as it does for
on-balance-sheet instruments.
Financial instruments whose contract amounts represent potential credit
risk are commitments to extend credit of approximately $94.8 million and $52.3
million and standby letters of credit of approximately $4.0 million and $7.2
million at December 31, 2003, and 2002, respectively. The increase in
commitments reflects an increase in construction lending. However, commitments
may often expire without being drawn upon. Of the $94.8 million of commitments
to extend credit at December 31, 2003, substantially all were variable rate
commitments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments issued that guarantee
the performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
11. Commitments:
Lease Arrangements
As of December 31, 2003, the Company had entered into non-cancelable leases
expiring through November 30, 2008. The leases are accounted for as operating
leases. The minimum annual rental payments required under these leases are as
follows:
(Dollars in thousands)
Year Ended Amount
------------ ----------
2004.............................................................. $ 958
2005.............................................................. 876
2006.............................................................. 826
2007.............................................................. 484
2008 ............................................................. 198
thereafter ....................................................... --
----------
Total............................................................. $3,342
==========
The Company incurred rent expense of $968,000, $936,000, and $899,000 for
the years ended December 31, 2003, 2002, and 2001, respectively.
REPUBLIC FIRST BANCORP | 68
- --------------------------------------------------------------------------------
Prior to 2001, the Company participated in a joint venture with the MBM/ATM
Group Ltd. Although the Company's participation in the venture was terminated,
the Company remains contingently liable on the following repayments:
(Dollars in thousands)
Year Ended Amount
------------ ---------
2004..................................................... $ 107
2005..................................................... 15
---------
Total.................................................... $122
=========
The Company did not incur rent and expense on these machines during 2003,
2002 and 2001, respectively.
Employment Agreements
The Company has entered into employment agreements with the President of
the Company and the President of the Bank, which provide for the payment of base
salary and certain benefits through the year 2004. The aggregate commitment for
future salaries and benefits under these employment agreements at December 31,
2003, is approximately $656,000.
Other
The Company and the Banks are from time to time a party (plaintiff or
defendant) to lawsuits that are in the normal course of business. While any
litigation involves an element of uncertainty, management, after reviewing
pending actions with its legal counsel, is of the opinion that the liability of
the Company and the Banks, if any, resulting from such actions will not have a
material effect on the financial condition or results of operations of the
Company and the Banks.
REPUBLIC FIRST BANCORP | 69
- --------------------------------------------------------------------------------
12. Regulatory Capital:
Dividend payments by the PA Bank to the Company are subject to the
Pennsylvania Banking Code of 1965 (the "Banking Code and the Federal Deposit
Insurance Act (the "FDIA"). Under the Banking Code, no dividends may be paid
except from "accumulated net earnings" (generally, undivided profits). Under the
FDIA, an insured bank may pay no dividends if the bank is in arrears in the
payment of any insurance assessment due to the FDIC. Under current banking laws,
the PA Bank would be limited to $26.5 million of dividends plus an additional
amount equal to its net profit for 2004, up to the date of any such dividend
declaration. Dividend payments by the DE Bank are similarly limited by the FDIC
and the Delaware Department of Banking to $2.9 million plus an additional amount
equal to its net profit for 2004. However, dividends would be further limited in
order to maintain capital ratios. The Company may consider dividend payments in
2004.
During 2003 the Boards of Directors of the Banks filed applications with
the Federal Reserve Board to withdraw their memberships in the Federal Reserve
Bank System and filed applications with the FDIC to continue deposit insurance.
The applications were accepted by both regulators, such that the Banks are now
insured and regulated by the FDIC.
