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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: September 30, 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
incorporation or organization) Identification Number
1608 Walnut Street, Philadelphia, Pennsylvania 19103
----------------------------------------------------
(Address of principal executive offices) (Zip code)
215-735-4422
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(Registrant's telephone number, including area code)
N/A
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(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.
7,435,681 shares of Issuer's Common Stock, par value
$0.01 per share, issued and outstanding as of September 30, 2004
Page 1 of 38
Exhibit index appears on page 36
Page 1
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 35
Item 4: Controls and Procedures 35
Part II: Other Information
Item 1: Legal Proceedings 36
Item 2: Changes in Securities and Use of Proceeds 36
Item 3: Defaults Upon Senior Securities 36
Item 4: Submission of Matters to a Vote of Security Holders 36
Item 5: Other Information 36
Item 6: Exhibits, Reports on Form 8-K and Certifications 36
Page 2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1: Financial Statements
-------------------- Page Number
-------------
(1) Consolidated Balance Sheets as of September 30, 2004, (unaudited) and December 31, 2003........................ 4
(2) Consolidated Statements of Income for the three and nine months ended
September 30, 2004, and 2003 (unaudited)..................................................................... 5
(3) Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004, and 2003 (unaudited)..................................................................... 6
(4) Notes to Consolidated Financial Statements..................................................................... 7
Page 3
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
as of September 30, 2004 and December 31, 2003
(dollars in thousands, except share data)
September 30, December 31,
ASSETS: 2004 2003
--------- ---------
(unaudited)
Cash and due from banks $ 19,053 $ 28,103
Interest bearing deposits with banks 1,546 3,547
Federal funds sold and interest-bearing deposits with banks 54,503 38,952
--------- ---------
Total cash and cash equivalents 75,102 70,602
Other interest-earning restricted cash 3,270 3,483
Investment securities available-for-sale, at fair value 47,003 61,686
Investment securities held-to-maturity at amortized cost
(Fair value of $7,102 and $8,300, respectively) 7,077 8,260
Loans receivable (net of allowance for loan losses of
$8,338 and $8,696, respectively) 544,925 479,523
Premises and equipment, net 4,502 4,412
Other real estate owned 207 207
Accrued interest receivable 3,751 3,710
Business owned life insurance 12,085 11,763
Other assets 14,957 11,146
--------- ---------
Total Assets $ 712,879 $ 654,792
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Deposits:
Demand - non-interest-bearing $ 104,385 $ 82,311
Demand - interest-bearing 50,295 73,315
Money market and savings 190,465 110,389
Time under $100,000 106,447 102,508
Time $100,000 or more 79,401 85,082
--------- ---------
Total Deposits 530,993 453,605
Short-term borrowings -- 2,852
FHLB Advances 100,000 125,000
Subordinated Debt 6,186 --
Accrued interest payable 2,605 2,841
Other liabilities 10,458 8,118
Corporation-obligated-mandatorily redeemable capital
securities of subsidiary trust holding solely junior
obligations of the corporation -- 6,000
--------- ---------
Total Liabilities $ 650,242 $ 598,416
--------- ---------
Shareholders' Equity:
Common stock par value $0.01 per share, 20,000,000 shares authorized; shares
issued 7,435,681 as of September 30, 2004
and 7,367,426 as of December 31, 2003 74 67
Additional paid in capital 41,818 33,396
Retained earnings 21,854 23,674
Treasury stock at cost (175,172 shares) (1,541) (1,541)
Accumulated other comprehensive income 432 780
--------- ---------
Total Shareholders' Equity 62,637 56,376
--------- ---------
Total Liabilities and Shareholders' Equity $ 712,879 $ 654,792
========= =========
(See notes to consolidated financial statements)
Page 4
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2004 and 2003
(dollars in thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------- ------- ------- -------
Interest income:
Interest and fees on loans $ 8,714 $ 7,339 $25,057 $31,215
Interest and dividend income on federal
funds sold and other interest-earning balances 161 243 524 735
Interest and dividends on investment securities 502 586 1,629 2,331
------- ------- ------- -------
Total interest income 9,377 8,168 27,210 34,281
------- ------- ------- -------
Interest expense:
Demand interest-bearing 98 108 270 355
Money market and savings 636 403 1,572 1,316
Time under $100,000 742 976 2,354 3,263
Time $100,000 or more 481 521 1,589 1,705
Other borrowed funds 1,906 2,079 5,982 6,168
------- ------- ------- -------
Total interest expense 3,863 4,087 11,767 12,807
------- ------- ------- -------
Net interest income 5,514 4,081 15,443 21,474
Provision (recovery) for loan losses (611) 647 263 6,345
------- ------- ------- -------
Net interest income after provision
for loan losses 6,125 3,434 15,180 15,129
------- ------- ------- -------
Non-interest income:
Loan advisory and servicing fees 100 167 344 462
Service fees on deposit accounts 437 410 1,351 1,062
Tax refund products -- 38 1,173 410
Short-term loan fee income 1,780 2,051 4,628 2,052
Lawsuit damage award 1,337 -- 1,337 --
Other income 188 160 5,601 232
------- ------- ------- -------
3,842 2,826 14,434 4,218
------- ------- ------- -------
Non-interest expenses:
Salaries and benefits 2,467 2,311 7,612 7,202
Occupancy 437 371 1,206 1,129
Depreciation 299 304 1,023 901
Legal 352 249 902 759
Advertising 31 21 138 140
Other expenses 1,760 1,165 4,272 3,666
------- ------- ------- -------
5,346 4,421 15,153 13,797
------- ------- ------- -------
Income before income taxes 4,621 1,839 14,461 5,550
Provision for income taxes 1,538 606 3,168 1,873
------- ------- ------- -------
Net income $ 3,083 $ 1,233 $11,293 $ 3,677
======= ======= ======= =======
Net income per share:
Basic $ 0.43 $ 0.17 $ 0.87 $ 0.52
======= ======= ======= =======
Diluted $ 0.41 $ 0.16 $ 0.83 $ 0.50
======= ======= ======= =======
(See notes to consolidated financial statements)
Page 5
Republic First Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003
Dollars in thousands
(unaudited)
For the nine months
ended September 30,
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 6,252 $ 3,677
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 263 6,345
Depreciation 1,023 901
Amortization of premium on investment securities 203 327
Increase in value of business owned life insurance (311) (153)
Increase in accrued interest receivable and other assets (3,365) (3,531)
Increase in accrued expenses
and other liabilities 2,104 2,074
-------- --------
Net cash provided by operating activities 6,169 9,640
-------- --------
Cash flows from investing activities:
Purchase of securities:
Held to maturity -- (2,461)
Available for sale (7,500) (5,554)
Proceeds from principal receipts, calls and
maturities of securities:
Held to maturity 1,184 2,739
Available for sale 20,960 49,428
Net increase in loans (65,307) (12,342)
Decrease in other interest earning restricted cash 213 644
Purchase of business owned life insurance -- (11,500)
Premises and equipment expenditures (1,113) (721)
-------- --------
Net cash (used in) provided by investing activities (51,563) 20,233
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options 358 924
Net increase in demand, money market and savings deposits 79,130 33,786
Repayment of overnight borrowing (2,852) --
Repayment of long-term borrowing (25,000) --
Net decrease in time deposits (1,742) (42,474)
-------- --------
Net cash provided by (used in) financing activities 49,894 (7,764)
-------- --------
Increase in cash and cash equivalents 4,500 22,109
Cash and cash equivalents, beginning of period 70,602 72,810
-------- --------
Cash and cash equivalents, end of period $ 75,102 $ 94,919
======== ========
Supplemental disclosure:
Interest paid $ 12,005 $ 13,183
======== ========
Taxes paid $ 1,800 $ 1,950
======== ========
(See notes to consolidated financial statements)
Page 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. The DE Bank is located at Brandywine
Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County
Delaware. The DE Bank offers many of the same services and financial products as
the PA Bank, and additionally offers nationally, short-term consumer loans and
other products not offered by the PA Bank.
The Company and the Banks encounter vigorous competition for market share from
bank holding companies, other community banks, thrift institutions and other
non-bank financial organizations, such as mutual fund companies, insurance
companies and brokerage companies.
