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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, 2004
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.
6,722,410 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of April 30, 2004
Page 1 of 33
Exhibit index appears on page 32
1
TABLE OF CONTENTS
Page
Part I: Financial Information
Item 1: Financial Statements (unaudited) 3
Item 2: Management's Discussion and Analysis of Financial Condition and 14
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: Changes in Securities 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 31
Item 6: Exhibits, Reports on Form 8-K and Certifications 32
2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
Page Number
(1) Consolidated Balance Sheets as of March 31, 2004, (unaudited) and December 31, 2003.......................... 4
(2) Consolidated Statements of Income for the three months ended
March 31, 2004, and 2003(unaudited).......................................................................... 5
(3) Consolidated Statements of Cash Flows for the three months ended
March 31, 2004, and 2003(unaudited).......................................................................... 6
(4) Notes to Consolidated Financial Statements................................................................... 7
3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of March 31, 2004 and December 31, 2003
dollars in thousands, except share data
ASSETS: March 31, 2004 December 31, 2003
--------------------- ------------------------
(unaudited)
Cash and due from banks $ 24,861 $ 28,103
Interest bearing deposits with banks 4,003 3,547
Federal funds sold and interest-bearing deposits with banks 61,622 38,952
--------------------- ------------------------
Total cash and cash equivalents 90,486 70,602
Other interest-earning restricted cash 3,910 3,483
Investment securities available for sale, at fair value 61,230 61,686
Investment securities held to maturity at amortized cost
(Fair value of $7,258 and $8,300, respectively) 7,219 8,260
Loans receivable (net of allowance for loan losses of
$8,745 and $8,696, respectively) 498,661 479,523
Premises and equipment, net 4,353 4,412
Other real estate owned 207 207
Accrued interest receivable 3,785 3,710
Business owned life insurance 11,872 11,763
Other assets 9,531 11,146
--------------------- ------------------------
Total Assets $ 691,254 $ 654,792
===================== ========================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 93,214 $ 82,311
Demand - interest-bearing 52,279 73,315
Money market and savings 141,466 110,389
Time under $100,000 116,635 102,508
Time $100,000 or more 86,983 85,082
--------------------- ------------------------
Total Deposits 490,577 453,605
Short-term borrowings -- 2,852
FHLB Advances 125,000 125,000
Subordinated debentures 6,186 --
Accrued interest payable 3,011 2,841
Other liabilities 8,561 8,118
Corporation-obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior
obligations of the corporation -- 6,000
--------------------- ------------------------
Total Liabilities 633,335 598,416
--------------------- ------------------------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares
authorized; shares issued 6,708,410 as of
March 31, 2004 and 6,697,660 as of December 31, 2003 67 67
Additional paid in capital 33,453 33,396
Retained earnings 25,185 23,674
Treasury stock at cost (175,172 shares) (1,541) (1,541)
Accumulated other comprehensive income 755 780
--------------------- ------------------------
Total Shareholders' Equity 57,919 56,376
--------------------- ------------------------
Total Liabilities and Shareholders' Equity $ 691,254 $ 654,792
===================== ========================
(See notes to consolidated financial statements)
4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31,
dollars in thousands, except per share data
(unaudited)
Three Months Ended
March 31
2004 2003
---- ----
Interest income:
Interest and fees on loans $8,482 $12,333
Interest and dividend income on federal
funds sold and other interest-earning balances 215 228
Interest and dividends on investment securities 600 998
--------------------- ----------------------
Total interest income 9,297 13,559
--------------------- ----------------------
Interest expense:
Demand interest-bearing 89 119
Money market and savings 415 432
Time under $100,000 810 1,216
Time $100,000 or more 619 652
Other borrowed funds 2,040 2,041
--------------------- ----------------------
Total interest expense 3,973 4,460
--------------------- ----------------------
Net interest income 5,324 9,099
Provision for loan losses 811 3,411
--------------------- ----------------------
Net interest income after provision
for loan losses 4,513 5,688
--------------------- ----------------------
Non-interest income:
Loan advisory and servicing fees 92 186
Service fees on deposit accounts 440 320
Short-term loan fee income 1,210 -
Tax refund products 879 372
Other income 126 17
--------------------- ----------------------
2,747 895
--------------------- ----------------------
Non-interest expenses:
Salaries and benefits 2,551 2,478
Occupancy 385 386
Depreciation 429 294
Legal 264 240
Advertising 69 73
Other expenses 1,287 1,135
--------------------- ----------------------
4,985 4,606
--------------------- ----------------------
Income before income taxes 2,275 1,977
Provision for income taxes 764 684
--------------------- ----------------------
Net income $1,511 $1,293
===================== ======================
Net income per share:
Basic $0.23 $0.21
===================== ======================
Diluted $0.22 $0.20
===================== ======================
(See notes to consolidated financial statements)
5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31,
Dollars in thousands
(unaudited)
2004 2003
------------- -------------
Cash flows from operating activities:
Net income $ 1,511 $ 1,293
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 811 3,411
Depreciation 429 294
Amortization of discounts on investment securities 93 108
Increase in value of business owned life insurance (109) -
Decrease (increase) in accrued interest receivable
and other assets 1,676 (2,361)
Increase (decrease) in accrued expenses
and other liabilities 613 (139)
------------- -------------
Net cash provided by operating activities 5,024 2,606
------------- -------------
Cash flows from investing activities:
Purchase of securities:
Held to maturity - (2,254)
Available for sale (5,500) (1,520)
Proceeds from principal receipts, calls and
maturities of securities:
Held to maturity 1,041 275
Available for sale 5,888 24,470
Net increase in loans (19,949) (3,909)
Increase in other interest-earning restricted cash (427) (37)
Premises and equipment expenditures (370) (236)
------------- -------------
Net cash provided by (used in) investing activities (19,317) 16,789
------------- -------------
Cash flows from financing activities:
Net proceeds from exercise of stock options 57 632
Net increase in demand, money market and savings deposits 20,945 42,902
Repayment of overnight borrowings (2,852) -
Net Increase in time deposits 16,027 1,308
------------- -------------
Net cash provided by financing activities 34,177 44,842
------------- -------------
Increase in cash and cash equivalents 19,884 64,237
Cash and cash equivalents, beginning of period 70,602 72,810
------------- -------------
Cash and cash equivalents, end of period $ 90,486 $ 137,047
============= =============
Supplemental disclosure:
Interest paid $ 3,803 $ 4,258
============= =============
Taxes paid $ - $ 950
============= =============
(See notes to consolidated financial statements)
6
REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Republic First Bancorp, Inc. ("the Company") is a two-bank holding company
organized and incorporated under the laws of the Commonwealth of Pennsylvania.