As part of the transition, the DE Bank entered into a Memorandum of
Understanding with the FDIC and the Office of the State Bank Commissioner
("Delaware Commissioner") which Memorandum of Understanding requires, among
other things, that in the event the FDIC and the Delaware Commissioner determine
that the short-term loan (payday loans) program of the DE Bank is not operated
in a safe and sound manner and request in writing that the DE Bank cease making
such short-term loans, the DE Bank will provide a strategy for exiting the
short-term loan program. After management discussions with the FDIC and the
Delaware Commissioner, the Board of Directors of the DE Bank determined to
continue the short-term loan program in accordance with the provisions of the
guidelines issued by the FDIC and the laws and regulations of the State of
Delaware.
State and Federal regulatory authorities have adopted standards for the
maintenance of adequate levels of capital by banks. Federal banking agencies
impose three minimum capital requirements on the Company's risk-based capital
ratios based on total capital, Tier 1 capital, and a leverage capital ratio. The
risk-based capital ratios measure the adequacy of a bank's capital against the
riskiness of its assets and off-balance sheet activities. Failure to maintain
adequate capital is a basis for "prompt corrective action" or other regulatory
enforcement action. In assessing a bank's capital adequacy, regulators also
consider other factors such as interest rate risk exposure; liquidity, funding
and market risks; quality and level or earnings; concentrations of credit;
quality of loans and investments; risks of any nontraditional activities;
effectiveness of bank policies; and management's overall ability to monitor and
control risks.
Management believes that the Banks meet, as of December 31, 2003, all
capital adequacy requirements to which it is subject. As of December 31, 2003,
the FDIC categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action provisions of the Federal Deposit
Insurance Act. There are no calculations or events since that notification that
management believes have changed the Banks' category.
REPUBLIC FIRST BANCORP | 70
- --------------------------------------------------------------------------------
The following table presents the Company's capital regulatory ratios at
December 31, 2003, and 2002:
To be well
For Capital capitalized under
Actual Adequacy Purposes regulatory capital
guidelines
----------------------- -------------------- --------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- --------- ---------
At December 31, 2003
Total risk based capital
Republic First Bank............................. $57,417 12.57% $36,534 8.00% $45,667 10.00%
First Bank of DE................................ 8,399 29.06% 2,312 8.00% 2,891 10.00%
Republic First Bancorp, Inc..................... 67,436 13.92% 38,765 8.00% -- --
Tier one risk based capital
Republic First Bank............................. 51,689 11.32% $18,267 4.00% 27,475 6.00%
First Bank of DE................................ 8,025 27.76% 1,156 4.00% 1,734 6.00%
Republic First Bancorp, Inc..................... 61,346 12.66% 19,382 4.00% -- --
Tier one leverage capital
Republic First Bank............................. 51,689 8.77% $29,475 5.00% 29,475 5.00%
First Bank of DE................................ 8,025 16.55% 2,410 5.00% 2,410 5.00%
Republic First Bancorp, Inc..................... 61,346 9.64% 31,817 5.00% -- --
At December 31, 2002
Total risk based capital
Republic First Bank............................. $52,400 13.39% $31,308 8.00% $39,135 10.00%
First Bank of DE................................ 6,144 22.59% 2,176 8.00% 2,720 10.00%
Republic First Bancorp, Inc..................... 60,581 14.49% 33,447 8.00% -- --
Tier one risk based capital
Republic First Bank............................. 47,493 12.14% $15,654 4.00% 23,481 6.00%
First Bank of DE................................ 5,801 21.33% 1,088 4.00% 1,632 6.00%
Republic First Bancorp, Inc..................... 55,337 13.24% 16,724 4.00% -- --
Tier one leverage capital
Republic First Bank............................. 47,493 7.82% $30,377 5.00% 30,377 5.00%
First Bank of DE................................ 5,801 13.94% 2,081 5.00% 2,081 5.00%
Republic First Bancorp, Inc..................... 55,337 8.56% 32,231 5.00% -- --
REPUBLIC FIRST BANCORP | 71
- --------------------------------------------------------------------------------
13. Benefit Plans:
Supplemental Retirement Plan
----------------------------
The Company maintains a Supplemental Retirement Plan for its former Chief
Executive Officer which provides for payments of approximately $100,000 a year.