The Company and the Banks are subject to 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 Republic First
Bancorp, Inc. 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 September 30, 2004, there were approximately $2.1 million of short-term
consumer loans outstanding, which were originated in Texas, California,
Michigan, Arizona, and Ohio and in other states. Effective in the third quarter
of 2003, the DE Bank began to sell a majority of these loans to independent
third parties while retaining a portion of the interest income, which the DE
Bank classifies as non-interest income. At September 30, 2004, the Company was
servicing $21.2 million of short-term consumer loans it had sold. The Company
evaluated these sales and determined that these transactions qualify as sales
under FAS 140.
Page 7
These loans generally have principal amounts of $1,500 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.
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.
The Company and its subsidiaries are subject to federal and state regulations
governing virtually all aspects of their activities, including but not limited
to, lines of business, liquidity, investments, the payment of dividends, and
others. Such regulations and the cost of adherence to such regulations can have
a significant impact on earnings and financial condition.
Page 8
Stock Based Compensation
(dollar amounts in thousands) Three months ended Nine months ended
September 30, September 30,
--------------------------- ---------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income as reported $ 3,083 $ 1,233 $ 6,252 $ 3,677
Less: Stock based compensation costs determined
under fair value method for all awards -- -- (54) (102)
------------ ------------ ------------ ------------
Net income, proforma $ 3,083 $ 1,233 $ 6,198 $ 3,575
============ ============ ============ ============
Earnings per common share-basic: As reported $ 0.43 $ 0.173 $ 0.87 $ 0.52
------------ ------------ ------------ ------------
Pro-forma $ 0.43 $ 0.173 $ 0.86 $ 0.51
------------ ------------ ------------ ------------
Earnings per common share-diluted: As reported $ 0.41 $ 0.16 $ 0.83 $ 0.50
------------ ------------ ------------ ------------
Pro-forma $ 0.41 $ 0.16 $ 0.82 $ 0.48
------------ ------------ ------------ ------------
The Company granted 11,667 and 56,667 options during the nine months ended
September 30, 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% 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.
At September 30, 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).
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. On October
13, 2004, FASB voted to delay the adoption of this proposed standard by public
companies until their first fiscal quarter beginning after June 15, 2005. The
Company is currently evaluating this proposed statement and its effects on its
results of operations.
Page 9
Note 3: 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
accounted for as derivatives that are entered into after September 30, 2004. The
adoption of SAB 105 is not expected to have a material effect on the Company's
financial statements.
Other Than Temporary Impairment
In November 2003, the Emerging Issues Task Force (EITF) of the FASB issued EITF
Abstract 03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments (EITF 03-1). The quantitative and qualitative
disclosure provisions of EITF 03-1 were effective for years ending after
December 15, 2003 and were included in the Company's 2003 Form 10-K. In March
2004, the EITF issued a Consensus on Issue 03-1 requiring that the provisions of
EITF 03-1 be applied for reporting periods beginning after June 15, 2004 to
investments accounted for under SFAS No. 115 and 124. EITF 03-1 establishes a
three-step approach for determining whether an investment is considered
impaired, whether that impairment is other-than-temporary, and the measurement
of an impairment loss. In September 2004, the FASB issued a proposed Staff
Position, EITF Issue 03-1-a, Implementation Guidance for the Application of
Paragraph 16 of EITF 03-1 (EITF 03-1-a). EITF 03-1-a would provide
implementation guidance with respect to debt securities that are impaired solely
due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of EITF 03-1.
In September 2004, the FASB issued a Staff Position, EITF Issue 03-1-1,
Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1 (EITF 03-1-1). FSP
EITF Issue No. 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No.
03-1, `The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments delays the effective date of certain provisions of EITF
Issue 03-1, including steps two and three of the Issue's three-step approach for
determining whether an investment is other-than-temporarily impaired. However,
step one of that approach must still be initially applied for impairment
evaluations in reporting periods beginning after June 15, 2004. The delay of the
effective date for paragraphs 10-20 of EITF Issue 03-1 will be superseded with
the final issuance of proposed FSP EITF Issue 03-1-a, Implementation Guidance
for the Application of Paragraph 16 of EITF Issue No. 03-1, `'The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. The
Company is in the process of determining the impact that this EITF will have on
its financial statements.
Note 4: 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
were required to be applied to certain variable interest entities by March 31,
2004.
Page 10
The Company adopted the provisions under the revised interpretation in the first
quarter of 2004. Accordingly, the Company no longer consolidates RFCT as of
September 30, 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 proposed 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 proposed rule would retain the current maximum percentage of total
capital permitted for trust preferred securities at 25%, but would enact other
changes to the rules governing trust preferred securities that affect their use
as part of the collection of entities known as "restricted core capital
elements". The rule would take effect March 31, 2007; however, a three-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 proposed rule and does not anticipate a material impact on its capital
ratios when the proposed rule is finalized.
Note 5: 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.
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. 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. Tax refund products are comprised of
accelerated check refunds and refund anticipation loans offered by the DE Bank
on a national basis to customers of Liberty Tax Services, an unaffiliated
national tax preparation firm. Short-term consumer loans are loans made to
customers offered by the DE Bank, with principal amounts of $1,500 or less and
terms of approximately two weeks. These loans typically are made in states that
are outside of the Company's normal market area through a small number of
marketers and involve rates and fees significantly different from other loan
products offered by either of the Banks.
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.
Page 11
Segment information for the nine and three month period ended September 30, 2004
and 2003, is as follows:
As of and for the nine months ended
September 30, 2004
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
---------------------- --------------- ------------------- --------------- -----------------
Net interest income $ 11,925 $ 1,174 $ 1,026 $ 1,318 $ 15,443
Provision (recovery) for loan losses (1,363) 90 500 1,036 263
Non-interest income 3,422 171 1,173 4,627 9,393
Non-interest expenses 11,384 1,035 763 1,971 15,153
Net income $ 3,340 $ 143 $ 620 $ 2,149 $ 6,252
====================== =============== =================== =============== =================
Selected Balance Sheet Accounts:
Total assets 662,707 44,199 - 5,973 712,879
Total loans 517,532 33,594 - 2,137 553,263
Total deposits 495,515 35,478 - - 530,993
September 30, 2003
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
---------------------- --------------- ------------------- --------------- -----------------
Net interest income $ 11,351 $ 1,146 $ 1,191 $ 7,786 $ 21,474
Provision for loan losses 60 91 1,042 5,152 6,345
Non-interest income 1,559 198 410 2,051 4,218
Non-interest expenses 10,688 1,142 545 1,422 13,797
Net income $ 1,472 $ 73 $ 9 $ 2,123 $ 3,677
====================== =============== =================== =============== =================
Selected Balance Sheet Accounts:
Total assets 594,353 42,705 - 7,709 644,767
Total loans 440,611 30,183 - 981 471,775
Total deposits 411,686 35,927 - - 447,613
Page 12
As of and for the three months ended
September 30, 2004
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
------------------- ------------- ----------------- --------------- -----------------
Net interest income $ 4,501 $ 366 $ - $ 647 $ 5,514
Provision for (recovery) loan losses (1,364) 30 - 723 (611)
Non-interest income 2,017 46 (1) 1,780 3,842
Non-interest expenses 4,284 332 120 610 5,346
------------------- ------------- ----------------- --------------- -----------------
Net income (loss) $ 2,404 $ 17 $ (78) $ 740 $ 3,083
=================== ============= ================= =============== =================
Selected Balance Sheet Accounts:
Total assets 662,707 44,199 - 5,973 712,879
Total loans 517,532 33,594 - 2,137 553,263
Total deposits 495,515 35,478 - - 530,993
September 30, 2003
(dollars in thousands) Short-term
Republic First First Bank of Tax Refund Consumer
Bank Delaware Products loans Total
------------------- ------------- ----------------- --------------- -----------------
Net interest income $ 3,599 $ 407 - $ 75 $ 4,081
Provision for loan losses - 30 - 617 647
Non-interest income 687 51 37 2,051 2,826
Non-interest expenses 3,470 376 145 430 4,421
------------------- ------------- ----------------- --------------- -----------------
Net income (loss) $ 563 $ 32 $ (68) $ 706 $ 1,233
=================== ============= ================= =============== =================
Selected Balance Sheet Accounts:
Total assets 594,353 42,705 - 7,709 644,767
Total loans 440,611 30,183 - 981 471,775
Total deposits 411,686 35,927 - - 447,613
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 September 30, 2004, and 2003,
respectively, there were no stock options, that were not included in the
calculation of EPS because the option price is greater than the average market
price for the period.