It includes two wholly owned subsidiaries, Republic First Bank ("PA Bank"), a
Pennsylvania state chartered bank and First Bank of Delaware ("DE Bank), a
Delaware state chartered Bank, (together "the Banks"). 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.
On June 1, 1999, the Company opened the DE Bank located at Brandywine
Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County
Delaware. The DE Bank offers substantially the same services and financial
products as the PA Bank, but additionally offers national consumer products to
the underbanked consumer, including short-term consumer loans and tax refund
products.
The Banks encounter vigorous competition for market share in the geographic
areas they serve 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 Banks are subject to regulation by 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.
Note 2: Summary of Significant Accounting Policies:
Basis of Presentation:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, the PA Bank and the DE Bank. 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 results of 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.
At March 31, 2004, there were approximately $950,000 of short-term consumer
loans outstanding, which were originated in Texas, California, Georgia, Arizona,
and Ohio. Effective in the third quarter of 2003, the DE Bank began to sell a
majority of these loans to third parties and retain a portion of the interest
income, which the DE Bank classifies as non-interest income. The Company
evaluated these sales and determined that these transactions qualify as
7
sales under FAS 140. These loans generally have principal amounts of $1,000 or
less and terms of approximately two weeks. Legislation eliminating, or limiting
interest rates upon short-term consumer loans has from time to time been
proposed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Loans".
The DE Bank offers two tax refund products to customers of Liberty Tax
Service. Liberty Tax Service is a nationwide tax service provider which prepares
and electronically files federal and state income tax returns and the DE Bank
offers certain Liberty Tax Service customers accelerated refunds ("Tax Refund
Products"). Prior to the incorporation of the DE Bank, the PA Bank for many
years offered tax refund products. Tax Refund Products consist of accelerated
check refunds ("ACRs") and refund anticipation loans ("RALs"). There can be no
assurance that revenues from these products will continue to grow or be
maintained at current levels in future periods.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make significant estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Significant estimates are made by management in determining the allowance
for loan losses, carrying values of other real estate owned and income taxes.
Consideration is given to a variety of factors in establishing these estimates.
In estimating the allowance for loan losses, management considers current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
Since the allowance for loan losses and carrying value of other real estate
owned are dependent, to a great extent, on the general economy and other
conditions that may be beyond the Banks' control, it is at least reasonably
possible that the estimates of the allowance for loan losses and the carrying
values of other real estate owned could differ materially in the near term.
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 March 31, 2004, the Company had a stock-based employee compensation plan.
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).
8
Stock Based Compensation
(dollar amounts in thousands) Three months ended
March 31,
--------------------------------
2004 2003
----------------- -------------
Net income as reported $ 1,511 $ 1,293
Less: Stock based compensation costs determined
under fair value method for all awards (54) (102)
----------------- -------------
Net income, pro forma $ 1,457 $ 1,191
================= =============
Earnings per common share-basic: As reported $ 0.23 $ 0.21
----------------- -------------
Pro-forma $ 0.22 $ 0.19
----------------- -------------
Earnings per common share-diluted: As reported $ 0.22 $ 0.20
----------------- -------------
Pro-forma $ 0.21 $ 0.18
----------------- -------------
The Company granted 11,667 and 56,667 options during the three months
ended March 31, 2004 and 2003, respectively. The proforma compensation expense
is based upon the fair value of the option at grant date. The fair value of each
option is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in 2004
and 2003, respectively: dividend yields of 0% for both periods; expected
volatility of 34.1% for 2004 and 31% for 2003; risk-free interest rates of 3.15%
and 4.0%, respectively and an expected life of 5.0 years for both periods.
Stock Options
On March 31, 2004, the Financial Accounting Standards Board (FASB) issued a
proposed Statement, Share-Based Payment an Amendment of FASB Statements No. 123
and APB No. 95, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
(a) equity instruments of the enterprise or (b) liabilities that are based on
the fair value of the enterprise's equity instruments or that may be settled by
the issuance of such equity instruments. Under the FASB's proposal, all forms of
share-based payments to employees, including employee stock options, would be
treated the same as other forms of compensation by recognizing the related cost
in the income statement. The expense of the award would generally be measured at
fair value at the grant date. Current accounting guidance requires that the
expense relating to so-called fixed plan employee stock options only be
disclosed in the footnotes to the financial statements. The proposed Statement
would eliminate the ability to account for share-based compensation transactions
using APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company
is currently evaluating this proposed statement and its effects on its results
of operations.
Note 4: Significant Accounting Pronouncements
Loan Commitments
The SEC recently released Staff Accounting Bulletin No. 105, Application of
Accounting Principles to Loan Commitments. SAB 105 provides guidance about the
measurement of loan commitments recognized at fair value under FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. SAB 105
also requires companies to disclose their accounting policy for those loan
commitments including methods and assumptions used to estimate fair value and
associated hedging strategies. SAB 105 is effective for all loan commitments
9
accounted for as derivatives that are entered into after March 31, 2004. The
adoption of SAB 105 is not expected to have a material effect on the Company's
financial statements.
Note 5: Variable Interest Entities
Management has determined that Republic First Capital Trust I ("RFCT"), utilized
for the Company's $6,000,000 of pooled preferred securities issuance, qualifies
as a variable interest entity under FIN 46, as revised. RFCT issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the Company.
RFCT is included in the Company's consolidated balance sheet and statements of
income as of and for the year ended December 31, 2003. Subsequent to the
issuance of FIN 46 in January 2003, the FASB issued a revised interpretation,
FIN 46(R) Consolidation of Variable Interest Entities, the provisions of which
must 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 deconsolidiation resulted in the
investment in the common stock of RFCT to be included in other assets as of
March 31, 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 banking regulatory
agencies have not issued any guidance that would change the regulatory capital
treatment for the trust-preferred securities issued by RFCT based on the
adoption of FIN 46(R). However, as additional interpretations from the banking
regulators related to entities such as RFCT become available, management will
reevaluate its potential impact to its Tier I capital calculation under such
interpretations, if any.
