UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2005
Commission File Number: 000-17007
Republic First Bancorp, Inc.
----------------------------
(Exact name of business issuer as specified in its charter)
Pennsylvania 23-2486815
------------ ----------
(State or other jurisdiction of IRS Employer Identification
incorporation or organization) Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
----------------------------------------------------
(Address of principal executive offices) (Zip code)
215-735-4422
------------
(Registrant's telephone number, including area code)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES X NO ____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
YES ____ NO X
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
Issuer's classes of common stock, as of the latest practicable date.
7,598,016 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of May 13, 2005
Page 1 of 36
Exhibit index appears on page 31
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TABLE OF CONTENTS
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Page
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Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
Item 3: Quantitative and Qualitative Information about Market Risk 30
Item 4: Controls and Procedures 30
Part II: Other Information
Item 1: Legal Proceedings 30
Item 2: Unregistered Sales of Equity and Use of Proceeds 30
Item 3: Defaults Upon Senior Securities 30
Item 4: Submission of Matters to a Vote of Security Holders 30
Item 5: Other Information 30
Item 6: Exhibits 31
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1: FINANCIAL STATEMENTS
Number Page
- ------ ----
(1) Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004........................... 4
(2) Consolidated Statements of Income for the three months ended
March 31, 2005 and 2004 (unaudited).......................................................................... 5
(3) Consolidated Statements of Cash Flows for the three months ended
March 31, 2005 and 2004 (unaudited).......................................................................... 6
(4) Notes to Consolidated Financial Statements (unaudited)....................................................... 7
-3-
Republic First Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
as of March 31, 2005 and December 31, 2004
dollars in thousands, except share data
ASSETS: March 31, 2005 December 31, 2004
--------- ---------
(unaudited)
Cash and due from banks $ 20,601 $ 15,900
Interest bearing deposits with banks 3,843 3,641
Federal funds sold and interest-bearing deposits with banks 61,432 17,162
--------- ---------
Total cash and cash equivalents 85,876 36,703
Other interest-earning restricted cash 3,422 2,923
Investment securities available for sale, at fair value 42,591 43,733
Investment securities held to maturity at amortized cost
(Fair value of $4,020 and $5,448, respectively) 4,002 5,427
Loans receivable (net of allowance for loan losses of
$6,713 and $6,684, respectively) 556,850 543,005
Premises and equipment, net 3,899 3,625
Other real estate owned 137 137
Accrued interest receivable 2,973 3,390
Business owned life insurance 10,679 10,595
Other assets 16,041 15,266
--------- ---------
Assets 726,470 664,804
Assets of First Bank of Delaware spin-off -- 55,608
--------- ---------
Total Assets $ 726,470 $ 720,412
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 94,155 $ 97,790
Demand - interest-bearing 48,606 54,762
Money market and savings 254,205 170,980
Time under $100,000 106,135 99,690
Time $100,000 or more 119,642 87,462
--------- ---------
Total Deposits 622,743 510,684
Short-term borrowings 33,055 61,090
FHLB Advances -- 25,000
Accrued interest payable 2,255 2,126
Other liabilities 6,392 5,890
Subordinated debt 6,186 6,186
--------- ---------
Liabilities 670,631 610,976
Liabilities of First Bank of Delaware spin-off -- 44,212
Total Liabilities 670,631 655,188
--------- ---------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares
authorized; shares issued 7,428,681 as of
March 31, 2005 and 7,428,681 as of December 31, 2004 74 74
Additional paid in capital 37,336 37,336
Retained earnings 19,772 17,651
Treasury stock at cost (192,689 shares) (1,541) (1,541)
Accumulated other comprehensive income 198 308
--------- ---------
Shareholder's Equity 55,839 53,828
Shareholder's Equity of First Bank of Delaware spin-off -- 11,396
--------- ---------
Total Shareholders' Equity 55,839 65,224
--------- ---------
Total Liabilities and Shareholders' Equity $ 726,470 $ 720,412
========= =========
(See notes to consolidated financial statements)
-4-
Three months ended
March 31,
2005 2004
------- -------
Interest income:
Interest and fees on loans $ 9,915 $ 7,696
Interest and dividend income on federal
funds sold and other interest-earning balances 476 215
Interest and dividends on investment securities 441 572
------- -------
Total interest income 10,832 8,483
------- -------
Interest expense:
Demand interest-bearing 85 87
Money market and savings 880 383
Time under $100,000 777 787
Time $100,000 or more 1,254 589
Other borrowed funds 638 2,091
------- -------
Total interest expense 3,634 3,937
------- -------
Net interest income 7,198 4,546
Provision for loan losses 703 699
------- -------
Net interest income after provision
for loan losses 6,495 3,847
------- -------
Non-interest income:
Loan advisory and servicing fees 184 70
Service fees on deposit accounts 485 353
Other income 474 170
------- -------
1,143 593
------- -------
Non-interest expenses:
Salaries and benefits 2,225 1,831
Occupancy 379 336
Depreciation 320 220
Legal 171 203
Advertising 45 65
Other expenses 1,331 947
------- -------
4,471 3,602
------- -------
Income from continuing operations before income taxes 3,167 838
Provision for income taxes 1,045 253
------- -------
Income from continuing operations 2,122 585
------- -------
Income from discontinued operations -- 1,437
Income tax on discontinued operations -- 509
Net income $ 2,122 $ 1,513
======= =======
Income per share from continuing operations:
Basic $ 0.29 $ 0.08
Diluted $ 0.28 $ 0.08
------- -------
Income per share from discontinued operations:
Basic -- $ 0.13
Diluted -- $ 0.12
------- -------
Net income per share:
Basic $ 0.29 $ 0.21
Diluted $ 0.28 $ 0.20
======= =======
(See notes to consolidated financial statements)
-5-
Republic First Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2005 and 2004
Dollars in thousands
(unaudited)
Three months ended
March 31,
2005 2004
-------- --------
Cash flows from operating activities:
Net income $ 2,122 $ 585
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 703 699
Depreciation 320 220
Amortization of discounts on investment securities 38 92
Increase in value of business owned life insurance (84) (109)
Decrease (increase) in accrued interest receivable
and other assets (274) 1,410
Increase (decrease) in accrued expenses
and other liabilities 631 (1,486)
-------- --------
Net cash provided by operating activities 3,456 1,411
-------- --------
Cash flows from investing activities:
Purchase of securities:
Held to maturity -- --
Available for sale (100) (5,500)
Proceeds from principal receipts, calls and
maturities of securities:
Held to maturity 1,427 1,041
Available for sale 1,036 5,767
Net increase in loans (14,577) (17,182)
Increase in other interest-earning restricted cash (499) (427)
Premises and equipment expenditures (594) (358)
-------- --------
Net cash used in investing activities (13,307) (16,659)
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options -- 57
Net increase in demand, money market and savings deposits 73,434 16,619
(Repayment) increase of overnight borrowings (28,035) 9,758
Repayment of long term borrowings (25,000) --
Net increase in time deposits 38,625 7,515
-------- --------
Net cash provided by financing activities 59,024 33,949
-------- --------
Increase in cash and cash equivalents 49,173 18,701
Cash and cash equivalents, beginning of period 36,703 70,011
-------- --------
Cash and cash equivalents, end of period $ 85,876 $ 88,712
======== ========
Supplemental disclosure:
Interest paid $ 3,505 $ 3,796
======== ========
Taxes paid $ -- $ --
======== ========
(See notes to consolidated financial statements)
-6-
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1: Organization
Republic First Bancorp, Inc. ("the Company") spun off its former
subsidiary, the First Bank of Delaware, through a distribution of the common
stock of the First Bank of Delaware on January 31, 2005. The Company's financial
statements are presented herein with an effective date of the spin-off as of
January 1, 2005. The Company is now a one-bank holding company organized and
incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised
of one wholly owned subsidiary, Republic First Bank ("Republic"), a Pennsylvania
state chartered bank. Republic 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.