At December 31, 2003, approximately $500,000 remained to be paid. A life
insurance contract has been purchased to insure against all of the payments,
which may be required prior to the originally anticipated retirement date of the
officer.
Defined Contribution Plan
-------------------------
The Company has a defined contribution plan pursuant to the provision of
401(k) of the Internal Revenue Code. The Plan covers all full-time employees who
meet age and service requirements. The plan provides for elective employee
contributions with a matching contribution from the Banks limited to 3%. The
total expense relating to the plan was $169,000, in 2003 and 2002 and $145,000
in 2001.
Directors' and Officers' Plan
-----------------------------
The Company has an agreement with an insurance company to provide for an
annuity payment upon the retirement or death of certain of the Banks' Directors
and officers, ranging from $15,000 to $25,000 per year for ten years. The plan
was modified for most participants in 2001, to establish a minimum age of 65 to
qualify for the payments. All participants are fully vested. The accrued
benefits under the plan at December 31, 2003, 2002, and 20001 totaled $886,000,
$834,000, and $786,000, respectively. The expense for the years ended December
31, 2003, 2002, and 2001, was $172,000, $172,000, and $271,000, respectively.
The Company funded the plan through the purchase of certain life insurance
contracts. The cash surrender value of these contracts (owned by the Company)
aggregated $1.8 million, $1.7 million, and $1.6 million at December 31, 2003,
2002, and 2001, respectively, which is included in other assets.
14. Fair Value of Financial Instruments:
The disclosure of the fair value of all financial instruments is required,
whether or not recognized on the balance sheet, for which it is practical to
estimate fair value. In cases where quoted market prices are not available, fair
values are based on assumptions including future cash flows and discount rates.
Accordingly, the fair value estimates cannot be substantiated, may not be
realized, and do not represent the underlying value of the Company.
The Company uses the following methods and assumptions to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash, Cash Equivalents and Other Interest-Earning Restricted Cash:
The carrying value is a reasonable estimate of fair value.
Investment Securities Held to Maturity and Available for Sale:
For investment securities with a quoted market price, fair value is equal
to quoted market prices. If a quoted market price is not available, fair value
is estimated using quoted market prices for similar securities.
Loans:
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair value is the carrying value. For other categories of
loans such as commercial and industrial loans, real estate mortgage and consumer
loans, fair value is estimated based on the present value of the estimated
future cash flows using the current rates at which similar loans would be made
to borrowers with similar collateral and credit ratings and for similar
remaining maturities.
Business Owned Life insurance:
The fair value of business owned life insurance is based on the estimated
realizable market value of the underlying investments and insurance reserves.
REPUBLIC FIRST BANCORP | 72
- --------------------------------------------------------------------------------
Deposit Liabilities:
For checking, savings and money market accounts, fair value is the amount
payable on demand at the reporting date. For time deposits, fair value is
estimated using the rates currently offered for deposits of similar remaining
maturities.
Borrowings:
Fair values of borrowings are based on the present value of estimated cash
flows, using current rates, at which similar borrowings could be obtained by the
Banks with similar maturities.
Commitments to Extend Credit and Standby Letters of Credit:
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparts. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for similar
arrangements.