Page 13
The following table is a comparison of EPS for the three and nine months ended
September 30, 2004, and 2003.
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
Net Income
$3,083,000 $1,233,000 $6,252,000 $3,677,000
Per Per Per Per
Shares Share Shares Share Shares Share Shares Share
--------- ----- --------- ----- -------- ----- -------- -----
Weighted average shares
For period 7,242,662 7,141,540 7,207,203 7,043,226
Basic EPS $0.43 $0.17 $0.87 $0.52
363,928 339,526 340,104 307,376
--------- --------- -------- --------
Add common stock equivalents representing
dilutive stock options
Effect on basic EPS of dilutive CSE $(0.02) $(0.01) $(0.04) $(0.02)
------- ------- ------- -------
Equals total weighted average
shares and CSE (diluted) 7,606,590 7,481,066 7,547,307 7,350,602
========= ========= ======== ========
Diluted EPS $0.41 $0.16 $0.83 $0.50
======= ======= ======= =======
Note 8: 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 Nine months ended
September 30, September 30,
------------------------------------ -----------------------------
2004 2003 2004 2003
---------------- ----------------- -------------- --------------
Net income $ 3,083 $ 1,233 $ 6,252 $ 3,677
Other comprehensive income, net of tax:
Unrealized gains/(losses) on securities:
Unrealized holding gains/(losses) during the period 110 (228) (348) (911)
---------------- ----------------- -------------- --------------
Comprehensive income $ 3,193 $ 1,005 $ 5,904 $ 2,766
================ ================= ============== ==============
Note 9: Stock Dividend
On July 13, 2004, the Board of Directors declared a 10% stock dividend with a
record date of August 5, 2004 and a payable date of August 24, 2004. The
financial information and per share information in this report have been
adjusted to reflect the 10% stock dividend.
Page 14
Note 10: Potential Spin-off
The Board of Directors of the Company is considering a potential spin-off of its
Delaware subsidiary, First Bank of Delaware and, in connection therewith,
requested a private letter ruling from the Internal Revenue Service. On October
27, 2004, the Company received a ruling from the Internal Revenue Service to the
effect that, among other things, the distribution would be tax free for U.S.
federal income tax purposes to the Company and its shareholders, and that
neither the Company nor its shareholders would recognize income, gain or loss as
a result of the distribution.
Following the spin-off, First Bank of Delaware would be an independent public
company. If the spin-off were to occur, it is contemplated that relative to
their share ownership in the Company. Holders of the Company's common stock
would continue to own their proportionate share of the Company. Subject to all
necessary regulatory filings and approvals, satisfaction of customary closing
conditions and approval by the Company's Board of Directors, the proposed
spin-off is expected to be completed during the first quarter of 2005.
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 2003 and 2002, and any
Current Reports on Form 8-K filed by the Company, as well as other filings.
Financial Condition:
September 30, 2004 Compared to December 31, 2003
Total assets increased $58.1 million to $712.9 million at September 30, 2004,
versus $654.8 million at December 31, 2003. This net increase reflected higher
federal funds and commercial loan balances.
Page 15
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 $65.0 million, to $553.3
million at September 30, 2004, versus $488.2 million at December 31, 2003.
Substantially all of the increase resulted in the commercial and construction
loan category. 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 September 30, 2004. Individual customers may have several loans that
are secured by different collateral. The aggregate amount of those relationships
that exceeded $6.8 million at September 30, 2004, was approximately $50.0
million. The $6.8 million threshold approximates 10% of total capital and
reserves and reflects an additional internal monitoring guideline. At September
30, 2004, the Company through the DE Bank had $2.1 million in short-term
consumer loans outstanding versus $1.4 million at December 31, 2003. At
September 30, 2004, the Company was servicing $21.2 million of short-term
consumer loans it had sold. These loans have principal amounts of less than
$1,500, and terms of approximately two weeks and at September 30, 2004, were
originated in Michigan, Texas, Arizona, Ohio and California through a small
number of marketers. Also in the third quarter 2004, the DE Bank began making
short-term consumer loans via the internet and phone in other selected states.
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. Prior to the effective date of Act No. 440, the DE Bank discontinued making
short-term loans in Georgia.
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 $47.0
million at September 30, 2004, a decrease of $14.7 million or 23.8%, from
year-end 2003. This decrease resulted primarily from prepayments on
mortgage-backed securities. At September 30, 2004, and December 31, 2003, the
portfolio had net unrealized gains of $655,000 and $1.2 million, respectively.
Investment securities held-to-maturity are investments for which there is the
intent and ability to hold the investment to maturity. These investments are
carried at amortized cost. The held-to-maturity portfolio consists primarily of
Federal Home Loan Bank ("FHLB") securities. At September
Page 16
30, 2004, securities held to maturity totaled $7.1 million, a decrease of $1.2
million, or 14.4% from $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
$4.5 million, to $75.1 million at September 30, 2004, from $70.6 million at
December 31, 2003, reflecting lower due from bank balances which were more than
offset by an increase in federal funds sold.
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 September 30, 2004
the balance was $3.3 million, a decrease of $200,000 from the December 31, 2003
balance of $3.5 million.
Fixed Assets:
Bank premises and equipment, net of accumulated depreciation, increased $90,000
to $4.5 million at September 30, 2004, from $4.4 million at December 31, 2003.
The increase reflected purchases of new computer equipment offset by
depreciation on existing assets.
Other Real Estate Owned:
Other real estate owned amounted to $207,000 at September 30, 2004 and December
31, 2003.
Business Owned Life Insurance:
The balance of business owned life insurance amounted to $12.1 million at
September 30, 2004 and $11.8 million at December 31, 2003. The income earned on
these policies is reflected in other income.
Other Assets:
Other assets at September 30, 2004 reflected a $2.7 million increase over the
December 31, 2003 balance in currency utilized by armored car currency providers
for a fee.
Deposits:
Deposits, which include non-interest and interest-bearing demand, 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 $77.4 million, or 17.1% to $531.0 million at
September 30, 2004, from $453.6 million at December 31, 2003. Average core
deposits (transaction accounts) increased 24.9%, or $64.7 million more than the
prior year period to $324.4 million in the third 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 decreased
$1.7 million, or .9% to $185.8 million at September 30, 2004, versus $187.6
million at the prior year-end.
Page 17
FHLB Borrowings:
FHLB borrowings totaled $100.0 million at September 30, 2004 and $125.0 million
at December 31, 2003. The Company's borrowings primarily mature in the fourth
quarter of 2004 and first quarter of 2005.
Shareholders' Equity:
Total shareholders' equity increased $6.3 million to $62.6 million at September
30, 2004, versus $56.4 million at December 31, 2003. This increase was primarily
the result of year-to-date 2004 net income of $6.2 million.
Three Months Ended September 30, 2004 Compared to September 30, 2003
- --------------------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased to $3.1 million or $0.41 per diluted
share for the three months ended September 30, 2004, compared to $1.2
million, or $0.16 per diluted share for the comparable prior year period.
The improvement reflected a $611,000 net credit in the provision for loan
losses in the third quarter of 2004, compared to expense of $647,000 in the
comparable prior year period. That credit resulted from the recovery of a
prior year charged-off loan. The recovery increased the reserve for loan
losses such that it exceeded amounts required by the Company's reserve
methodology. Additionally, as a result of litigation, $1.3 million was
reflected in non-interest income, to reflect a court award of damages in
excess of the original charge-off amount. The improvement also reflected a
$224,000 reduction in interest expense resulting primarily from lower rates
paid on time deposits (certificates of deposit) and growth in lower cost
core deposits. The majority of the $1.2 million increase in interest income
resulted from commercial loan growth. Average commercial and construction
loans increased 20.2% and average core deposits increased 24.9% in the
third quarter of 2004, respectively, compared to the prior year comparable
period. The increased net income resulted in a return on average assets and
average equity of 1.76% and 20.21% respectively, in the third quarter of
2004 compared to 0.75% and 8.94% respectively for the comparable prior year
period.