Republic encounters vigorous competition for market share in the geographic
areas it serves 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.
Republic is subject to regulation by certain state and federal agencies.
These regulatory agencies periodically examine the Company and its subsidiary
for adherence to laws and regulations. As a consequence, the cost of doing
business may be affected.
Note 2: Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Republic. The accompanying unaudited
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2005
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2005. 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 Republic. Earnings
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the results of operations 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.
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
-7-
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Since the allowance for loan losses and carrying value of other real estate
owned are dependent, to a great extent, on the general economy and other
conditions that may be beyond the Republic's 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.
Stock Based Compensation:
The Company accounts for stock options under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which
contains a fair valued-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar equity
instruments under Accounting Principles Board (APB) Opinion 25, Accounting for
Stock Issued to Employees. Entities that continue to account for stock options
using APB Opinion 25 are required to make pro forma disclosures of net income
and earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The FASB recently published SFAS 123 (Revised
2004), Share-based Payment ("SFAS 123R"). SFAS 123R, which is effective from the
annual period that begins after June 15, 2005, will require that compensation
cost related to share-based payment transactions, including stock options, be
recognized the financial statements. Management is currently evaluating the
provisions of SFAS 123R. In first quarter 2005, the Company vested all unvested
options, and the related expense is reflected in the table below.
The Company has a stock-based employee compensation plan, which is more
fully described in note 16 to the consolidated financial statements in the
Company's annual report on Form 10-K for the year ended December 31, 2004. 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 value 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).
-8-
Stock Based Compensation
Three months ended
March 31,
Continuing
(dollar amounts in thousands) Operations
2005 2004 2004
---------------------- --------------------- ---------------------
Net income as reported $ 2,122 $1,513 $ 585
Less: Stock based compensation costs determined
under fair value method for all awards (52) (54) (41)
---------------------- --------------------- ---------------------
Net income, pro forma $ 2,070 $1,459 $ 544
====================== ===================== =====================
Earnings per common share-basic: As reported $ 0.29 $ 0.21 $ 0.08
---------------------- --------------------- ---------------------
Pro-forma $ 0.29 $ 0.20 $ 0.08
---------------------- --------------------- ---------------------
Earnings per common share-diluted: As reported $ 0.28 $ 0.20 $ 0.08
---------------------- --------------------- ---------------------
Pro-forma $ 0.27 $ 0.19 $ 0.07
---------------------- --------------------- ---------------------
The Company granted no options during the three months ended March 31,
2005. The pro forma compensation expense for that period is based upon the
vesting of all unvested options in that quarter. 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 those grants: dividend
yield of 0%; expected volatility of between 32.2% and 35.2%; risk-free interest
rate of between 3.24% and 3.77% and an expected life of 5.0 years. As a result
of the spin-off of First Bank of Delaware, related stock option expense was
allocated between those two entities on the basis of stock prices as of the date
of the spin-off.
The Company granted 11,667 options during the three months ended March 31,
2004. The pro forma 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 the grants in 2004: dividend yields of 0%; expected
volatility of 34.1%; risk-free interest rate of 3.15% and an expected life of
5.0 years.
Reclassifications and Restatement for 10% Stock Dividend:
Certain items in the financial statements and accompanying note have been
reclassified to conform to the current year's presentation format. There was no
effect on net income for the periods presented herein as a result of
reclassifications. All applicable amounts in these financial statements have
been restated for a 10% stock dividend paid on August 24, 2004.
Note 4: Significant Accounting Pronouncements
Management has determined that Republic First Capital Trust I ("RFCT"),
utilized for the Company's $6,000,000 of pooled preferred securities issuance,
qualifies as a variable interest entity under FIN 46, as revised. RFCT issued
mandatorily redeemable preferred stock to investors and loaned the proceeds to
the Company. RFCT is included in the Company's consolidated balance sheet and
statements of income as of and for the year ended December 31, 2003. Subsequent
to the issuance of
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FIN 46 in January 2003, the FASB issued a revised interpretation, FIN 46(R),
Consolidation of Variable Interest Entities, the provisions of which were
required to be applied to certain variable interest entities by March 31, 2004.
The Company adopted the provisions under the revised interpretation in the
first quarter of 2004. Accordingly, the Company no longer consolidates RFCT as
of March 31, 2004. FIN 46(R) precludes consideration of the call option embedded
in the preferred stock when determining if the Company has the right to a
majority of RFCT's expected residual returns. The deconsolidation resulted in
the investment in the common stock of RFCT to be included in other assets as of
September 30, 2004 and the corresponding increase in outstanding debt of
$186,000. In addition, the income received on the Company's common stock
investment is included in other income. The adoption of FIN 46R did not have a
material impact on the financial position or results of operations. The Federal
Reserve has issued final guidance on the regulatory capital treatment for the
trust-preferred securities issued by RFCT as a result of the adoption of FIN
46(R). The final rule would retain the current maximum percentage of total
capital permitted for trust preferred securities at 25%, but would enact other
changes to the rules governing trust preferred securities that restrict their
use as part of the collection of entities known as "restricted core capital
elements." The rule would take effect March 31, 2009; however, a five-year
transition period starting March 31, 2004 and leading up to that date would
allow bank holding companies to continue to count trust preferred securities as
Tier 1 Capital after applying FIN-46(R). Management has evaluated the effects of
the final rule and does not anticipate a material impact on its capital ratios.
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 of 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. The adoption of SOP 03-3 did not have a
material effect on the Company's financial statements.