Note 6: Legal Proceedings
The Company and the Banks are from time to time parties (plaintiff or
defendant) to lawsuits in the normal course of business. While any litigation
involves an element of uncertainty, management, after reviewing pending actions
with legal counsel, is of the opinion that the liabilities of the Company and
the Banks, if any, resulting from such actions will not have a material effect
on the financial condition or results of operations of the Company and the
Banks.
10
Note 7: 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 Service, 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 several
states through a small number of marketers and involve rates and fees
significantly different from other loan products offered by either of the Banks.
The Company evaluates the performance of the community banking segments based
upon net income, return on equity and return on average assets. Tax refund
products and short-term consumer loans are evaluated based upon net income. Tax
refund products and short-term consumer loans are provided to satisfy consumer
demands while diversifying the Company's earnings stream.
Segment information for the three months ended March 31, 2004 and 2003, is as
follows:
11
As of and for the three months ended
March 31, 2004
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income $ 3,162 $ 953 $ 996 $ 213 $ 5,324
Provision for loan losses -- 30 700 81 811
Non-interest income 593 65 879 1,210 2,747
Non-interest expenses 3,675 305 398 607 4,985
Net income $ 532 $ 55 $ 473 $ 451 $ 1,511
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets 633,245 53,508 2,615 1,886 691,254
Total loans 473,692 30,149 2,615 950 507,406
Total deposits 447,348 41,073 2,156 -- 490,577
March 31, 2003
(dollars in thousands)
Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
-------- -------- -------- -------- --------
Net interest income $ 4,033 $ 364 $ 1,154 $ 3,548 $ 9,099
Provision for loan losses 60 31 1,018 2,302 3,411
Non-interest income 432 91 372 -- 895
Non-interest expenses 3,496 289 259 562 4,606
Net income $ 600 $ 89 $ 162 $ 442 $ 1,293
======== ======== ======== ======== ========
Selected Balance Sheet Accounts:
Total assets $633,583 $ 41,969 $ 5,000 $ 12,782 $693,334
Total loans 422,557 29,660 2,926 9,940 465,083
Total deposits 462,456 33,056 5,000 -- 500,512
12
Note 8: 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, 2004,
and 2003, respectively, there were 0 and 23,890 of 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. These CSEs, however, may become
dilutive in the future.
The following table is a comparison of EPS for the three months ended
March 31, 2004, and 2003.
Year to Date
2004 2003
Net Income
$1,511,000 $1,293,000
Per Per
Shares Share Shares Share
------ ----- ------ -----
Weighted average shares
For period 6,530,088 6,240,331
Basic EPS $0.23 $0.21
Add common stock equivalents 312,306 234,660
--------- ---------
representing dilutive stock options
Effect on basic EPS of dilutive CSE $(.01) $(0.01)
----- -----
Equals total weighted average
shares and CSE (diluted) 6,842,394 6,474,991
========= =========
Diluted EPS $0.22 $0.20
===== =====
Note 9: Comprehensive Income
The following table displays net income and the components of
other comprehensive income to arrive at total comprehensive income. For the
Company, the only components of other comprehensive income are those related
to the unrealized gains (losses) on available for sale investment securities.
(dollar amounts in thousands) Three months ended
March 31,
---------------------------------------------
2004 2003
---------------- -----------------
Net income $ 1,511 $ 1,293
Other comprehensive income, net of tax:
Unrealized losses on securities:
Unrealized holding losses during the period (25) (354)
---------------- -----------------
Comprehensive income $ 1,486 $ 939
================ =================
13
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, 2003, Quarterly Reports on Form 10-Q,
filed by the Company in 2004 and 2003, and any Current Reports on Form 8-K filed
by the Company, as well as other filings.
Financial Condition:
March 31, 2004, Compared to December 31, 2003
Total assets increased $36.5 million to $691.3 million at March 31,
2004, versus $654.8 million at December 31, 2003. This increase reflected a
$19.2 million increase in loan balances. These loans were primarily funded by an
increase in core deposits (transaction accounts).
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. Total loans increased $19.2 million, to $507.4
million at March 31, 2004, versus $488.2 million at December 31, 2003.
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, short-term consumer 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. The Banks' commercial loans typically range between $250,000
and $5,000,000 but customers may borrow significantly larger amounts up to the
Banks' combined legal lending limit of approximately $10.3 million at March 31,
2004. Individual customers may have several loans that are secured by different
collateral. The aggregate amount of those relationships that exceeded $5.9
million at March 31, 2004, was $58.9 million. The $5.9 million threshold
approximates 10% of total capital and reserves and reflects an additional
14
internal monitoring guideline. At March 31, 2004, the Company through the DE
Bank had $950,000 in short-term consumer loans outstanding versus $1.4 million
at December 31, 2003. These loans have principal amounts of less than $1,000,
and terms of approximately two weeks and at March 31, 2004, were originated in
Georgia, Texas, Arizona, Ohio and California through a small number of
marketers. The De Bank has begun making loans in Michigan in the second quarter
of 2004.
In April, 2004, the State of Georgia enacted Act No. 440. Effective May 1,
2004, Act No. 440 substantially increased the penalties under Georgia law for
making payday loans prohibited by Georgia usury laws, and adopted a presumption
that an agent assisting in such loans is the de facto lender if the agent
receives a predominant economic interest in loan revenues. The DE Bank's
marketing and servicing agent receives the predominant share of loan revenues.
The DE Bank and its servicer, together with a number of other banks and
servicers, have challenged Act No. 440 in the U. S. District Court for the
Northern District of Georgia. The plaintiffs allege, among other things, that
the Act conflicts with and is preempted by Section 27 of the Federal Deposit
Insurance Act because it prevents FDIC insured state banks from lending at the
(non-Georgia) rates of interest expressly authorized for state banks (but not
other lenders) by Section 27. The court has issued a temporary restraining order
against enforcement of Act No. 440 for actions by plaintiffs through May 15
2004. However, as of May 7, 2004, the court has not ruled on plaintiffs' motion
for a preliminary injunction and, in any event, the Bank anticipates that any
ruling by the district court will be appealed by the losing party to the U. S.