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.
Page 18
For the three months ended For the three months ended
September 30, 2004 September 30, 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 43,913 161 1.45% 76,927 243 1.25%
Securities 58,723 502 3.39% 54,552 586 4.26%
Loans receivable 535,942 8,714 6.45% 458,719 7,339 6.35%
------------------ --------------- -------------- ----------------- -------------- --------------
Total interest-earning assets 638,578 9,377 5.83% 590,198 8,168 5.49%
Other assets 60,688 57,736
------------------ -----------------
Total assets $ 699,266 $ 647,934
================== =================
Interest-bearing liabilities:
Demand-non interest
bearing $ 94,618 $ 71,029
Demand interest-bearing 62,659 98 0.62% 59,463 108 0.72%
Money market & savings 167,166 636 1.51% 129,265 403 1.24%
Time deposits 178,595 1,223 2.72% 186,149 1,497 3.19%
------------------ --------------- -------------- ----------------- -------------- --------------
Total deposits 503,038 1,957 1.54% 445,906 2,008 1.79%
Total interest-bearing
deposits 408,420 1,957 1.99% 374,877 2,008 2.12%
------------------ --------------- -------------- ----------------- -------------- --------------
Other borrowings 120,648 1,906 6.27% 134,074 2,079 6.15%
------------------ --------------- -------------- ----------------- -------------- --------------
Total interest-bearing
liabilities $ 529,068 $ 3,863 2.90% 508,951 4,087 3.19%
================== =============== ============== ================= -------------- --------------
Total deposits and
other borrowings 623,686 3,863 2.43% 579,980 4,087 2.80%
------------------ --------------- -------------- ----------------- -------------- --------------
Noninterest-bearing
liabilites 14,590 13,227
Shareholders' equity 60,990 54,727
------------------ -----------------
Total liabilities and
shareholders' equity $ 699,266 $ 647,934
================== =================
Net interest income $ 5,514 $ 4,081
=============== ==============
Net interest spread 3.38% 2.69%
============== ==============
Net interest margin 3.40% 2.74%
============== ==============
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.
Page 19
Rate/Volume Table
Three months ended September 30,
2004 versus 2003
(dollars in thousands)
Due to change in:
Volume Rate Total
-------- -------- --------
Interest earned on:
Federal funds sold $ (121) $ 39 $ (82)
Securities 35 (119) (84)
Loans 1,256 119 1,375
- --------------------------------------------------------------------------------
Total interest-earning assets 1,170 39 1,209
Interest expense of
deposits
Interest-bearing demand deposits (4) 14 10
Money market and savings (144) (89) (233)
Time deposits 52 222 274
- --------------------------------------------------------------------------------
Total deposit interest expense (96) 147 51
Other borrowings 212 (39) 173
- --------------------------------------------------------------------------------
Total interest expense 116 108 224
- --------------------------------------------------------------------------------
Net interest income $ 1,286 $ 147 $ 1,433
================================================================================
The Company's net interest margin increased 66 basis points to 3.40% for the
three months ended September 30, 2004, versus the prior year comparable period.
Interest on short-term consumer loans contributed approximately $647,000 to net
interest income for the quarter ended September 30, 2004 and 40 basis points to
the margin versus $158,000 and 9 basis points for the prior year comparable
period. Excluding the impact of short-term loans and tax products, margins
increased 35 basis points in the third quarter of 2004 compared to the prior
year comparable period. The increase reflected the impact of the 24.9% increase
in average lower cost core deposits (transaction accounts), and the repricing of
certificates of deposit to lower rates. Those factors more than offset the
impact of residential mortgage loan and security prepayments. While management
could replace significant amounts of security prepayments, it has deferred
longer term security purchases in light of the lower interest rate environment.
A total of $100.0 million of Federal Home loan Bank ("FHLB") advances which
carry an average interest rate of 6.30% mature beginning the fourth 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 rose 0.34% to 5.83% for the three months ended
September 30, 2004, from 5.50% for the prior year comparable period due
primarily to the increased short term loan interest. The average rate paid on
interest-bearing liabilities decreased 29 basis points to 2.90% for the three
months ended September 30, 2004, from 3.19% in the prior year comparable period,
as the Company repriced its certificates of deposit lower and lower cost core
deposits increased.
The Company's net interest income increased $1.4 million, or 35.1%, to $5.5
million for the three months ended September 30, 2004, from $4.1 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
commercial and short-term consumer loans. Excluding the impact of short-term
consumer loans and tax products, the net interest margin increased by
approximately $944,000 as increased commercial loan volume more than offset the
impact of residential mortgage loan and
Page 20
security prepayments. Average interest-earning assets increased $48.4 million to
$638.6 million versus $590.2 for the prior year period.
The Company's total interest income increased $1.2 million, or 14.8%, to $9.4
million for the three months ended September 30, 2004, from $8.2 million for the
prior year comparable period. Interest and fees on loans increased $1.4 million
to $8.7 million for the three months ended September 30, 2004, from $7.3 million
for the prior year comparable period. The yield on loans increased 10 basis
points to 6.45% reflecting the increased short-term loan interest. Interest and
dividends on investment securities decreased $84,000 to $502,000 for the three
months ended September 30, 2004, from $586,000 for the prior year comparable
period. The average rate earned on investment securities declined 85 basis
points to 3.39% as higher coupon mortgage backed securities prepaid more rapidly
than lower coupons and were replaced with shorter term, lower rate securities
and the rates earned on variable rate securities declined due to the lower
interest rate environment. Interest income on federal funds sold decreased
$82,000, primarily as a result of lower average balances.
The Company's total interest expense decreased $224,000, or 5.5%, to $3.9
million for the three months ended September 30, 2004, from $4.1 million for the
prior year comparable period, primarily due to the lower rate environment. The
Company repriced certain deposits lower, particularly certificates of deposit.
Interest-bearing liabilities averaged $529.1 million for the three months ended
September 30, 2004, versus $509.0 million for the prior year comparable period
reflecting lower amounts of higher cost borrowings and certificates of deposit.
Those lower reductions were more than offset by increased balances in lower cost
core deposits. The average rate paid on interest-bearing liabilities decreased
29 basis points to 2.90% for the three months ended September 30, 2004, due
primarily to the increase in core deposits and lower rates on certificates of
deposit (time deposits).
Interest expense on certificates of deposit decreased $274,000, or 18.3%, to
$1.2 million at September 30, 2004, from $1.5 million for the prior year
comparable period. This decline reflected lower rate certificates of deposit as
the average rate declined 47 basis points to 2.72%. In addition, average
certificates of deposit outstanding decreased $7.6 million, or 4.1%, to $178.6
million, for the quarter ended September 30, 2004, from $186.1 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, decreased
$173,000 due to a reduction in average balances.
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 $1.3 million to ($611,000) for the three months ended September 30,
2004, from $647,000 for the prior year comparable period. The decrease reflects
excess reserves for loan losses, resulting from a $1.4 million recovery credited
to the reserve, representing the previously charged-off balance of the related
loan. Partially offsetting the impact of that recovery on the reserve and
provision, was a $400,000 additional provision for short-term consumer loans.
Page 21
Non-Interest Income
Total non-interest income increased $1.0 million to $3.8 million for the three
months ended September 30, 2004, versus $2.8 million for the prior year
comparable period. The $1.0 million reflected a $1.3 million favorable judgment
and related lawsuit damage award, received for damages previously incurred in
connection with the charge-off recovery discussed under "Provision for Loan
Losses".