At December 31, 2003 and December 31, 2002, the carrying amount and the
estimated fair value of the Company's financial instruments are as follows:
December 31, 2003 December 31, 2002
------------------------------- -------------------------
Carrying Fair Carrying Fair
(Dollars in Thousands) Amount Value Amount Value
------------- ---------------- ----------- -----------
Balance Sheet Data:
Financial Assets:
Cash and cash equivalents............................ $ 70,602 $ 70,602 $ 72,810 $ 72,810
Other interest-earning restricted cash............... 3,483 3,483 4,228 4,228
Investment securities available for sale............. 61,686 61,686 87,291 87,291
Investment securities held to maturity............... 8,260 8,300 9,270 9,297
Loans receivable, net................................ 479,523 483,300 457,047 464,126
Business owned life insurance........................ 11,763 11,763 -- --
Accrued interest receivable.......................... 3,710 3,710 3,777 3,777
Financial Liabilities:
Deposits:
Demand, savings and money market.................. $266,015 $266,015 $233,060 $233,060
Time.............................................. 187,590 188,005 223,242 225,646
Corporation-obligated mandatorily
redeemable capital securities of
subsidiary trust company solely junior
Obligations of the corporation....................... 6,000 6,000 6,000 6,000
Short-term borrowings................................ 2,852 2,852 -- --
FHLB advances........................................ 125,000 128,883 125,000 135,183
Accrued interest payable............................. 2,841 2,841 3,596 3,596
December 31, 2003 December 31, 2002
------------------------------- -------------------------
Notional Fair Notional Fair
(Dollars in Thousands) Amount Value Amount Value
------------- ---------------- ----------- -----------
Off Balance Sheet Data:
Commitments to extend credit $94,781 $947 $ 52,251 $ 523
Letters of credit 3,962 40 7,217 72
REPUBLIC FIRST BANCORP | 73
- --------------------------------------------------------------------------------
15. Parent Company Financial Information
The following financial statements for Republic First Bancorp, Inc. should
be read in conjunction with the consolidated financial statements and the other
notes related to the consolidated financial statements.
BALANCE SHEETS
December 31, 2003 and 2002
(dollars in thousands)
2003 2002
----------- ----------
ASSETS:
Cash.................................................................. $ 837 $ 1,081
Investment in subsidiaries............................................ 60,744 55,457
Other assets.......................................................... 962 799
----------- ----------
Total Assets....................................................... $62,543 $57,337
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Accrued expenses................................................... $ 167 $ 61
Corporation-obligated mandatorily redeemable
securities of subsidiary trust holding solely junior
subordinated debentures of the corporation....................... 6,000 6,000
----------- ----------
Total Liabilities............................................. 6,167 6,061
----------- ----------
Shareholders' Equity:
Common stock.......................................................... 67 64
Additional paid in capital............................................ 33,396 32,305
Retained earnings..................................................... 23,674 18,760
Treasury stock at cost (175,172 shares)............................... (1,541) (1,541)
Accumulated other comprehensive income................................ 780 1,688
----------- ----------
Total Shareholders' Equity.................................... 56,376 51,276
----------- ----------
Total Liabilities and Shareholders' Equity.................... $62,543 $57,337
=========== ==========
REPUBLIC FIRST BANCORP | 74
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME AND CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2003, 2002 and 2001
(dollars in thousands)
2003 2002 2001
---------- ---------- ----------
Interest income.............................................................. $ 3 $ 3 $ 21
Dividend income from subsidiaries............................................ 372 392 --
---------- ---------- ----------
Total income................................................................. 375 395 21
Trust preferred interest expense............................................. 372 392 33
Expenses .................................................................... 11 220 5
---------- ---------- ----------
Total expenses .............................................................. 383 612 38
---------- ---------- ----------
Net income (loss) before taxes............................................... (8) (217) (17)
---------- ---------- ----------
Federal income tax benefit................................................... (3) (201) --