Court of Appeals for the 11th Circuit. Prior to the effective date of Act No.
440, the DE Bank discontinued making short term loans in Georgia. It will not
resume making such loans unless and until it receives a favorable decision on
the preliminary injunction motion and any appeal thereof. A favorable final
decision in this litigation would constitute a strong endorsement of the DE
Bank's short term loan program. Conversely, an adverse decision would call into
question the legality of the program's current structure and would likely have a
material adverse effect on the Delaware Bank.
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
$61.2 million at March 31, 2004, which was comparable to the $61.7 million at
year-end 2003. At March 31, 2004, and December 31, 2003, the portfolio had net
unrealized gains of $1.1 million and $1.2 million, respectively.
Investment securities held-to-maturity are investments for which there is
the intent and ability to hold the investment to maturity. These investments are
carried at amortized cost. The held-to-maturity portfolio consists primarily of
Federal Home Loan Bank ("FHLB") securities. At March 31, 2004, securities held
to maturity totaled $7.2 million, compared to $8.3 million at year-end 2003. 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
are all liquid funds. The aggregate amount in these three categories increased
by $19.9 million, to $90.5 million at March 31, 2004, from $70.6 million at
December 31, 2003, as increases in deposit balances were invested in Federal
Funds.
Other Interest-Earning Restricted Cash:
Other interest-earning restricted cash represents funds provided to fund an
offsite ATM network for which the Company is compensated. At March 31, 2004, the
balance was $3.9 million versus $3.5 million at December 31, 2003.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, decreased
$59,000 to $4.4 million at March 31, 2004. The decrease reflected depreciation
of equipment and software.
15
Other Real Estate Owned:
Other real estate owned amounted to $207,000 at March 31, 2004 and December
31, 2003.
Business Owned Life Insurance:
The balance of business owned life insurance amounted to $11.9 million at
March 31, 2004 and $11.8 million at December 31, 2003. 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 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.
Period ended deposits increased by $37.0 million, or 8.2% to $490.6 million
at March 31, 2004, from $453.6 million at December 31, 2003. Average core
deposits(transaction accounts) increased 9.8%, or $25.2 million more than the
prior year period to $282.7 million in the first quarter 2004. Deposit growth
benefited from the Company's business development efforts and bank
consolidations in the Philadelphia market which, in management's opinion,
continue to leave some customers underserved. Period end time deposits increased
$16.0 million, or 8.5% to $203.6 million at March 31, 2004, versus $187.6
million at the prior year-end. The increase resulted from the purchase of
institutional deposits which were available at a relatively low cost.
FHLB Borrowings:
FHLB borrowings totaled $125.0 million at both March 31, 2004 and
December 31, 2003. These borrowings primarily mature in the fourth quarter of
2004 and first quarter of 2005.
Shareholders' Equity:
Total shareholders' equity increased $1.5 million to $58.0 million at
March 31, 2004, versus $56.4 million at December 31, 2003. This increase was
primarily the result of year-to-date 2004 net income of $1.5 million.
Three Months Ended March 31, 2004 Compared to March 31, 2003
- ------------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased to $1.5 million or $0.22 per diluted
share for the three months ended March 31, 2004, compared to $1.3 million, or
$0.20 per diluted share for the comparable prior year period. The improvement
16
reflected a $487,000 reduction in interest expense resulting primarily from
lower rates paid on time deposits(certificates of deposit). It also reflected an
increase in tax refund product revenue of approximately $507,000. Of the $4.3
million decrease in interest income, $3.5 million related to the participation
of short-term consumer loans to third parties in 2004. Non-interest income
increased $1.2 million due to the classification of fees on short-term loans to
non interest income after such participation. Interest margins were also
impacted by prepayments in the residential real estate and mortgage-backed
securities portfolios. Average commercial and construction loans increased 14.8%
and average core deposits increased 9.8% in the first quarter of 2004,
respectively, compared to the prior year comparable period. A $2.6 million
decrease in the provision for loan losses, related primarily to short-term
loans, more than offset a $2.2 million decrease in short-term loan interest and
short-term loan non-interest income. The increased net income resulted in a
return on average assets and average equity of .87% and 10.66% respectively, in
the first quarter of 2004 compared to .76% and 0.94% respectively for the same
period in 2003.
Analysis of Net Interest Income
Historically, the Company's earnings have depended significantly upon
the Banks' net interest income, which is the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income is impacted by changes in the mix of the volume and rates of
interest-earning assets and interest-bearing liabilities.