The company accounts for stock options under the provisions of SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, which
contains a fair valued-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date based on
the fair value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123 permits
entities to continue accounting for employee stock options and similar equity
instruments under Accounting Principle Board (APB) Opinion 25, Accounting for
Stock Issued to Employees. Entities that continue to account for stock options
using APB Opinion 25 are required to make pro forma disclosures of net income
and earnings per share, as if the fair value-based method of accounting defined
in SFAS No. 123 had been applied. The FASB recently published SFAS 123 (Revised
2004), Share-Based Payment ("SFAS 123R"). SFAS 123R, which is effective for the
first annual period that begins after June 15, 2005, will require that
compensation cost related to share-based payment transactions, including stock
options, be recognized in the financial statements. Management is currently
evaluating the provisions of SFAS 123R.
-10-
In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB
No.107"), Share-Based Payment, providing guidance on option valuation methods,
the accounting for income tax effects of share-based payment arrangements upon
adoption of SFAS No. 123(R), and the disclosures in MD&A subsequent to the
adoption. The Company will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R) on January 1, 2006.
Note 5: Legal Proceedings
The Company and Republic are from time to time parties (plaintiff or
defendant) to lawsuits in the normal course of business. While any litigation
involves an element of uncertainty, management, after reviewing pending actions
with legal counsel, is of the opinion that the liabilities of the Company and
Republic, if any, resulting from such actions will not have a material effect on
the financial condition or results of operations of the Company.
-11-
Note 6: 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. After the spin-off of First Bank of Delaware, the Company
has two reportable segments: community banking and tax refund loans. The
community bank segment primarily encompasses the commercial loan and deposit
activities of Republic, as well as consumer loan products in the area
surrounding its branches. Republic additionally purchases tax refund loans from
the First Bank of Delaware, which comprise the other segment.
The Company evaluates the performance of the community banking segments
based upon net income, return on equity and return on average assets. Segment
information for the three months ended March 31, 2005 and 2004 is as follows:
As of and for the three months ended:
March 31, 2005
(dollars in thousands)
Republic First Tax Refund
Bank Loans Total
------------------- ----------------- -----------------
Net interest income $ 6,091 $ 1,107 $ 7,198
Provision for loan losses (217) 920 703
Non-interest income 1,143 - 1,143
Non-interest expenses 4,471 - 4,471
Net income $ 1,998 $ 124 $ 2,122
=================== ================= =================
Selected Balance Sheet Accounts:
Total assets $ 724,554 $ 1,916 $ 726,470
Total loans 561,647 1,916 563,563
Total deposits 622,743 - 622,743
March 31, 2004
(dollars in thousands)
Republic First Tax Refund
Bank Loans Total
------------------- ----------------- -----------------
Net interest income $ 3,692 $ 854 $ 4,546
Provision for loan losses - 699 699
Non-interest income 593 - 593
Non-interest expenses 3,602 - 3,602
Income after tax $ 484 $ 101 585
=================== ================= =================
Discontinued operations 928
-----------------
Net income $1,513
=================
Selected Balance Sheet Accounts:
Total assets 650,745 2,615 653,360
Total loans 473,692 2,615 476,307
Total deposits 449,505 - 449,505
-12-
Note 7: Earnings Per Share:
Earnings per share ("EPS") consists of two separate components: basic EPS
and diluted EPS. Basic EPS is computed by dividing net income by the weighted
average number of common shares outstanding for each period presented. Diluted
EPS is calculated by dividing net income by the weighted average number of
common shares outstanding plus dilutive common stock equivalents ("CSEs"). CSEs
consist of dilutive stock options granted 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. CSEs which are anti-dilutive are not
included in the following calculation. At March 31, 2005, and 2004,
respectively, there were no stock options that were not included in the
calculation of EPS because the option exercise price is greater than the average
market price for the period.
The following tables are a comparison of EPS for the three months ended March
31, 2005 and 2004.
2005 2004
---- ----
Year to Date
Income from Continuing Operations $2,122,000 $585,000
Per Per
Shares Share Shares Share
------ ----- ------ -----
Weighted average shares
For period 7,236,131 7,183,096
Basic EPS $0.29 $0.08
Add common stock equivalents
representing dilutive stock options 481,507 338,266
------- -------
Effect on basic EPS of dilutive CSE $(.01) -
-----
Equals total weighted average
shares and CSE (diluted) 7,717,638 7,521,362
========= =========
Diluted EPS $0.28 $0.08
===== =====
Income from Discontinued Operations - $928,000
Per Per
Shares Share Shares Share
------ ----- ------ -----
Weighted average shares
For period 7,183,096
Basic EPS $0.13
Add common stock equivalents
representing dilutive stock options 338,266
-------
Effect on basic EPS of dilutive CSE $(0.01)
------
Equals total weighted average
shares and CSE (diluted) 7,521,362
=========
Diluted EPS $0.12
=====
Net Income $2,122,000 $1,513,000
Per Per
Shares Share Shares Share
------ ----- ------ -----
Weighted average shares
For period 7,236,131 7,183,096
Basic EPS $0.29 $0.21
Add common stock equivalents
representing dilutive stock options 481,507 338,266
------- -------
Effect on basic EPS of dilutive CSE $(0.01) $(0.01)
------ ------
Equals total weighted average
shares and CSE (diluted) 7,717,638 7,521,362
========= =========
Diluted EPS $0.28 $0.20
===== =====
-13-
Note 8: Comprehensive Income
The following table displays net income and the components of other
comprehensive income to arrive at total comprehensive income. The only
components of other comprehensive income are those related to the unrealized
gains (losses) on available for sale investment securities.
(dollar amounts in thousands) Three months ended
March 31,
---------------------------
2005 2004
------------ ------------
Net income $ 2,122 $ 1,513
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses during the period (110) (27)
------------ ------------
Comprehensive income $ 2,012 $ 1,486
============ ============
Amounts of other comprehensive income relating to discontinued operations are
immaterial.
Note 9: Restatement of Prior Year for Discontinued Operations
Prior year amounts have been restated to reflect the discontinued
operations of First Bank of Delaware which was spun off effective as of January
1, 2005.
-14-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of significant
changes in the Company's results of operations, financial condition and capital
resources presented in the accompanying consolidated financial statements. This
discussion should be read in conjunction with the accompanying notes to the
consolidated financial statements.
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "may," "believes," "expect," "estimate," "project," "anticipate,"
"should," "intend," "probability," "risk," "target," "objective" and similar
expressions or variations on such expressions. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements. For example, risks and uncertainties can arise with changes in:
general economic conditions, including their impact on capital expenditures; new
service and product offerings by competitors and price pressures; and similar
items. Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis only as of the
date hereof. The Company undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or circumstances that arise
after the date hereof. Readers should carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission, including the Company's Annual Report on
Form 10-K for the year ended December 31, 2004, Quarterly Reports on Form 10-Q,
filed by the Company in 2005 and 2004, and any Current Reports on Form 8-K filed
by the Company, as well as other filings.