Non-Interest Expenses
Total non-interest expenses increased $925,000 to $5.3 million for the three
months ended September 30, 2004, from $4.4 million for the prior year comparable
period. Salaries and employee benefits increased $156,000 or 6.75%, to $2.5
million for the three months ended September 30, 2004, from $2.3 million for the
prior year comparable period reflecting increased commercial loan department
related expenses to support related loan growth. Increases of approximately 3%
resulted from average cost of living increases.
Occupancy expense increased $66,000 or 17.8% to $437,000 in 2004 reflecting the
rental of additional space for the Company's main Philadelphia location, and
other rent increase both of which totaled $26,000. The increase also reflected
additional repairs and maintenance which amounted to $33,000. Legal fees
increased $103,000 or 41.3% in 2004, reflecting increases related to the
proposed spin-off of First Bank of Delaware. Depreciation and advertising
expense were comparable in both periods.
Other expenses increased $595,000, or 51.1% to $1.8 million for the three months
ended September 30, 2004, from $1.2 million for the prior year comparable
period. Other expenses reflected a charge of $150,000 as a result of sales and
use tax audit performed in third quarter 2004. It also reflected an $85,000
charge for expenses related to the proposed spin-off of the First Bank of
Delaware, directors fees which increased $79,000, and correspondent bank service
charges which increased $82,000 as a result of increased volume and price
increases.
Provision for Income Taxes
The provision for income taxes increased $932,000, to $1.5 million for the three
months ended September 30, 2004, from $606,000 for the prior year comparable
period. This increase was primarily the result of the increase in pre-tax
income. The effective tax rate increased to 33.3% from 32.9%.
Nine Months Ended September 30, 2004 Compared to September 30, 2003
- -------------------------------------------------------------------
Results of Operations:
Overview
The Company's net income increased $2.6 million or 70.0% to $6.3 million or
$0.83 per diluted share for the nine months ended September 30, 2004, compared
to $3.7 million, or $0.50 per diluted share for the prior year comparable
period. The improvement reflected a $611,000 net credit in the provision for
loan losses for the third quarter 2004. That credit resulted from the recovery
of a prior year charged-off loan, which increased the reserve for loan losses
such that it exceeded amounts required by the Company's reserve methodology.
Additionally, as a result of related litigation, $1.3 million was reflected in
miscellaneous income, to reflect a court award of damages in excess of the
original charged-off amount. The improvement also reflected a $1.0 million
reduction in interest
Page 22
expense resulting primarily from lower rates paid on time deposits (certificates
of deposit) and increased balances of lower cost core deposits. It further
reflected an increase in tax refund product revenue of approximately $763,000.
The $7.1 million decrease in interest income resulted primarily because the
Company began selling the majority of its short-term consumer loans in the third
quarter 2003, when previously it had retained such loans. Related income was
accounted for as interest prior to the sales, and non-interest income when loans
were sold. Accordingly, non-interest income on short-term consumer loans
increased $2.6 million. The impact of the participation of short-term loans was
further offset by the reduction in short-term loan related provision expense,
which decreased $4.1 million. Interest margins were also impacted by prepayments
in the residential real estate and mortgage-backed securities portfolios.
Average commercial and construction loans increased 18.3% and average core
deposits increased 13.9% in the first nine months of 2004, respectively,
compared to the prior year comparable period. The increased net income resulted
in a return on average assets and average equity of 1.20% and 13.83%,
respectively, in the first nine months of 2004 compared to .74% and 9.26% for
the comparable prior year period.
Page 23
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.
For the nine months ended For the nine months ended
September 30, 2004 September 30, 2003
------------------------------------------------ ----------------------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
------------------ ------------- ------------ -------------- ------------ -------------
Interest-earning assets:
Federal funds sold
and other interest-
earning assets $ 60,353 $ 524 1.16% $ 76,684 $ 735 1.28%
Securities 64,664 1,629 3.36% 68,877 2,331 4.51%
Loans receivable 516,372 25,057 6.47% 468,853 31,215 8.88%
------------------ ------------- ------------ -------------- ------------ -------------
Total interest-earning assets 641,389 27,210 5.66% 614,414 34,281 7.44%
Other assets 52,142 44,210
------------------ --------------
Total assets $ 693,531 $ 658,624
================== ==============
Interest-bearing liabilities:
Demand-non interest
bearing 95,659 - 73,116 -
Demand interest-bearing 59,256 270 0.61% 59,142 355 0.80%
Money market & savings 143,765 1,572 1.46% 129,993 1,316 1.35%
Time deposits 192,158 3,943 2.74% 200,979 4,968 3.30%
------------------ ------------- ------------ -------------- ------------ -------------
Total deposits 490,838 5,785 1.57% 463,230 6,639 1.91%
Total interest-bearing
deposits 395,179 5,785 1.95% 390,114 6,639 2.27%
------------------ ------------- ------------ -------------- ------------ -------------
Other borrowings 128,091 5,982 6.23% 133,316 6,168 6.17%
------------------ ------------- ------------ -------------- ------------ -------------
Total interest-bearing
liabilities $ 523,270 $ 11,767 3.00% $ 523,430 $ 12,807 3.27%
================== ============= ============ ============== ============ =============
Total deposits and
other borrowings 618,929 11,767 2.53% 596,546 12,807 2.87%
---------------------------------- ------------ ----------------------------- -------------
Noninterest-bearing
liabilites 14,335 8,978
Shareholders' equity 60,267 53,100
------------------ --------------
Total liabilities and
shareholders' equity $ 693,531 $ 658,624
================== ==============
Net interest income $ 15,443 $ 21,474
============= ============
Net interest spread 3.13% 4.57%
============ =============
Net interest margin 3.21% 4.66%
============ =============
Page 24
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
Nine months ended September 30,
2004 versus 2003
(dollars in thousands)
Due to change in:
Volume Rate Total
-------------- ------------- ------------
Interest earned on:
Federal funds sold $ (191) $ (20) $ (211)
Securities (106) (596) (702)
Loans 2,306 (8,464) (6,158)
- ------------------------------------------------------------------------------------------------
Total interest-earning assets 2,009 (9,080) (7,071)
Interest Expense of
Deposits
Interest-bearing demand deposits - 85 86
Money market and savings (151) (105) (256)
Time deposits 181 844 1,025
- ------------------------------------------------------------------------------------------------
Total deposit interest expense 30 824 855
Other borrowed funds 454 (268) 186
- ------------------------------------------------------------------------------------------------
Total interest expense 484 556 1,041
- ------------------------------------------------------------------------------------------------
Net interest income $ 2,494 $ (8,524) $ (6,030)
- ------------------------------------------------------------------------------------------------
The Company's net interest margin decreased 145 basis points to 3.21% for year
to date 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. Interest on short-term consumer loans
contributed approximately $1.3 million to net interest income year to date 2004
and 26 basis points to the margin versus $8.1 million and 1.76% in the prior
year comparable period. Excluding the impact of short-term loans and tax
products, margins increased to 2.71% year to date 2004 from 2.62% in the prior
year comparable period. That increase reflected lower deposit rates and lower
cost core deposit growth which more than offset the impact of residential
mortgage and mortgage-backed security prepayments. While management could
replace significant amounts of such prepayments, it has deferred long term
security purchases in light of the lower interest rate environment. A total of
$100.0 million of Federal Home loan Bank ("FHLB") advances which carry an
average interest rate of 6.30% mature beginning the fourth 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 1.78% to 5.66% year to date 2004, from
7.44% 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-
Page 25
bearing liabilities decreased 27 basis points to 3.00% year to date 2004, from
3.27% in the prior year comparable period, as the Company repriced its deposits
lower.
The Company's net interest income decreased $6.0 million, or 28.1%, to $15.4
million for year to date 2004, from $21.5 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 classified as non-interest income after the
participation of such loans. Excluding the impact of short-term loans and tax
products, total net interest income increased by approximately $965,000 between
the two periods, as increased commercial loan volume offset the impact of
residential mortgage loan and security pre payments.
The Company's total interest income decreased $7.1 million, or 20.6%, to $27.2
million year to date 2004, from $34.3 million for the prior year comparable
period. Interest and fees on loans decreased $6.2 million to $25.1 million year
to date 2004, from $31.2 million for the prior year comparable period. This
decline reflects a $6.8 million reduction in short term loan interest income.