17
For the three months ended For the three months ended
March 31, 2004 March 31, 2003
--------------------------------------- ---------------------------------------
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 $ 76,302 $ 215 1.13% $ 74,879 $ 228 1.23%
Securities 69,570 600 3.45% 85,091 998 4.69%
Loans receivable 499,070 8,482 6.82% 484,907 12,333 10.20%
-------- -------- ------ -------- -------- ------
Total interest-earning assets 644,942 9,297 5.78% 644,877 13,559 8.53%
Other assets 50,034 33,829
-------- --------
Total assets $694,976 $678,706
======== ========
Interest-bearing liabilities:
Demand-non interest
bearing $ 98,156 $ 76,651
Demand interest-bearing 58,576 $ 89 0.61% 58,024 $ 119 0.81%
Money market & savings 126,002 415 1.32% 122,887 432 1.39%
Time deposits 212,517 1,429 2.70% 225,353 1,868 3.29%
-------- -------- ------ -------- -------- ------
Total deposits 495,251 1,933 1.57% 482,915 2,419 2.03%
Total interest-bearing
deposits 397,095 1,933 1.95% 406,264 2,419 2.41%
-------- -------- ------ -------- -------- ------
Other borrowings 133,462 2,040 6.13% 134,850 2,041 6.14%
-------- -------- ------ -------- -------- ------
Total interest-bearing
liabilities $530,557 $ 3,973 3.00% $541,114 $ 4,460 3.34%
======== ======== ====== ======== -------- ======
Total deposits and
other borrowings 628,713 3,973 2.53% 617,765 4,460 2.93%
-------- -------- ------ -------- -------- ------
Non interest-bearing
liabilites 9,388 8,895
Shareholders' equity 56,875 52,046
-------- --------
Total liabilities and
shareholders' equity $694,976 $678,706
======== ========
Net interest income $ 5,324 $ 9,099
======== ========
Net interest spread 3.25% 5.58%
====== =====
Net interest margin 3.31% 5.71%
====== =====
Net interest margin not including
short-term loan and tax refund products 2.58% 2.76%
====== =====
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, 2004
versus March 2003
(dollars in thousands)
Due to change in:
Volume Rate Total
------------------- ------------- -------------------
Interest earned on:
Federal funds sold $ 7 $ (20) $ (13)
Securities (134) (264) (398)
Loans 366 (4,217) (3,851)
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 239 (4,501) (4,262)
Interest expense of
deposits
Interest-bearing demand deposits 1 (31) (30)
Money market and savings 15 (32) (17)
Time deposits (86) (353) (439)
- -----------------------------------------------------------------------------------------------------------------------
Total deposit interest expense (70) (416) (486)
Other borrowings (1) - (1)
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense (71) (416) (487)
- -----------------------------------------------------------------------------------------------------------------------
Net interest income $ 310 $ (4,085) $ (3,775)
- -----------------------------------------------------------------------------------------------------------------------
The Company's net interest margin decreased 240 basis points to 3.31% for
the three months ended March 31, 2004, versus the prior year comparable period.
The decline reflected the decision to participate a majority of the short-term
loan outstandings to third parties beginning in the third quarter of 2003,
thereby reducing interest income and increasing non-interest income. Fees on
short-term consumer loans contributed approximately $213,000 to net interest
income for March 31, 2004 and 13 basis points to the margin versus $3.5 million
and 2.20% for the prior year comparable period. Excluding the impact of
short-term loans and tax products, margins decreased to 2.58% in the first
quarter of 2004 from 2.76% in the prior year comparable period. That decrease
reflected lower loan rates and the negative impact of the historically high
residential mortgage and mortgage-backed security prepayments, partially offset
by the 9.8% increase in average lower cost core deposits (transaction accounts),
and the repricing of certificates of deposit and other deposits in the lower
interest rate environment. While management could replace significant amounts of
such security prepayments, it has deferred 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 6.20% 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
2.75% to 5.78% for the three months ended March 31, 2004, from 8.53% for the
prior year comparable period due primarily to the participation of short-term
loans which commenced in the third quarter of 2003. The average rate paid on
interest-bearing liabilities decreased 34 basis points to 3.00% for the three
months ended March 31, 2004, from 3.34% in the prior year comparable period, as
the Company repriced its deposits to the lower rate environment.
19
The Company's net interest income decreased $3.8 million, or 41.5%, to
$5.3 million for the three months ended March 31, 2004, from $9.1 million for
the prior year comparable period. As shown in the Rate Volume table above, the
decrease in net interest income was due primarily to lower rates earned on loans
reflecting lower short-term loan income which was reflected as non-interest
income after the participation of such loans. Excluding the impact of short term
loans and tax products, the net interest margin decreased by approximately
$282,000 reflecting a $458,000 reduction in interest on residential mortgages
which were prepaid and not replaced. Average interest-earning assets amounted to
$644.9 million for first quarter 2004 and 2003.
The Company's total interest income decreased $4.3 million, or 31.4%,
to $9.3 million for the three months ended March 31, 2004, from $13.6 million
for the prior year comparable period. Interest and fees on loans decreased $3.9
million to $8.5 million for the three months ended March 31, 2004, from $12.3
million for the prior year comparable period. This decline reflects a $3.5
million reduction in short term loan income and $458,000 from prepayments in the
residential mortgage portfolio and lower yields on commercial and construction
loans reflecting the lower rate environment. The yield on loans declined 3.38%
to 6.82% primarily reflecting the reduced short-term loan fees. Interest and
dividends on investment securities decreased $398,000 to $600,000 for the three
months ended March 31, 2004, from $998,000 for the prior year comparable period.
This decline reflected the $15.5 million, or 18.2%, decrease in average
investment securities outstanding to $69.6 million at March 31, 2004 from $85.1
million for the prior year period. In addition, the average rate earned on
investment securities declined 124 basis points to 3.45% as higher coupon
mortgage backed securities 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 related average balances
were comparable in both periods.
The Company's total interest expense decreased $487,000, or 10.9%, to $4.0
million for the three months ended March 31, 2004, from $4.5 million for the
prior year comparable period, due to the lower rate environment. The Company
repriced deposits to the lower rate environment, particularly certificates of
deposit. Interest-bearing liabilities averaged $530.6 million for the three
months ended March 31, 2004, versus $541.1 million for the prior year comparable
period reflecting lower amounts of higher cost certificates of deposit. The
average rate paid on interest-bearing liabilities decreased 34 basis points to
3.00% for the three months ended March 31, 2004, 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
$439,000, or 23.5%, to $1.4 million at March 31, 2004, from $1.9 million for the
prior year comparable period. This decline reflected the lower interest rate
environment as the average rate declined 59 basis points to 2.70%. In addition,
average certificates of deposit outstanding decreased $12.8 million, or 5.7%, to
$212.5 million, for the quarter ended March 31, 2004, from $225.4 million in the
prior year comparable period, as higher cost time deposits matured and were not
replaced due to the growth in lower cost core deposits.
Interest expense on other borrowings, primarily FHLB advances, was
comparable in both periods.
Provision for Loan Losses
The provision for loan losses is charged to operations in an amount
necessary to bring the total allowance for loan losses to a level that reflects
the known and estimated inherent losses in the portfolio. The provision for loan
losses decreased $2.6 million to $811,000 for the three months ended March 31,
2004, from $3.4 million for the prior year comparable period. This decrease
primarily reflected a $2.6 million decrease in the provision for short term
20
loans, as the majority of such loans were participated to third parties,
beginning in the third quarter of 2003.