Financial Condition:
March 31, 2005 Compared to December 31, 2004
Total assets increased $61.7 million to $726.5 million at March 31, 2005,
versus $664.8 million at December 31, 2004. This increase reflected a $13.8
million increase in net loans. These loans were funded by increases in
transaction accounts and certificates of deposit. The balance of the increase in
total assets reflected periodic fluctuations in money market and savings
accounts, which were temporarily invested in federal funds sold.
Loans:
The loan portfolio represents the Company's largest asset category and is
its most significant source of interest income. The Company's lending strategy
focuses on small and medium size businesses and professionals that seek highly
personalized banking services. Net loans increased $13.8 million, to $556.9
million at March 31, 2005, versus $543.0 million at December 31, 2004.
Substantially all of the increase resulted from commercial and construction
loans. The loan portfolio consists of secured and unsecured commercial loans
including commercial real estate, construction loans, residential mortgages,
automobile loans, home improvement loans, home equity loans and lines of credit,
overdraft lines of credit and others. Commercial loans are originated as either
fixed or variable rate loans with typical terms of 1 to 5 years. Commercial
loans typically range between $250,000 and $5,000,000 but customers
-15-
may borrow significantly larger amounts up to the legal lending limit of
approximately $10.3 million at March 31, 2005. Individual customers may have
several loans that are secured by different collateral.
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. Republic'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 $42.6
million at March 31, 2005, which was comparable to the $43.7 million at year-end
2004. At March 31, 2005 and December 31, 2004, the portfolio had net unrealized
gains of $300,000 and $502,000, 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 March 31, 2005, securities held
to maturity totaled $4.0 million, compared to $5.4 million at year-end 2004. At
both dates, respective carrying values approximated market values.
Cash and Cash Equivalents:
Cash and due from banks, interest bearing deposits and federal funds sold
are all liquid funds. The aggregate amount in these three categories increased
by $49.2 million, to $85.9 million at March 31, 2005, from $36.7 million at
December 31, 2004, as increases in deposit balances were invested in Federal
Funds. The increase reflected large deposits which are likely short-term.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which Republic is compensated. At March 31, 2005, the
balance was $3.4 million versus $2.9 million at December 31, 2004.
Fixed Assets:
Premises and equipment, net of accumulated depreciation, increased $274,000
to $3.9 million at March 31, 2005. The increase reflected software for the
commercial loan department and other data processing equipment.
Other Real Estate Owned:
Other real estate owned amounted to $137,000 at March 31, 2005 and December
31, 2004.
Business Owned Life Insurance:
The balance of business owned life insurance amounted to $10.7 million at
March 31, 2005 and $10.6 million at December 31, 2004. The income earned on
these policies is reflected in other income.
Deposits:
Deposits, which include non-interest and interest-bearing demand deposits,
money market, savings and time deposits, are Republic's 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. Institutional deposits also may be
utilized when they represent a lower-cost funding alternative.
-16-
Period ended deposits increased by $112.1 million to $622.7 million at
March 31, 2005, from $510.7 million at December 31, 2004. The majority of that
increase represents balances that are likely short-term. Average transaction
accounts increased 33.2% or $80.4 million more than the prior year period to
$322.8 million in the first quarter of 2005. A portion of that increase is
likely short-term. Deposit growth benefited from the Company's business
development efforts. Period end time deposits increased $38.6 million, or 20.6%
to $225.8 million at March 31, 2005, versus $187.2 million at the prior
year-end. The increase resulted primarily from the purchase of institutional
deposits which were available at a relatively low cost, and which are reflected
under "Time $100,000 or more" in the balance sheet.
FHLB Borrowings:
FHLB borrowings totaled $33.1 million at March 31, 2005 and $86.1 million
at December 31, 2004. The March 31, 2005 balance was comprised wholly of
overnight borrowings.
Shareholders' Equity:
Total shareholders' equity increased $2.0 million to $55.8 million at March
31, 2005, versus $53.8 million at December 31, 2004. This increase was primarily
the result of year-to-date net income of $2.1 million.
Three Months Ended March 31, 2005 Compared to March 31, 2004
- ------------------------------------------------------------
Results of Operations:
Overview
The Company's income from continuing operations increased to $2.1 million
or $0.28 per diluted share for the three months ended March 31, 2005, compared
to $585,000, or $0.08 per diluted share for the comparable prior year period.
The improvement reflected a $2.3 million, or 27.7%, increase in total interest
income, reflecting a 20.7% increase in average loans outstanding. Interest
expense decreased $303,000 between the periods, notwithstanding additional
funding required to fund that loan growth. The decrease in interest expense
reflected the maturity of relatively high cost FHLB advances. Non-interest
income increased $550,000 reflecting a one time $251,000 lawsuit award.
Non-interest bearing demand accounts increased 23.6% in the first quarter of
2005, compared to the prior year's first quarter. The increased net income
resulted in a return on average assets and average equity from continuing
operations of 1.15 % and 15.48% respectively, in the first quarter of 2005
compared to .36% and 4.90% respectively for the same period in 2004.
Analysis of Net Interest Income
Historically, the Company's earnings have depended significantly upon net
interest income, which is the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities. Net
interest income is impacted by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
-17-
For the three months ended For the three months ended
March 31, 2005 March 31, 2004
--------------------------------------------- --------------------------------------------------
Interest-earning assets:
Interest Interest
(Dollars in thousands) Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------- ------------- ------------- ------------------- ------------ -------------
Federal funds sold
and other interest-
earning assets $ 77,425 $ 476 2.47% $ 81,272 $ 215 1.07%
Securities 48,593 441 3.63% 67,826 572 3.37%
Loans receivable 567,247 9,915 7.01% 469,872 7,696 6.57%
-------------- ------------- ------------- ------------------- ------------ -------------
Total interest-earning assets 693,265 10,832 6.27% 618,970 8,483 5.56%
Other assets 42,794 36,456
-------------- -------------------
Total assets $ 736,059 $ 655,426
============== ===================
Interest-bearing liabilities:
Demand-non interest
bearing $ 93,559 $ 75,698
Demand interest-bearing 55,029 $ 85 0.62% 57,089 $ 87 0.61%
Money market & savings 174,225 880 2.03% 109,631 383 1.40%
Time deposits 283,087 2,031 2.88% 204,982 1,376 2.69%
-------------- ------------- ------------- ------------------- ------------ -------------
Total deposits 605,900 2,996 1.98% 447,400 1,846 1.67%
Total interest-bearing
deposits 512,341 2,996 2.35% 371,702 1,846 2.01%
-------------- ------------- ------------- ------------------- ------------ -------------
Other borrowings 62,150 638 4.12% 148,169 2,091 5.64%
-------------- ------------- ------------- ------------------- ------------ -------------
Total interest-bearing
liabilities $ 574,491 $ 3,634 2.54% $ 519,871 $ 3,937 3.03%
============== ============= ============= =================== ------------ =============
Total deposits and
other borrowings 668,050 3,634 2.18% 595,569 3,937 2.64%
-------------- ------------- ------------- ------------------- ------------ -------------
Non interest-bearing
liabilites 13,176 12,058
Shareholders' equity 54,833 47,799
-------------- -------------------
Total liabilities and
shareholders' equity $ 736,059 $ 655,426
============== ===================
Net interest income $ 7,198 $ 4,546
============= ============
Net interest spread 3.73% 2.53%
============= =============
Net interest margin 4.16% 2.95%
============= =============
Net interest margin not including
tax refund loans 3.63% 2.44%
============= =============
-18-
The rate volume table below presents an analysis of the impact on interest
income and expense resulting from changes in average volumes and rates during
the period. Changes due to rate and volume variances have been allocated to
rate.