The yield on loans declined 2.41% to 6.47% primarily reflecting the reduced
short-term loan fees. Interest and dividends on investment securities decreased
$702,000 to $1.6 million year to date 2004, from $2.3 million for the prior year
comparable period. This decline reflected the $4.2 million, or 6.1%, decrease in
average investment securities outstanding to $64.6 million year to date 2004
from $68.9 million for the prior year period. In addition, the average rate
earned on investment securities declined 115 basis points to 3.36% as higher
coupon mortgage backed securities prepaid more rapidly than lower coupons and
were replaced with shorter term, lower rate securities 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 $1.0 million or 8.1%, to $11.8
million year to date 2004, from $12.8 million for the prior year comparable
period, due to the lower deposit rates. The Company repriced deposits to the
lower rate environment, particularly certificates of deposit. The average rate
paid on interest-bearing liabilities decreased 27 basis points to 3.00% year to
date 2004, compared to the comparable prior year period, due primarily to the
decrease in average rates paid on deposit products and increased balances of
lower cost core deposits.
Interest expense on time deposits (certificates of deposit) decreased $1.0
million or 20.63%, to $3.9 million year to date 2004, from $5.0 million for the
prior year comparable period. This decline reflected the lower interest rate
environment as the average rate declined 56 basis points to 2.74%. In addition,
average certificates of deposit outstanding decreased $8.8 million, or 4.4%, to
$192.2 million, year to date 2004, from $201.0 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 year to date 2004 provision for
loan losses decreased $6.1 million to $263,000, from $6.3 million for the prior
year comparable period. This decrease reflected a $4.1 million decrease in the
provision for short-term loans, as the majority of such loans were sold to third
parties, beginning in the third quarter of 2003. Finally, it reflected the
impact of $200,000 of recoveries on tax refund loans. It also reflected the
impact of the large recovery described in the "Provision for Loan Losses" in the
three month comparison above.
Page 26
Non-Interest Income
Total non-interest income increased $5.2 million to $9.4 million year to date
2004, versus $4.2 million for the prior year comparable period. Of the $4.2
million increase, $2.6 million resulted from the participation of short term
loans. Prior to second quarter 2003, such loans were not participated and fees
were recognized as interest income. Tax refund product income increased by
$763,000, primarily as a result of volume. Approximately $1.3 million resulted
from a lawsuit damage award related to a charged-off loan, for damages
previously incurred.
Non-Interest Expenses
Total non-interest expenses increased $1.4 million, or 9.8% to $15.2 million
year to date 2004, from $13.8 million for the prior year comparable period.
Salaries and employee benefits increased $410,000 or 5.7%, to $7.6 million year
to date 2004, from $7.2 million for the prior year comparable period. The
increase resulted primarily from additional staff and incentive expense related
to loan and deposit generation.
Occupancy expense increased $77,000, or 6.82%, for year to date 2004 compared to
2003. This increase reflected $28,000 for the rental of additional space for the
Company's main Philadelphia location, and other rental increases. Additional
repairs and maintenance amounted to $40,000.
Legal expense increased $143,000 or 18.8% for year to date 2004 compared to
2003. This increase resulted primarily from legal expense related to the
proposed spin-off of First Bank of Delaware.
Advertising expense was comparable in both periods.
Depreciation expense increased $122,000, or 13.5%, to $1.0 million year to date
2004, versus $901,000 for the prior year comparable period. Substantially all of
the increase resulted from a write-off of software related to the tax refund
products.
Provision for Income Taxes
The provision for income taxes increased $1.3 million, or 69.1%, to $3.2 million
year to date 2004, from $1.9 million for the prior year comparable period. This
increase was primarily the result of the increase in pre-tax income. The
effective tax rate was 33.6% for year to date 2004, versus 33.7% for the prior
year comparable period.
Commitments, Contingencies and Concentrations
The Banks are a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit totaling $130.4 million at September 30, 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.
Page 27
Financial instruments whose contract amounts represent potential credit risk are
commitments to extend credit of approximately $125.9 million and $94.8 million
and standby letters of credit of approximately $4.5 million and $4.0 million at
September 30, 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 Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the customer.
Collateral held varies but may include real estate, marketable securities,
pledged deposits, equipment and accounts receivable.
Standby letters of credit are conditional commitments 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 September 30, 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 approximately $165.0
million, which represented 29.8% of gross loans receivable at September 30,
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.
Regulatory Matters
The following table presents the Company's capital regulatory ratios at
September 30, 2004, and December 31, 2003:
December 31, 2003:
To be well
capitalized
For Capital under FRB
Actual Adequacy purposes capital guidelines
Amount Ratio Amount Ratio Amount Ratio
------------- ------------ ------------- ----------- -------- ----------
Dollars in thousands
At September 30, 2004
Total risk based capital
Republic First Bank $62,044 12.34% $40,209 8.00% $50,262 10.00%
First Bank of Delaware 10,784 27.98% 3,083 8.00% 3,854 10.00%
Republic First Bancorp, 74,758 13.78% 43,414 8.00% - N/A
Inc.
Tier one risk based capital
Republic First Bank 55,752 11.09% 20,105 4.00% 30,157 6.00%
First Bank of Delaware 10,292 26.70% 1,542 4.00% 2,313 6.00%
Republic First Bancorp, 67,955 12.52% 21,707 4.00% - N/A
Inc.
Tier one leveraged capital
Republic First Bank 55,752 8.64% 32,254 5.00% 32,254 5.00%
First Bank of Delaware 10,292 18.67% 2,757 5.00% 2,757 5.00%
Republic First Bancorp, 67,955 9.71% 34,990 5.00% - N/A
Inc.
Page 28
To be well
capitalized
For Capital under FRB
Actual Adequacy purposes 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% - -
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% - -
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% - -
Dividends
The Company has not paid any cash dividends on its Common Stock.
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 are in part, to monitor the Banks' liquidity and
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 $75.1 million at September 30, 2004,
compared to $70.6 million at December 31, 2003, due primarily to a decrease in
federal funds sold. Loan maturities and repayments, if not reinvested in loans,
also are immediately available for liquidity. At September 30, 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 December 31, 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 September
Page 29
30, 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 September 30, 2004, the Company had aggregate outstanding commitments
(including unused lines of credit and letters of credit) of $130.4 million.
Certificates of deposit scheduled to mature in one year totaled $100.0 million
at September 30, 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 September 30, 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 September 30, 2004, and December 31,
2003, the PA Bank had borrowed $100 million and $125.0 million, respectively,
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.
Investment Securities Portfolio
At September 30, 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 consist of US Government Agency
securities and other investments. The book and market values of securities
available-for-sale were $46.4 million and $47.0 million as of September 30,
Page 30
2004, respectively. The net unrealized gain on securities available for sale as
of that date was $655,000.
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. 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 September 30, 2004. Individual customers may have several loans
often secured by different collateral. The aggregate amount of those
relationships that exceeded $6.8 million (an internal monitoring guideline which
approximates 10% of capital and reserves) at September 30, 2004, was
approximately $50.0 million.
Total loans increased $65.0 million, to $553.3 million at September 30, 2004,
from $488.2 million at December 31, 2003. Substantially all of the growth was in
commercial and construction loans. Commercial loans grew $49.5 million over that
period, or an increase of 13.4%, while construction and land development loans
grew $18.0 million, an increase of 20.4%.
The following table sets forth the Company's gross loans by major categories for
the periods indicated:
(dollars in thousands) As of September 30, 2004 As of December 31, 2003
-------------------------------------------------------------------------------
Balance % of Total Balance % of Total
-------------------------------------------------------------------------------
Commercial:
Real estate secured $ 350,898 63.4 $ 302,618 62.0
Construction and land development 106,884 19.3 88,850 18.2
Non real estate secured 59,638 10.8 52,041 10.7
Unsecured 7,270 1.3 13,688 2.7
-------------------------------------------------------------------------------
524,690 94.8 457,197 93.6
Residential real estate 8,266 1.5 14,875 3.0
Consumer, short-term & other 20,307 3.7 16,147 3.4
-------------------------------------------------------------------------------
Total loans 553,263 100.0% 488,219 100.0%
Less allowance for loan losses (8,338) (8,696)
---------------- ------------------
Net loans $ 544,925 $ 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.