Non-Interest Income
Total non-interest income increased $1.9 million to $2.7 million for the
three months ended March 31, 2004, versus $895,000 for the prior year comparable
period. Of the $1.9 million increase, $1.2 million resulted from the
participation of most short term loans. In first quarter 2003, such loans were
not participated , and fees were recognized as interest income. Tax refund
product income increased by $507,000, primarily as a result of increases in the
volume of such products. Service fees on deposit accounts also increased,
primarily as a result of volume. The Company also realized income from business
owned life insurance which comprised virtually all of the $126,000 other income
category in first quarter 2004. Loan advisary and servicing fees decreased,
primarily as a result of decreased volume.
Non-Interest Expenses
Total non-interest expenses increased $379,000 or 8.2% to $5.0 million for
the three months ended March 31, 2004, from $4.6 million for the prior year
comparable period. Salaries and employee benefits increased $73,000 or 2.9%, to
$2.6 million for the three months ended March 31, 2004, from $2.5 million for
the prior year comparable period resulting primarily from additional incentive
expense related to loan and deposit generation.
Occupancy expense was comparable in both periods at approximately
$385,000.
Depreciation expense increased $135,000, or 45.9% to $429,000 for the three
months ended March 31, 2004, versus $294,000 for the prior year comparable
period. Substantially all of the $135,000 increase resulted from a write off of
software related to the tax refund products.
Legal fees increased $24,000, or 10.0%, to $264,000 in first quarter 2004,
compared to $240,000 in first quarter 2003, resulting from fees on a number of
different matters.
Advertising expense decreased $4,000, or 5.5% , to $69,000 in first
quarter 2004, compared to $73,000 first quarter 2003. The decrease reflected the
placement of fewer advertisements.
Other expenses increased $152,000, or 13.4% to $1.3 million for the three
months ended March 31, 2004, from $1.1 million for the prior year comparable
period. Of the increase, $69,000 reflected an increase in state taxes. Delaware
state franchise taxes increased approximately $41,000 as a result of increases
in taxable income. The balance of the increase resulted from increases in
Pennsylvania shares tax, which reflected increases in shareholders' equity
against which the tax rate is applied.
Provision for Income Taxes
The provision for income taxes increased $80,000, to $764,000 for the
three months ended March 31, 2004, from $684,000 for the prior year comparable
period. This increase was primarily the result of the increase in pre-tax
income. The effective tax rate declined to 33.6% from 34.6% due to business
owned life insurance income, a portion of which is not taxable. The business
owned life insurance was purchased in the second quarter of 2003.
21
Commitments, Contingencies and Concentrations
The Banks are party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their customers.
These financial instruments include commitments to extend credit and standby
letters of credit totaling $117.4 million at March 31, 2004. 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 $112.8 million and $94.8
million and standby letters of credit of approximately $4.5 million and $4.0
million at March 31, 2004, and December 31, 2003, respectively.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and many require the payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Banks evaluate each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained upon extension of credit is based on management's credit evaluation of
the customer. Collateral held varies but may include real estate, marketable
securities, pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
At March 31, 2004, the Banks 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 $146.4 million, which
represented 28.9% of gross loans receivable at March 31, 2004. Various types of
real estate are included in this category, including industrial, retail shopping
centers, office space, residential multi-family and others. Loan concentrations
are considered to exist when there is amounts loaned to a multiple number of
borrowers engaged in similar activities that management believes would cause
them to be similarly impacted by economic or other conditions.
22
Regulatory Matters
The following table presents the Company's capital regulatory ratios at
March 31, 2004, and December 31, 2003:
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, 2004
Total risk based capital
Republic First Bank $58,187 12.33% $37,741 8.00% $47,176 10.00%
First Bank of Delaware 9,417 26.02% 2,895 8.00% 3,618 10.00%
Republic First Bancorp, 69,219 13.79% 40,154 8.00% - N/A
Inc.
Tier one risk based capital
Republic First Bank 52,272 11.08% 18,870 4.00% 28,306 6.00%
First Bank of Delaware 8,953 24.74% 1,447 4.00% 2,171 6.00%
Republic First Bancorp, 62,914 12.53% 20,077 4.00% - N/A
Inc.
Tier one leveraged capital
Republic First Bank 52,272 7.99% 32,722 5.00% 32,722 5.00%
First Bank of Delaware 8,953 14.73% 3,039 5.00% 3,039 5.00%
Republic First Bancorp, 62,914 9.07% 34,697 5.00% - N/A
Inc.
Actual For Capital To be well
Adequacy purposes capitalized under FRB
capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ----------- ----------- ---------- ----------- ----------
At December 31, 2003
Total risk based capital
Republic First Bank $57,417 12.57% $36,534 8.00% $45,667 10.00%
First Bank of Delaware 8,399 29.06% 2,312 8.00% 2,891 10.00%
Republic First Bancorp, Inc. 67,436 13.92% 38,765 8.00% - N/A
Tier one risk based capital
Republic First Bank 51,689 11.32% 18,267 4.00% 27,475 6.00%
First Bank of Delaware 8,025 27.76% 1,156 4.00% 1,734 6.00%
Republic First Bancorp, Inc. 61,346 12.66% 19,382 4.00% - N/A
Tier one leveraged capital
Republic First Bank 51,689 8.77% 29,475 5.00% 29,475 5.00%
First Bank of Delaware 8,025 16.55% 2,410 5.00% 2,410 5.00%
Republic First Bancorp, Inc. 61,346 9.64% 31,817 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 the Banks to maintain certain liquidity
ratios such that the Banks maintain available funds, or can obtain available
funds at reasonable rates, in order to satisfy commitments to borrowers and the
demands of depositors. In response to these requirements, the Banks have each
formed Asset/Liability Committees ("ALCOs"), comprised of selected members of
the Banks' boards of directors and senior management, which monitor such ratios.
The purpose of the Committees is in part, to monitor the Banks' liquidity and
23
adherence to the ratios in addition to managing the relative interest rate risk
to the Banks. The ALCOs meet at least quarterly.
The Company's most liquid assets, consisting of cash due from banks,
deposits with banks and federal fund sold, totaled $90.5 million at March 31,
2004, compared to $70.6 million at December 31, 2003, 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,
2004, the Company 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, 2004.