Rate/Volume Table
Three months ended March 31, 2005
versus March 31, 2004
(dollars in thousands)
Due to change in:
Volume Rate Total
---------------- ---------------- -------------
Interest earned on:
Federal funds sold $ (24) $ 285 $ 261
Securities (175) 44 (131)
Loans 1,702 517 2,219
- ------------------------------------------------------------------------------------------------
Total interest-earning assets 1,503 846 2,349
Interest expense of
deposits
Interest-bearing demand deposits 3 (1) 2
Money market and savings (327) (170) (497)
Time deposits (560) (95) (655)
- ------------------------------------------------------------------------------------------------
Total deposit interest expense (884) (266) (1,150)
Other borrowings 890 563 1,453
- ------------------------------------------------------------------------------------------------
Total interest expense 6 297 303
- ------------------------------------------------------------------------------------------------
Net interest income $ 1,509 $ 1,143 $ 2,652
- ------------------------------------------------------------------------------------------------
The Company's net interest margin increased 123 basis points to 4.16% for
the three months ended March 31, 2005, versus the prior year comparable period.
Excluding the impact of tax refund loans, margins similarly increased 119 basis
points to 3.63% in the first quarter of 2005 from 2.44% in the prior year
comparable period.
While yields on interest-bearing assets increased 71 basis points to 6.27%
in first quarter 2005 from 5.56% in first quarter 2004, the yields on total
deposits and other borrowings fell 46 basis points to 2.18% from 2.64% between
those respective periods. Those 71 and 46 basis point improvements comprise the
majority of the improvement in the margin. The increase in yields on assets
resulted primarily from the 175 basis points of increases in short-term interest
rates between the two quarters. The decrease in the cost of funds reflected the
impact of the maturity of relatively high cost FHLB advances. A total of $125.0
million of Federal Home Loan Bank ("FHLB") advances which carried an average
interest rate of 6.20% matured beginning the third quarter of 2004 through the
first quarter of 2005.
The Company's net interest income increased $2.7 million, or 58.3%, to $7.2
million for the three months ended March 31, 2005, from $4.5 million for the
prior year comparable period. As shown in the Rate Volume table above, the
increase in net interest income was due primarily to the increased volume of
loans. Higher rates on loans resulted primarily from variable rate loans which
immediately adjust to increases in the prime rate. Other borrowings expense
decreased as a result of the maturity of the $125.0 million of FHLB advances,
which were only partially replaced by overnight FHLB borrowings. The first
quarter net interest margin reflects seasonal tax refund loan income which
increased the margin by $1.1 million in first quarter 2005, compared to $854,000
in first quarter 2004. Average interest-earning assets
-19-
amounted to $693.3 million for first quarter 2005 and $619.0 million for first
quarter 2004. Substantially all of the $74.3 million increase resulted from loan
growth.
The Company's total interest income increased $2.3 million, or 27.7%, to
$10.8 million for the three months ended March 31, 2005, from $8.5 million for
the prior year comparable period. Interest and fees on loans increased $2.2
million to $9.9 million for the three months ended March 31, 2005, from $7.7
million for the prior year comparable period. The majority of the increase
resulted from a 20.7% increase in average loan balances. In first quarter 2005,
average loan balances amounted to $567.2 million, compared to $469.9 million in
the comparable prior year period. The balance of the 28.8% increase in interest
on loans resulted primarily from the repricing of the variable rate portfolio to
higher short term market interest rates. Interest and dividends on investment
securities decreased $131,000 to $441,000 for the three months ended March 31,
2005, from $572,000 for the prior year comparable period. This decline reflected
the $19.2 million, or 28.3%, decrease in average investment securities
outstanding to $48.6 million for first quarter 2005 from $67.8 million for the
comparable prior year period. The reduction in securities balances resulted from
the continued deferral of long-term securities purchases. Interest on federal
funds sold and other interest-earning assets increased $261,000, or 121.3%, due
to increases in short-term market interest rates.
The Company's total interest expense decreased $303,000, or 7.7%, to $3.6
million for the three months ended March 31, 2005, from $3.9 million for the
prior year comparable period. The decrease in interest expense reflected the
maturity of $125.0 million of FHLB advances, with an average rate of 6.20%.
Those advances were replaced by overnight and FHLB borrowings and deposits which
generally bore interest at 3% or less. Interest-bearing liabilities averaged
$574.5 million for the three months ended March 31, 2005, versus $519.9 million
for the prior year comparable period, or an increase of $54.6 million. The
increase reflected additional funding utilized for loan growth. Average
transaction account balances increased $80.4 million which facilitated an $86.0
million decrease in other borrowings. A portion of the increase in transaction
accounts is likely short-term. The average rate paid on interest-bearing
liabilities decreased 49 basis points to 2.54% for the three months ended March
31, 2005. That decrease resulted notwithstanding the increase in market interest
rates due primarily to the maturity of the 6.20% average rate FHLB advances. All
such advances had matured by March 31, 2005. Money market and savings interest
expense increased $497,000 to $880,000 in first quarter 2005, from the
comparable prior year period. Related average balances increased $64.6 million,
or 58.9%, in those respective periods, and accounted for the majority of the
increase. The balance of the increase reflected the higher short-term interest
rate environment, which while increased, lagged the general increase in
short-term market interest rates. Accordingly, rates on total interest-bearing
deposits increased 34 basis points in first quarter 2005 compared to first
quarter 2004, while short term rates increased approximately 175 basis points
between those periods.