---------- ---------- ----------
Net income (loss) before undistributed income of subsidiary.................. (5) (16) (17)
---------- ---------- ----------
Equity in undistributed income of subsidiary................................. 4,919 2,216 2,131
---------- ---------- ----------
Net income................................................................... $ 4,914 $ 2,200 $ 2,114
========== ========== ==========
Shareholders' equity, beginning of year...................................... $51,276 $46,843 $43,030
Exercise of stock options.................................................... 1,094 189 -
Net income................................................................... 4,914 2,200 2,114
Change in unrealized gain (loss) on securities available for sale............ (908) 2,044 1,699
---------- ---------- ----------
Shareholders' equity, end of year............................................ $56,376 $51,276 $46,843
========== ========== ==========
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
(dollars in thousands)
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income............................................................ $4,914 $2,200 $2,114
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Increase in other assets.......................................... 61 6 (196)
Increase in other liabilities..................................... 106 26 35
Equity in undistributed income of subsidiaries.................... (4,919) (2,216) (2,131)
---------- ---------- ----------
Net cash provided by (used in) operating activities.......... 162 16 (178)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of subsidiary common stock................................... (1,500) -- (7,048)
---------- ---------- ----------
Net cash used in investing activities........................ (1,500) -- (7,048)
---------- ---------- ----------
Cash from Financing Activities:
Exercise of stock options............................................. 1,094 189 --
Proceeds from issuance of trust preferred securities.................. -- -- 6,000
---------- ---------- ----------
Net cash provided by financing activities.................... 1,094 189 6,000
---------- ---------- ----------
Increase/(decrease) in cash................................................ (244) 205 (1,226)
Cash, beginning of period.................................................. 1,081 876 2,102
---------- ---------- ----------
Cash, end of period........................................................ $837 $1,081 $ 876
========== ========== ==========
REPUBLIC FIRST BANCORP | 75
- --------------------------------------------------------------------------------
16. Stock Based Compensation
The Company maintains a Stock Option Plan (the "Plan") under which the
Company grants options to its employees and directors. Under the terms of the
plan, 1.4 million shares of common stock are reserved for such options. The Plan
provides that the exercise price of each option granted equals the market price
of the Company's stock on the date of grant. Any option granted vests within one
to five years and has a maximum term of ten years. All options are granted upon
approval of the Stock Option Committee of the Board of Directors, consisting of
three disinterested members (as defined under Rule 16b-3 of the Securities
Exchange Act of 1934, as amended). Stock Options are issued to promote the
interests of the Company by providing incentives to (i) designated officers and
other employees of the Company or a Subsidiary Corporation (as defined herein),
(ii) non-employee members of the Company's Board of Directors and (iii)
independent contractors and consultants who may perform services for the
Company. The Company believes that the Plan causes participants to contribute
materially to the growth of the Company, thereby benefiting the Company's
shareholders.
For the Years Ended December 31,
-------------------------------------------------------------------------------------
(Dollars in thousands)
2003 2002 2001
-------------------------- --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ----------- ------------ ----------- ----------- -----------
Outstanding, beginning of year 898,314 $4.42 776,612 $4.05 769,712 $4.07
Granted 181,667 10.34 186,167 5.85 8,000 5.13
Exercised (286,526) 3.82 (46,965) 2.99 -- --
Forfeited (3,320) 6.01 (17,500) 7.37 (1,100) 9.09
------------ ----------- ------------ ----------- ----------- -----------
Outstanding, end of year 790,135 5.99 898,314 4.42 776,612 4.05
------------ ----------- ------------ ----------- ----------- -----------
Options exercisable at year-end 752,885 5.81 864,772 4.38 734,862 3.93
----------- ----------- -----------
Weighted average fair value of
options granted during the year $3.72 $2.03 $2.25
----------- ----------- -----------
The following table summarizes information about options outstanding at
December 31, 2003.