Additionally, the majority of its securities are available to satisfy liquidity
requirements through pledges to the Federal Home Loan Bank System ("FHLB") to
access the Banks' line of credit.
Funding requirements have historically been satisfied primarily by
generating core deposits and certificates of deposit with competitive rates, and
utilizing the facilities of the FHLB. At March 31, 2004, the PA Bank had $51.3
million in unused lines of credit available under arrangements with the FHLB and
correspondent banks compared to $67.0 million at December 31, 2003. These lines
of credit enable the PA Bank to purchase funds for short or long-term needs at
rates often lower than other sources and require pledging of securities or loan
collateral. The amount of available credit has been decreasing with the
prepayment of mortgage backed loans and securities.
At March 31, 2004, the Company had aggregate outstanding commitments
(including unused lines of credit and letters of credit) of $117.4 million.
Certificates of deposit scheduled to mature in one year totaled $114.8 million
at March 31, 2004, and borrowings scheduled to mature within one year totaled
$125.0 million. These borrowings, callable by the FHLB, will likely be replaced
by borrowings at then current rates or a combination of borrowings and
certificates of deposit. The Company anticipates that it will have sufficient
funds available to meet its current commitments.
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 from a correspondent bank to assist in
managing the PA Banks' liquidity position. That line of credit totaled $10.0
million and was unused at March 31, 2004. The PA Bank has established a line of
credit with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing
capacity of approximately $166.3 million. As of March 31, 2004, and December 31,
2003, the PA Bank had borrowed $125.0 million under that line of credit.
Securities also represent a primary source of liquidity for the Banks.
Accordingly, investment decisions generally reflect liquidity over other
considerations.
The Company's primary short-term funding sources are certificates of
deposit and its securities portfolio. The circumstances that are reasonably
likely to affect those sources are as follows. The Banks have historically been
able to generate certificates of deposit by matching Philadelphia market rates
or paying a premium rate of 25 to 50 basis points over those market rates. It is
anticipated that this source of liquidity will continue to be available;
however, its incremental cost may vary depending on market conditions. The
Company's securities portfolio is also available for liquidity, 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.
The Banks' ALCOs are responsible for managing the liquidity position and
interest sensitivity of the Banks. Those committees' primary objective is to
maximize net interest income while configuring the Banks' interest-sensitive
assets and liabilities to manage interest rate risk and provide adequate
liquidity.
24
Investment Securities Portfolio
At March 31, 2004, 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 US
Government Agency securities and other investments. The book and market values
of investment securities available for sale were $60.1 million and $61.2 million
as of March 31, 2004, respectively. The net unrealized gain on investment
securities available for sale as of that date was $1.1 million.
Loan Portfolio
The Company's loan portfolio consists of secured and unsecured
commercial loans including commercial real estate loans, loans secured by
one-to-four family residential property, commercial construction and residential
construction loans as well as residential mortgages, home equity loans,
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. 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 March 31, 2004. Individual
customers may have several loans often secured by different collateral. The
aggregate amount of those relationships that exceeded $5.9 million (an internal
monitoring guideline which approximates 10% of capital and reserves) at March
31, 2004, was $58.9 million.
Total loans increased $19.2 million, to $507.4 million at March 31,
2004, from $488.2 million at December 31, 2003. Commercial and construction
loans increased $20.5 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, 2004 As of December 31, 2003
-------------------------------------------------------------------------------
Balance % of Total Balance % of Total
-------------------------------------------------------------------------------
Commercial:
Real estate secured $ 314,605 62.0 $ 302,618 62.0
Construction and land development 100,835 19.9 88,850 18.2
Non real estate secured 55,559 11.0 52,041 10.7
Unsecured 6,653 1.2 13,688 2.8
-------------------------------------------------------------------------------
477,652 94.1 457,197 93.7
Residential real estate 11,193 2.2 14,875 3.0
Consumer, short-term & other 18,561 3.7 16,147 3.3
-------------------------------------------------------------------------------
Total loans 507,406 100.0% 488,219 100.0%
Less allowance for loan losses (8,745) (8,696)
---------------- ------------------
Net loans $ 498,661 $ 479,523
================ ==================
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. 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.
26
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
March 31, 2004 December 31, 2003
---------------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $1,394 $3,084
Non-accrual loans 7,743 5,527
---------------------------------------------
Total non-performing loans (1) 9,137 8,611
Other real estate owned 207 207
---------------------------------------------
Total non-performing assets (2) $9,344 $8,818
=============================================
Non-performing loans as a percentage of total
loans net of unearned
income 1.80% 1.76%
Non-performing assets as a percentage of total
assets 1.35% 1.35%
(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 increased $2.2 million, to $7.7 million at March
31, 2004, from $5.5 million at December 31, 2003. Loans accruing, but past due
90 days or more decreased $1.7 million to $1.4 million at March 31, 2004 from
$3.0 million at December 31, 2003. The primary factor in both of these changes,
was the transfer of a single commercial real estate loan between these
categories, $1.9 million of which was reflected in non accrual loans at March
31, 2004.
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, 2004, 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 $7.7
million at March 31, 2004, and $5.5 million at December 31, 2003, and the amount
of related valuation allowances was $1.4 million at both of those dates. There
were no commitments to extend credit to any borrowers with impaired loans as of
the end of the periods presented herein.
27
At March 31, 2004, and December 31, 2003, internally classified
accruing substandard loans totaled approximately $7.5 million and $11.2 million
respectively; and doubtful loans totaled approximately $1.0 million and $895,000
respectively. There were no loans classified as loss at those dates.
The Bank had delinquent loans as follows: (i) 30 to 59 days past due, in
the aggregate principal amount of $2.3 million at March 31, 2004 and $2.6
million at December 31, 2003; and (ii) 60 to 89 days past due, at March 31, 2004
and December 31, 2003, in the aggregate principal amount of $413,000 and $2.1
million, respectively.
At March 31, 2004, the Company had no foreign loans and no loan
concentrations exceeding 10% of total loans except for credits extended to real
estate operators and lessors in the aggregate amount of $146.4 million, which
represented 28.9% of gross loans receivable at March 31, 2004. Various types of
real estate are included in this category, including industrial, retail shopping
centers, office space, residential multi-family and others. Loan concentrations
are considered to exist when multiple number of borrowers are engaged in similar
activities that management believes would cause them to be similarly impacted by
economic or other conditions.