Page 31
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.
The following summary shows information concerning loan delinquency and other
non-performing assets at the dates indicated.
September 30, December 31,
2004 2003
--------------------------------------
(dollars in thousands)
Loans accruing, but past due 90 days or more $ 804 $3,084
Non-accrual loans 6,841 5,527
--------------------------------------
Total non-performing loans (1) $ 7,645 $8,611
Other real estate owned 207 207
--------------------------------------
Total non-performing assets (2) $ 7,852 $8,818
======================================
Non-performing loans as a percentage of total
loans net of unearned
Income 1.38% 1.76%
Non-performing assets as a percentage of total
assets 1.10% 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 $1.7 million to $6.8 million at September 30, 2004,
from $5.5 million at December 31, 2003. The increase resulted from the addition
of several loans each with principal amounts of less than $200,000. Loans
accruing, but past due 90 days or more decreased $2.3 million to $804,000 at
September 30, 2004 from $3.1 million at December 31, 2003. That decrease
reflected the sale and refinancing of a property collateralizing a $1.9 million
loan balance included at
Page 32
December 31, 2003, to a new purchaser, after the loan was transferred to other
real estate owned. The sale and subsequent refinance were arms length and the
new loan was made in accordance with the Company's normal underwriting terms.
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 September 30, 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 $6.8 million at
September 30, 2004, and $5.5 million at December 31, 2003, and the amount of
related valuation allowances were $1.6 million and $1.4 million, respectively.
There were no commitments to extend credit to any borrowers with impaired loans
as of the end of the periods presented herein.
At September 30, 2004, and December 31, 2003, internally classified accruing
substandard loans totaled approximately $4.7 million and $11.2 million
respectively; and doubtful loans totaled approximately $1.1 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, at
September 30, 2004 and December 31, 2003, in the aggregate principal amount of
$1.7 million and $2.6 million; and (ii) 60 to 89 days past due, at September 30,
2004 and December 31, 2003, in the aggregate principal amount of $421,000 and
$2.1 million, respectively.
At September 30, 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 approximately $165
million, which represented $29.8 million of gross loans receivable at September
30, 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 September 30,
2004 and December 31, 2003. Year to date activity in other real estate owned
included the addition of a $1.5 million property, related to a $1.9 million
loan, which was sold. Of the $1.5 million sales price, a total of approximately
$300,000 was received in cash. The balance of $1.2 million was financed by the
Company at prevailing rates and terms. Substantially all of the $427,000
difference between the $1.9 million loan and the $1.5 million transferred to
OREO was fully reserved and was charged off. There was no activity in the third
quarter.
At September 30, 2004, the Company had no credit exposure to "highly leveraged
transactions" as defined by the Federal Reserve Bank.
Page 33
Allowance for Loan Losses
An analysis of the Company's allowance for loan losses for the six months ended
September 30, 2004, and 2003, and the twelve months ended December 31, 2003 is
as follows:
For the nine months For the twelve months For the nine months
ended ended ended
(dollars in thousands) September 30, 2004 December 31, 2003 September 30, 2003
---------------------- ----------------------- -----------------------
Balance at beginning of period $ 8,696 $ 6,642 $ 6,642
Charge-offs:
Commercial and construction 454 365 1
Short-term loans 1,040 4,299 4,218
Tax refund loans 700 1,393 1,393
Consumer -- 53 --
-------- -------- --------
Total charge-offs 2,194 6,110 5,612
-------- -------- --------
Recoveries:
Commercial and construction 1,369 1,066
1,023
Tax refund loans 200 334 333
Consumer --
4 --
-------- -------- --------
Total recoveries 1,573 1,400 1,356
-------- -------- --------
Net charge-offs 621 4,710 4,256
-------- -------- --------
Provision for loan losses 263 6,764 6,345
-------- -------- --------
Balance at end of period $ 8,338 $ 8,696 $ 8,731
======== ======== ========
Average loans outstanding (1) $516,372 $470,237 $468,853
======== ======== ========
As a percent of average loans (1):
Net charge-offs (annualized) .16% 1.00% 1.21%
Provision for loan losses .05% 1.44% 1.35%
Allowance for loan losses 1.61% 1.85% 1.86%
Allowance for loan losses to:
Total loans, net of unearned income at
period end 1.50% 1.78% 1.85%
Total non-performing loans at period
end 109.06% 101.00% 125.04%
(1) Includes non-accruing loans.
In the third quarter, the PA Bank received a recovery of $1.4 million on a
previously charged-off commercial loan, as a result of litigation. The PA Bank
also received $1.3 million for related damages, which were reflected under other
income.
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
2004 compared to 2003, 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
Page 34
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 September
30, 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 September 30, 2004, loans made for commercial and construction,
residential mortgage and consumer purposes, respectively, amounted to $524.7
million, $8.3 million and $20.3 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.
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.
Page 35
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
---------------------------------------------------
None.
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.
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).
Page 36
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 (furnished but not filed for purposes of the Securities Exchange
Act of 1934.
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 13, 2003.
Reports on Form 8-K
Press release dated October 5, 2004.
Entry into a Material Definitive Agreement dated October 19, 2004
Note: The Deferred Corporation Plan referenced in this 8-K, is attached
to this form 10-Q.
Other Events dated October 27, 2004
Page 37
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: November 12, 2004
Page 38
REPUBLIC FIRST BANCORP, INC.
DEFERRED COMPENSATION PLAN
Effective as of January 1, 2005
Page 39
Table of Contents
Page
----
Loan Commitments.................................................................................................10
DEFINITIONS.......................................................................................................2
"Account"................................................................................................2
"Affiliated Company".....................................................................................2
"Base Compensation"......................................................................................2
"Cause"..................................................................................................2
"Change in Control"......................................................................................3
"Code"...................................................................................................3
"Committee"..............................................................................................3
"Company"................................................................................................3
"Company Contribution"...................................................................................3
"Company Contribution Participant "......................................................................3
"Compensation"...........................................................................................3
"Deferral Contribution"..................................................................................3
"Deferral Contribution Participant"......................................................................3
"Effective Date".........................................................................................3
"ERISA"..................................................................................................3
"Non-Employee Director"..................................................................................3
"Participant"............................................................................................3
"Participating Company"..................................................................................3
"Plan"...................................................................................................4
"Plan Year"..............................................................................................4
"Termination of Employment"..............................................................................4
ADMINISTRATION AND ELIGIBILITY FOR PARTICIPATION..................................................................5
Administration by the Committee..........................................................................5
-------------------------------
Powers and Duties of the Committee.......................................................................5
----------------------------------
Eligibility for Participation............................................................................5
-----------------------------
Applicability of ERISA...................................................................................5
----------------------
CONTRIBUTIONS.....................................................................................................5
Company Contribution.....................................................................................5
--------------------
Deferral Contribution....................................................................................5
---------------------
Investment...............................................................................................5
----------
VESTING AND DISTRIBUTION..........................................................................................5
Vesting of Units.........................................................................................6
----------------
Distribution of Account Upon Termination of Employment...................................................6
------------------------------------------------------
AMENDMENT OR TERMINATION..........................................................................................6
Page 40
Amendment or Termination.................................................................................6
------------------------
Effect of Amendment or Termination.......................................................................6
----------------------------------
GENERAL PROVISIONS................................................................................................6
Participants' Rights Unsecured...........................................................................6
------------------------------
No Guaranty of Benefits..................................................................................6
-----------------------
No Enlargement of Employee Rights........................................................................6
---------------------------------
Spendthrift Provision....................................................................................6
---------------------
Applicable Law...........................................................................................6
--------------
Designation of Beneficiary...............................................................................6
--------------------------
Incapacity of Recipient..................................................................................7
-----------------------
Limitations on Liability.................................................................................7
------------------------
Claims Procedure.........................................................................................7
----------------
Tax Liability............................................................................................7
-------------
Compliance with Securities Laws..........................................................................7
-------------------------------
USERRA................................................................................................. 7
------
WHEREAS, Republic First Bancorp, Inc. (the "Company") desires
to adopt the Republic First Bancorp, Inc. Deferred Compensation Plan in order to
promote the interests of the Company by providing certain senior executives,
officers and non-employee directors on whose judgment, initiative and efforts
the successful conduct of the business of the Company largely depends, and who
are largely responsible for the management, growth and protection of the
business of the Company, with deferred compensation based on the revenues of the
Company;
NOW, THEREFORE, effective as of January 1, 2005, Republic
First Bancorp, Inc. establishes the Republic First Bancorp, Inc. Deferred
Compensation Plan, as hereinafter set forth.