-------------------------------------------------------------------------------------------
Options outstanding Options exercisable
------------------------------------------ -------------------------
Weighted
Number Average Weighted Weighted
Range of exercise Prices outstanding remaining Average Average
at December contractual exercise Exercise
31, 2003 life (years) price Shares Price
-------------- --------------------------- ----------- -----------
3.56 to 4.25 338,421 5.1 $3.85 338,421 $3.85
4.85 to 6.62 290,194 8.0 5.68 275,444 5.68
7.00 to 9.09 40,520 6.4 7.74 40,520 7.74
9.10 to 12.19 121,000 10.0 12.13 98,500 12.13
-------------- ------------ ----------- -----------
790,135 $5.99 752,885 $5.81
-------------- ------------ ----------- -----------
REPUBLIC FIRST BANCORP | 76
- --------------------------------------------------------------------------------
17. Segment Reporting
The Company's reportable segments represent strategic businesses that
offer different products and services. The segments are managed separately
because each segment has unique operating characteristics, management
requirements and marketing strategies. The Company has four reportable segments:
two community banking segments; tax refund products; and short-term consumer
loans. The community banking segments are primarily comprised of the results of
operations and financial condition of the Banks. The Company additionally offers
national consumer products to the underbanked consumer including tax refund
products and short-term consumer loans. Tax refund products are comprised of
accelerated check refunds and refund anticipation loans offered by the DE Bank
on a national basis to customers of Liberty Tax Services an unaffiliated
national tax preparation firm. Short-term consumer loans are loans made to
customers offered by the DE Bank, with principal amounts of $1,000 or less and
terms of approximately two weeks. These loans typically are made in states that
are outside of the Company's normal market area through a small number of
marketers and involve rates and fees significantly different from other loan
products offered by either of the banks.
Segment information for the years ended December 31, 2003, 2002 and
2001 is as follows:
December 31, 2003
(Dollars in thousands)
Republic Short-term
First First Bank of Tax Refund Consumer
Bank Delaware Products Loans Total
------------ --------------- -------------------------- -----------
Net interest income ............................. $ 14,996 $ 1,499 $ 1,191 $8,065 $ 25,751
Provision for loan losses........................ 360 121 1,042 5,241 6,764
Non-interest income.............................. 2,359 264 487 4,026 7,136
Non-interest expenses............................ 14,264 1,572 633 2,256 18,725
Net income....................................... $ 1,931 $ 46 $ 2 $2,935 $ 4,914
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $610,255 $38,564 $ - $5,973 $654,792
Total loans, net................................. 452,491 26,357 - 675 479,523
Total deposits................................... 420,358 33,247 - - 453,605
December 31, 2002
(Dollars in thousands)
Republic Short-term
First First Bank of Tax Refund Consumer
Bank Delaware Products Loans Total
------------ --------------- -------------------------- -----------
Net interest income (loss)....................... $ 17,972 $ 1,468 $ (21) $4,542 $ 23,961
Provision for loan losses........................ 3,490 260 - 1,553 5,303
Non-interest income.............................. 2,009 512 761 - 3,282
Non-interest expenses............................ 15,528 1,536 545 977 18,586
Net income....................................... $ 645 $ 120 $ 130 $1,305 $ 2,200
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $598,853 $42,260 $ - $6,579 $647,692
Total loans, net................................. 424,010 28,169 - 4,868 457,047
Total deposits................................... 421,575 34,727 - - 456,302
REPUBLIC FIRST BANCORP | 77
- --------------------------------------------------------------------------------
December 31, 2001
(Dollars in thousands)
Republic Short-term
First First Bank of Tax Refund Consumer
Bank Delaware Products Loans Total
------------ --------------- -------------------------- -----------
Net interest income.............................. $ 16,642 $ 949 $ - $2,764 $ 20,355
Provision for loan losses........................ 2,800 132 - 1,032 3,964
Non-interest income.............................. 2,137 524 283 - 2,944
Non-interest expenses............................ 13,182 1,707 234 1,057 16,180
Net income (loss)................................ $ 1,874 $ (245) $ 33 $ 452 $ 2,114
============ ============ ============ =========== ===========
Selected Balance Sheet Amounts:
Total assets..................................... $607,951 $35,311 $ - $9,067 $652,329
Total loans, net................................. 432,847 24,209 - 6,832 463,888
Total deposits................................... 417,360 29,857 - - 447,217
REPUBLIC FIRST BANCORP | 78
- --------------------------------------------------------------------------------