Other Real Estate Owned:
The balance of other real estate owned amounted to $207,000 at March
31, 2004 and December 31, 2003. There was no activity in first quarter 2004.
At March 31, 2004, 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 Company's allowance for loan losses for the three
months ended March 31, 2004, and 2003, and the twelve months ended December 31,
2003 is as follows:
For the three For the twelve months For the three months
months ended ended ended
(dollars in thousands) March 31, 2004 December 31, 2003 March 31, 2003
---------------- --------------------- -----------------------
Balance at beginning of period ............. $ 8,696 $ 6,642 $ 6,642
Charge-offs:
Commercial and construction ............... 2 365 1
Short-term loans ......................... 69 4,299 2,757
Tax refund loans ......................... 700 1,393 --
Consumer .................................. -- 53
-------- -------- --------
Total charge-offs .................... 771 6,110 2,758
-------- -------- --------
Recoveries:
Commercial and construction .............. 9 1,066 20
Short-term loans ......................... -- -- 223
Tax refund loans ......................... -- 334 --
Consumer ................................. -- -- --
-------- -------- --------
Total recoveries ..................... 9 1,400 243
-------- -------- --------
Net charge-offs ............................ 762 4,710 2,515
-------- -------- --------
Provision for loan losses .................. 811 6,764 3,411
-------- -------- --------
Balance at end of period ................ $ 8,745 $ 8,696 $ 7,538
======== ======== ========
Average loans outstanding (1) ........... $499,070 $470,237 $484,907
======== ======== ========
28
As a percent of average loans (1):
Net charge-offs (annualized) ............ 0.61% 1.00% 2.08%
Provision for loan losses
(annualized) ......................... 0.64% 1.44% 2.81%
Allowance for loan losses ............... 1.75% 1.85% 1.55%
Allowance for loan losses to:
Total loans, net of unearned income at
period end ........................... 1.72% 1.78% 1.62%
Total non-performing loans at period
end .................................. 95.71% 101.00% 104.49%
(1) Includes nonaccruing loans
Substantially all of the decrease in short-term loan charge-offs
resulted from the participation of the vast majority of such loans to third
parties, beginning in the third quarter of 2003. The reduction in tax refund
loan charge-offs in first quarter 2004 compared to fullyear 2003, the more
comparable period, reflected the addition of significant new controls and
underwriting requirements for such loans.
Management makes at least a quarterly determination as to an
appropriate provision from earnings to maintain an allowance for loan losses
that is management's best estimate of known and inherent losses. The Company's
Board of Directors periodically reviews the status of all non-accrual and
impaired loans and loans classified by the Banks' regulators or internal loan
review officer, who reviews both the loan portfolio and overall adequacy of the
allowance for loan losses. The Board of Directors also considers specific loans,
pools of similar loans, 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,
2004. However, there can be no assurance that, if asset quality deteriorates in
future periods, additions to the allowance for loan losses will not be required.
The Banks' management is unable to determine in what loan category future
charge-offs and recoveries may occur. The following schedule sets forth the
allocation of the allowance for loan losses among various categories. The
allocation is based upon historical experience. The entire allowance for loan
losses is available to absorb loan losses in any loan category:
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, 2004, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $477.7
million, $11.2 million and $18.6 million.
29
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.
ITEM 3: QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
Interest Rate Risk Management
There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation in the 2003 Annual Report on
Form 10-K filed with the SEC.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The management of the Company, including the Chief Executive Officer and the
Chief Financial Officer, has conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934 as of a date (the "Evaluation Date") within 90
days prior to the filing date of this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that, as of
the Evaluation Date, the Company's disclosure controls and procedures were
effective in ensuring that all material information relating to the Company,
including its consolidated subsidiaries, required to be filed in this quarterly
report has been made known to them in a timely manner. (b) Changes in internal
controls.
There have been no significant changes made in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to the Evaluation Date.
Part II Other Information
Item 1: LEGAL PROCEEDINGS
None.
Item 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Item 3: DEFAULTS UPON SENIOR SECURITIES
None
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting or Republic First Bancorp, Inc. , to take
action upon the reelection of two directors and the election of two new
30
directors of the Company was held on April 27, 2004 at 4:00 pm at the
Union League of Philadelphia at Broad and Sansom Streets, Philadelphia,
PA., 19103, after written notice of said meeting, according to law, was
mailed to each shareholder of record entitled to receive notice of said
meeting, 30 days prior thereto. As of the record date of said meeting
of the shareholders, the number of shares then issued and outstanding
was 6,533,238 shares of common stock, of which 6,533,238 were entitled
to vote. A total of 5,651,402 shares were voted. No nominee received
less than 98.2 % of the voted shares. Therefore, pursuant to such
approval, the following directors were reelected to the Company:
Neal I. Rodin and Steven J. Shotz
The following new directors were elected:
Barry L. Spevak and Lyle W. Hall, Jr.
Item 5: OTHER INFORMATION
Our chief executive officer and chief financial officer have furnished
to the SEC the certification with respect to this Report that is required by
Section 906 of the Sarbanes-Oxley Act of 2003.
31
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
The following Exhibits are filed as part of this report. (Exhibit
numbers correspond to the exhibits required by Item 601 of Regulation S-K for an
annual report on Form 10-K)
Exhibit No.
10 Material Contracts.- None
21 Subsidiaries of the Company
Republic First Bank,
First Bank of Delaware
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 Section 1350 certifications pursuant to Section 906 of the
Sarbanes-Oxley Act 2002
All other schedules and exhibits are omitted because they are not
applicable or because the required information is set out in the financial
statements or the notes hereto.
**Incorporated by reference in the Company's Form 10-K, filed March 25, 2004
Reports on Form 8-K and 8-KA
Press release dated April 21, 2004.
32
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.
Harry D. Madonna
----------------------
President and Chief Executive Officer
Paul Frenkiel
----------------------
Executive Vice President and Chief Financial Officer
Dated: May 13, 2004
33