Interest expense on time deposits (certificates of deposit) increased
$655,000, or 47.6%, to $2.0 million for first quarter 2005, from $1.4 million
for the prior year comparable period. The majority of that increase resulted
from increases in related average balances. Average time deposits increased
$78.1 million, or 38.1%, between those periods. Average rates increased only 18
basis points between those periods, as increases lagged the increases in
short-term market interest rates.
Interest expense on other borrowings decreased $1.5 million to $638,000 in
first quarter 2005, primarily as a result of decreased average balances. Average
other borrowings, substantially FHLB advances and overnight borrowings,
decreased $86.0 million, or 58.1%, between those respective periods. These
reductions in balances reflected the increases in transaction accounts, which
were utilized as a less costly funding source for loan growth. As the $125.0
million of 6.20% average rate FHLB advances matured, these were replaced with
less costly transaction accounts, or overnight FHLB borrowings.
-20-
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 amounted to $703,000 in first quarter 2005 which was comparable to the
prior year first quarter. The first quarter 2005 provision reflected $919,000
for losses on tax refund loans, which were more than offset by $1.1 million in
related revenues. The first quarter 2005 provision was reduced as a result of an
approximate $252,000 recovery on a commercial loan, which had been charged off
in the prior year. That recovery resulted in a reserve balance which exceeded
that determined by Republic's methodology. The quarterly provision was reduced
accordingly.
Non-Interest Income
Total non-interest income increased $550,000 to $1.1 million for the three
months ended March 31, 2005, versus $593,000 for the prior year comparable
period. That increase reflected a $251,000, one-time award in a lawsuit,
reflected in other income. The increase also reflected a $132,000 increase in
service charges on deposit accounts which resulted primarily from increases in
the volume of accounts and related activity. Also contributing to the increases
in deposit service charges were increases on various service charges effective
beginning fourth quarter 2004.
Non-Interest Expenses
Total non-interest expenses increased $869,000 or 24.1% to $4.5 million for
the three months ended March 31, 2005, from $3.6 million for the prior year
comparable period. Salaries and employee benefits increased $394,000 or 21.5%,
to $2.2 million for the three months ended March 31, 2005, from $1.8 million for
the prior year comparable period. That increase reflected additional salary
expense related to commercial loan and deposit production, and related support
staff. It also reflected annual merit increases which are targeted at
approximately 3%.
Occupancy expense increased $43,000, or 12.8%, to $379,000. The increase
reflected an additional branch location which was opened in first quarter 2005.
Depreciation expense increased $100,000 to $320,000 for the three months
ended March 31, 2005, versus $220,000 for the prior year comparable period. The
majority of the increase resulted from the write-off of assets determined to
have shorter lives than originally expected.
Legal fees decreased $32,000, or 15.8%, to $171,000 in first quarter 2005,
compared to $203,000 in first quarter 2004, resulting from reduced fees on a
number of different matters.
Advertising expense decreased $20,000, or 30.8% , to $45,000 in first
quarter 2005, compared to $65,000 in first quarter 2004. The decrease reflected
a decrease in the number of advertisements.
Other expenses increased $384,000, or 40.5% to $1.3 million for the three
months ended March 31, 2005, from $947,000 for the prior year comparable period.
The increase reflected a $104,000 increase in data processing expense reflecting
the outsourcing of check processing. In previous periods, Republic employees had
performed these functions, and related expense was included in salaries and
benefits. The increase also reflected approximately $99,000 of staff acquisition
fees. Audit and accounting fees increased approximately $60,000, reflecting
expense connected with Sarbanes Oxley compliance.
-21-
Provision for Income Taxes
The provision for income taxes for continuing operations increased
$792,000, to $1.0 million for the three months ended March 31, 2005, from
$253,000 for the prior year comparable period. That increase was primarily the
result of the increase in pre-tax income. The effective tax rates in those
periods were 33% and 30% respectively. The effective rate was lower in the 2004
period due to the impact of a relatively fixed amount of tax exempt income on
lower income.
Commitments, Contingencies and Concentrations
Republic is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit totaling $174.2 million at March 31, 2005. 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 $166.6 million and $156.6
million and standby letters of credit of approximately $7.5 million and $8.0
million at March 31, 2005, and December 31, 2004, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Republic evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
-22-
Regulatory Matters
The following table presents the Company's capital regulatory ratios at
March 31, 2005, and December 31, 2004:
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ----------- ----------- -----------
Dollars in thousands
At March 31, 2005
Total risk based capital
Republic First Bank $66,440 11.99% $44,342 8.00% $55,427 10.00%
Republic First Bancorp, Inc. 66,440 11.99% 44,342 8.00% - N/A
Tier one risk based capital
Republic First Bank 59,727 10.78% 22,171 4.00% 33,256 6.00%
Republic First Bancorp, Inc. 59,727 10.78% 22,171 4.00% - N/A
Tier one leveraged capital
Republic First Bank 59,727 8.12% 36,775 5.00% 36,775 5.00%
Republic First Bancorp, Inc. 59,727 8.12% 36,775 5.00% - N/A
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------ ------------- ---------- ------------- ----------
At December 31, 2004
Total risk based capital
Republic First Bank $64,251 12.09% $42,526 8.00% $53,158 10.00%
Republic First Bancorp, Inc. 64,251 12.09% 42,526 8.00% - N/A
Tier one risk based capital
Republic First Bank 57,606 10.84% 21,263 4.00% 31,895 6.00%
Republic First Bancorp, Inc. 57,606 10.84% 21,263 4.00% - N/A
Tier one leveraged capital
Republic First Bank 57,606 9.25% 31,143 5.00% 31,143 5.00%
Republic First Bancorp, Inc. 57,606 9.25% 31,143 5.00% - N/A
Dividend Policy
The Company has not paid any cash dividends on its common stock, but may
consider dividend payments in the future.
Liquidity
Financial institutions must maintain liquidity to meet day-to-day
requirements of depositors and borrowers, take advantage of market opportunities
and provide a cushion against unforeseen needs. Liquidity needs can be met by
utilizing cash and federal funds sold, converting assets to cash through
computer repurchase or sale various or drawing upon lines of credit cash
generated by increasing deposits represents the primarily source of liquidity.
Regulatory authorities require certain liquidity ratios such that Republic
maintains available funds, or can obtain available funds at reasonable rates, in
order to satisfy commitments to borrowers and depositors. In response to these
requirements, Republic has formed an Asset/Liability Committee
-23-
("ALCO"), comprised of selected members of the board of directors and senior
management, which monitors such ratios. The purpose of the Committee is in part,
to monitor liquidity and adherence to the ratios in addition to managing the
relative interest rate risk to Republic. The ALCO meets at least quarterly.
Republic's most liquid assets, consisting of cash due from banks, deposits
with banks and federal funds sold, totaled $85.9 million at March 31, 2005,
compared to $36.7 million at December 31, 2004, due primarily to an increase in
federal funds sold. Loan maturities and repayments, if not reinvested in loans,
also are immediately available for liquidity. At March 31, 2005, Republic
estimated that in excess of $50.0 million of loans would mature or be repaid in
the six month period that will end September 30, 2005. Additionally, the
majority of its securities are available to satisfy liquidity requirements
through pledges to the FHLB to access Republic's line of credit.
Funding requirements have historically been satisfied primarily by
generating transaction accounts and certificates of deposit with competitive
rates, and utilizing the facilities of the FHLB. At March 31, 2005, Republic had
$104.8 million in unused lines of credit readily available under arrangements
with the FHLB and correspondent banks compared to $100.6 million at December 31,
2004. These lines of credit enable Republic to purchase funds for short or
long-term needs at rates often lower than other sources and require pledging of
securities or loan collateral. The amount of available credit has been
decreasing with the prepayment of mortgage backed loans and securities.
At March 31, 2005, Republic had aggregate outstanding commitments
(including unused lines of credit and letters of credit) of $166.6 million.
Certificates of deposit scheduled to mature in one year totaled $129.8 million
at March 31, 2005. There were no FHLB advances outstanding at March 31, 2005,
and short-term borrowings of $33.1 million consisted wholly of overnight FHLB
borrowings. The Company anticipates that it will have sufficient funds available
to meet its current commitments.
Republic's target and actual liquidity levels are determined by comparisons
of the estimated repayment and marketability of its interest-earning assets and
projected future outflows of deposits and other liabilities. Republic has
established a line of credit from a correspondent bank to assist in managing
Republic's liquidity position. That line of credit totaled $10.0 million and was
unused at March 31, 2005. Republic has established a line of credit with the
Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity of
approximately $170.4 million. As of March 31, 2005, Republic had borrowed $33.1
million under that line of credit. Securities also represent a primary source of
liquidity. Accordingly, investment decisions generally reflect liquidity over
other considerations.
Republic'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. Republic 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, its incremental cost may vary depending on market conditions.
Republic's securities portfolio is also available for liquidity, usually 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.
Republic's ALCO is responsible for managing its liquidity position and
interest sensitivity. That committee's primary objective is to maximize net
interest income while configuring interest-sensitive assets and liabilities to
manage interest rate risk and provide adequate liquidity.
-24-
Investment Securities Portfolio
At March 31, 2005, the Company had identified certain investment securities
that are being held for indefinite periods of time, including securities that
will be used as part of the Company's asset/liability management strategy and
that may be sold in response to changes in interest rates, prepayments and
similar factors. These securities are classified as available for sale and are
intended to increase the flexibility of the Company's asset/liability
management. Available for sale securities consisted of U.S. Government Agency
securities and other investments. The book and market values of investment
securities available for sale were $42.3 million and $42.6 million as of March
31, 2005, respectively. The net unrealized gain on investment securities
available for sale as of that date was $300,000.
Loan Portfolio
The Company's loan portfolio consists of secured and unsecured commercial
loans including commercial real estate loans, loans secured by one-to-four
family residential property, commercial construction and residential
construction loans as well as residential mortgages, home equity loans,
short-term consumer and other consumer loans. Commercial loans are primarily
term loans made to small to medium-sized businesses and professionals for
working capital, asset acquisition and other purposes. Commercial loans are
originated as either fixed or variable rate loans with typical terms of 1 to 5
years. Republic's commercial loans typically range between $250,000 and
$5,000,000 but customers may borrow significantly larger amounts up to
Republic's combined legal lending limit of approximately $10.3 million at March
31, 2005. Individual customers may have several loans often secured by different
collateral.
Net loans increased $13.8 million, to $556.9 million at March 31, 2005,
from $543.0 million at December 31, 2004. Commercial and construction loans
increased $11.3 million due primarily to increased volume in the commercial real
estate and construction loan portfolios.
-25-
The following table sets forth the Company's gross loans by major
categories for the periods indicated:
(dollars in thousands) As of March 31, 2005 As of December 31, 2004
-----------------------------------------------------------------------
Balance % of Total Balance % of Total
-----------------------------------------------------------------------
Commercial:
Real estate secured $ 356,623 63.3 $ 350,682 63.8
Construction and land development 117,615 20.9 107,462 19.6
Non real estate secured 54,287 9.6 57,361 10.4
Unsecured 7,188 1.3 8,917 1.6
-----------------------------------------------------------------------
535,713 95.1 524,422 95.4
Residential real estate 7,908 1.4 8,219 1.5
Consumer, short-term & other 19,942 3.5 17,048 3.1
-----------------------------------------------------------------------
Total loans 563,563 100.0% 549,689 100.0%
Less allowance for loan losses (6,713) (6,684)
---------------- --------------
Net loans $ 556,850 $ 543,005
================ ==============
Credit Quality
Republic's 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 and approves the majority of
commercial loans.
Loans, including impaired loans, are generally classified as non-accrual if
they are past due as to maturity or payment of interest or principal for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past due
less than 90 days may also be classified as non-accrual if repayment in full of
principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due are reasonably assured of repayment within an
acceptable period of time, and there is a sustained period of repayment
performance by the borrower, in accordance with the contractual terms.
While a loan is classified as non-accrual or as an impaired loan and the
future collectibility of the recorded loan balance is doubtful, collections of
interest and principal are generally applied as a reduction to principal
outstanding. When the future collectibility of the recorded loan balance is
expected, interest income may be recognized on a cash basis. In the case where a
non-accrual loan had been partially charged off, recognition of interest on a
cash basis is limited to that which would have been recognized on the recorded
loan balance at the contractual interest rate. Cash interest receipts in excess
of that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
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The following summary shows information concerning loan delinquency and
other non-performing assets at the dates indicated.
March 31, December 31,
2005 2004
----------------------------------------
(dollars in thousands)
Loans accruing, but past due 90
days or more - -
Non-accrual loans $3,212 $4,854
----------------------------------------
Total non-performing loans (1) 3,212 4,854
Other real estate owned 137 137
----------------------------------------
Total non-performing assets (2) $3,349 $4,991
========================================
Non-performing loans as a percentage
of total loans net of unearned
Income 0.57% 0.88%
Non-performing assets as a percentage
of total assets 0.46% 0.75%
(1) Non-performing loans are comprised of (i) loans that are on a nonaccrual
basis; (ii) accruing loans that are 90 days or more past due and (iii)
restructured loans.
(2) Non-performing assets are composed of non-performing loans and other real
estate owned (assets acquired in foreclosure).
Non accrual-loans decreased $1.6 million, to $3.2 million at March 31,
2005, from $4.9 million at December 31, 2004. That reduction reflected the
pay-off of loans totaling $1.3 million to a single borrower, without loss of
principal. There were no loans accruing, but past due 90 days or more at either
date.
Problem loans consist of loans that are included in performing loans, but
for which potential credit problems of the borrowers have caused management to
have serious doubts as to the ability of such borrowers to continue to comply
with present repayment terms. At March 31, 2005, all identified problem loans
are included in the preceding table or are classified as substandard or
doubtful, with a specific reserve allocation in the allowance for loan losses
(see "Allowance For Loan Losses"). Management believes that the appraisals and
other estimates of the value of the collateral pledged against the non-accrual
loans generally exceed the amount of its outstanding balances.
The recorded investment in loans which are impaired totaled $3.2 million at
March 31, 2005, and $4.9 million at December 31, 2004, and the amount of related
valuation allowances were $770,000 and $1.2 million respectively at those dates.
The lower March 31, 2005 amount reflected the pay-off of loans totaling $1.3
million noted previously under the discussion of non-accrual loans. There were
no commitments to extend credit to any borrowers with impaired loans as of the
end of the periods presented herein.
At March 31, 2005, compared to December 31, 2004, internally classified
substandard loans had decreased to $5.4 million from $8.7 million; while
doubtful loans increased by $1.1 million to approximately $1.4 million from
$337,000. There were no loans classified as loss at those dates. The $3.3
million decrease in substandard loans reflected the pay-off of loans to one
borrower totaling $1.3
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million noted previously under the discussion of non-accrual loans. That
reduction also reflected the transfer of two separate loans totaling $1.2
million to "doubtful" substantially accounting for the increase in that
category.
Republic had delinquent loans as follows: (i) 30 to 59 days past due, in
the aggregate principal amount of $2.6 million at March 31, 2005 and $329,000 at
December 31, 2004; and (ii) 60 to 89 days past due, at March 31, 2005 and
December 31, 2004, in the aggregate principal amount of $436,000 and $89,000,
respectively.
Other Real Estate Owned:
The balance of other real estate owned amounted to $137,000 at March 31,
2005 and December 31, 2004. There was no activity in first quarter 2005.
At March 31, 2005, the Company had no credit exposure to "highly leveraged
transactions" as defined by the Federal Reserve Bank.
Allowance for Loan Losses
An analysis of the allowance for loan losses for the three months ended
March 31, 2005, and 2004, and the twelve months ended December 31, 2004 is as
follows:
For the three For the twelve months For the three months
months ended ended ended
(dollars in thousands) March 31, 2005 December 31, 2004 March 31, 2004
---------------------- ----------------------- -----------------------
Balance at beginning of period............ $ 6,684 $7,333 $7,333
Charge-offs:
Commercial and construction.............. 1 1,036 2
Tax refund loans........................ 920 700 700
Consumer ................................ 14 186 -
---------------------- ----------------------- -----------------------
Total charge-offs 935 1,922 702
---------------------- ----------------------- -----------------------
Recoveries:
Commercial and construction............. 259 1,383 5
Tax refund loans........................ - 200 -
Consumer................................ 2 4 -
---------------------- ----------------------- -----------------------
Total recoveries.................... 261 1,587 5
---------------------- ----------------------- -----------------------
Net charge-offs........................... 674 335 697
---------------------- ----------------------- -----------------------
Provision for loan losses................. 703 (314) 700
---------------------- ----------------------- -----------------------
Balance at end of period............... $6,713 $6,684 $7,336
====================== ======================= =======================
Average loans outstanding (1).......... $567,247 $493,635 $469,872
====================== ======================= =======================
As a percent of average loans (1):
Net charge-offs (annualized)........... 0.48% 0.07% 0.59%
Provision for loan losses
(annualized)........................ 0.50% (0.06)% 0.60%
Allowance for loan losses.............. 1.18% 1.35% 1.56%
Allowance for loan losses to:
Total loans, net of unearned income at
period end.......................... 1.19% 1.22% 1.54%
Total non-performing loans at period
end................................. 209.00% 137.70% 93.80%
(1) Includes nonaccruing loans.
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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 Republic's regulators or internal loan review
officer, who reviews both the loan portfolio and overall adequacy of the
allowance for loan losses. The Board of Directors also considers specific loans,
pools of similar loans, historical charge-off activity, economic conditions and
other relevant factors in reviewing the adequacy of the loan loss reserve. Any
additions deemed necessary to the allowance for loan losses are charged to
operating expenses.
The Company has an existing loan review program, which monitors the loan
portfolio on an ongoing basis. Loan review is conducted by a loan review officer
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 March 31,
2005. 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.
Republic's management is unable to determine in which loan category future
charge-offs and recoveries may occur. The entire allowance for loan losses is
available to absorb loan losses in any loan category. The majority of the
Company's loan portfolio represents loans made for commercial purposes, while
significant amounts of residential property may serve as collateral for such
loans. The Company attempts to evaluate larger loans individually, on the basis
of its loan review process, which scrutinizes loans on a selective basis and
other available information. Even if all commercial purpose loans could be
reviewed, there is no assurance that information on potential problems would be
available. The Company's portfolios of loans made for purposes of financing
residential mortgages and consumer loans are evaluated in groups. At March 31,
2005, loans made for commercial and construction, residential mortgage and
consumer purposes, respectively, amounted to $535.7 million, $8.0 million and
$20.0 million.
Effects of Inflation
The majority of assets and liabilities of a financial institution are
monetary in nature. Therefore, a financial institution differs greatly from most
commercial and industrial companies that have significant investments in fixed
assets or inventories. Management believes that the most significant impact of
inflation on financial results is the Company's need and ability to react to
changes in interest rates. As discussed previously, management attempts to
maintain an essentially balanced position between rate sensitive assets and
liabilities over a one year time horizon in order to protect net interest income
from being affected by wide interest rate fluctuations.
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ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation in the 2004 Annual Report on
Form 10-K filed with the SEC.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, with the
assistance of management, evaluated the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as of the end of the
period covered by this report (the "Evaluation Date"). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
the Evaluation Date, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in our reports under the
Exchange Act, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in internal controls.
There has not been any change in our internal control over financial
reporting during our quarter ended March 31, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II OTHER INFORMATION
-------------------------
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
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ITEM 6: 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.
- -----------
31.1 Certification of the Chief Executive Officer under Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of the Chief Financial Officer under Section 302 of the
Sarbanes-Oxley Act
32.1 Certification of the Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act
32.2 Certification of the Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act
-31-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Issuer has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Republic First Bancorp, Inc.
/s/Harry D. Madonna
-------------------
President and Chief Executive Officer
/s/Paul Frenkiel
----------------
Chief Financial Officer
Dated: May 13, 2005
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