DEFINITIONS
Wherever used herein the following terms shall have the meanings
hereinafter set forth:
"Account" means, with respect to a Participant, the bookkeeping account
maintained under the Plan in the Participant's name to which is credited Company
Contributions, if any, and Deferral Contributions, if any, as adjusted to
reflect the income, gains and losses credited with respect to such contributions
and any distributions to the Participant.
"Affiliated Company" means a business entity, or predecessor of such entity, if
any, which is a member of a controlled group of corporations, which includes the
Company.
"Base Compensation" means, with respect to a Participant, the Participant's
regular salary.
"Cause" means (a) breach of a fiduciary duty to the Company involving personal
profit or which causes harm to the Company or any subsidiary, (b) conviction of
a felony or willful violation of any banking law or regulation or an indictment
or return of any information, or a conviction involving a crime of moral
turpitude, (c) negligent performance of the Participant's duties that results in
a material impairment of the Company's financial condition, (d) an order from
any regulatory authority to terminate the Participant for breach of any law or
Page 41
regulations, or (e) a failure of the Participant to comply with a direct lawful
written order of the Board of Directors of the Company.
"Change in Control" means the occurrence of any of the following: (a) any
"person" (as such term is used in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934) becomes the "beneficial owner," directly or indirectly, of
securities of the Company representing thirty (30%) percent or more of the
combined voting power of the Company's then outstanding securities or (b) the
Company becomes a subsidiary of another corporation or is merged or consolidated
into another corporation or if substantially all of its assets shall have been
sold to an unaffiliated party or parties unless thereafter (1) directors of the
Company immediately prior thereto continue to constitute at least fifty (50%)
percent of the directors of the surviving entity or purchaser or (2) the
Company's securities continue to represent, or are converted into securities
which represent, more than sixty-six and two thirds (66-2/3) percent of the
combined voting power of the surviving entity or purchaser, or (c) fifty (50%)
percent or more of the Board of Directors of the Company is comprised of persons
who were not nominated by the Board of Directors of the Company for election as
directors, or (d) the Board of Directors of the Company adopts a plan of
complete liquidation by the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to time,
and any regulations relating thereto.
"Committee" means the Compensation Committee of the Board of Directors of the
Company.
"Company" means Republic First Bancorp, Inc., a Pennsylvania corporation, or any
successor corporation or other entity resulting from a merger or consolidation
into or with the Company.
"Company Contribution" means the amounts credited to a Participant's Account as
determined under Section 3.1.
"Company Contribution Participant " means a senior executive of the Company or a
Participating Company who has been designated by the Committee as eligible for
participation in Company Contributions pursuant to Article II.
"Compensation" means, unless otherwise determined by the Committee with respect
to a Participant, all cash amounts paid by the Company or a Participating
Company to the Participant during a calendar year in respect of services
performed during the year, including without limitation, Base Compensation, cash
bonuses and directors' fees or which would have been paid, but for the election
under this Plan.
"Deferral Contribution" means the amounts credited to a Participant's Account as
determined under Section 3.2.
"Deferral Contribution Participant" means each Company Contribution Participant,
each officer of the Company or a Participating Company and each Non-Employee
Director.
"Effective Date" means January 1, 2005.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"Non-Employee Director" means a member of the Board of Directors of the Company
who is not also an employee of the Company.
"Participant" means each Company Contribution Participant and each Deferral
Contribution Participant who has completed the election and enrollment forms
provided by the Committee.
"Participating Company" means the Company and each Affiliated Company that has
adopted Plan.
Page 42
"Plan" means Republic First Bancorp, Inc. Deferred Compensation Plan, as set
forth herein and as may be amended from time to time.
"Plan Year" means each calendar year beginning on or after the Effective Date.
"Termination of Employment" means, with respect to a Participant, the date the
Participant ceases to be an employee of the Company and all affiliated
companies, as determined by the Committee or, in the case of a Non-Employee
Director, the date the Non-Employee Director ceases to be a voting member of the
Board of Directors of the Company.
Words in the masculine gender shall include the feminine and the singular
shall include the plural, and vice versa, unless qualified by the context. Any
headings used herein are included for ease of reference only and are not to be
construed so as to alter the terms hereof.
Page 43
ADMINISTRATION AND ELIGIBILITY FOR PARTICIPATION
Administration by the Committee. The Committee shall be responsible for the
general operation and administration of the Plan and for carrying out the
provisions of the Plan.
Powers and Duties of the Committee. The Committee shall administer the Plan in
accordance with its terms and shall have all powers necessary to carry out the
provisions of the Plan. The Committee shall interpret the Plan and shall
determine all questions arising in the administration, interpretation, and
application of the Plan, including but not limited to, questions of eligibility,
determinations of Cause and the status and rights of employees, Non-Employee
Directors, Participants and other persons. Any such determination by the
Committee shall presumptively be conclusive and binding on all persons. The
regularly kept records of the Company shall be conclusive and binding upon all
persons with respect to the amount of a Participant's Compensation for a Plan
Year. All rules and determinations of the Committee shall be uniformly and
consistently applied with respect to all Participants in similar circumstances.
Eligibility for Participation. The Committee shall designate which senior
executives of the Company shall participate in the Plan as Company Contribution
Participants. Once a senior executive is designated as a Company Contribution
Participant in the Plan for a particular Plan Year, he shall remain a Company
Contribution Participant for purposes of Article III until the Committee decides
otherwise and for all other purposes until his benefit hereunder is distributed
in full. Any other individual shall become a Deferral Contribution Participant
as of the day he attains the position of officer of the Company or Non-Employee
Director and shall remain a Deferral Contribution Participant for purposes of
Article III until he ceases to hold such position and for all other purposes
until his benefit hereunder is distributed in full.
Applicability of ERISA. The operation and interpretation of the Plan, including
but not limited to, the designation of senior executives, officers and
Non-Employee Directors as Participants, shall be consistent with the fact that
the Plan is primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees, as provided in
Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA.
CONTRIBUTIONS
Company Contribution.
---------------------
With respect to each Plan Year, the Company will credit to each Company
Contribution Participant's Account an amount equal to twenty (20) percent of the
Company Contribution Participant's Base Compensation for the prior calendar
year. For the first Plan Year, a Company Compensation Participant's 2004 Base
Compensation shall be used to calculate the amount of the 2005 Company
Contribution. Company Contributions shall be credited to a Company Contribution
Participant's Account as soon as administratively practicable following the
start of each Plan Year.
Deferral Contribution.
----------------------
A Deferral Contribution Participant may elect to defer the receipt of up to 100%
of the Compensation otherwise payable to the Deferral Contribution Participant
with respect to a Plan Year by completing the election form provided by the
Committee. The Company shall credit such amount to the Deferral Contribution
Participant's Account.
The election by which a Deferral Contribution Participant elects to defer his
Compensation shall be in writing, signed by the Participant, and delivered to
the Committee prior to January 1 of the Plan Year to which the Compensation
relates. In the case of the first year in which an individual becomes a Deferral
Contribution Participant, such election may be made with respect to services to
be performed subsequent to the election within thirty (30) days after the date
the individual becomes a Deferral Contribution Participant.
Any such election shall be irrevocable with respect to the Compensation for a
Plan Year after such Plan Year has commenced. Deferral Contributions shall be
credited to a Deferral Contribution Participant's Account on a quarterly basis.
Investment. Amounts credited to a Participant's Account shall be credited with
gains, losses and expenses as if they had been invested in the common stock of
the Company.
VESTING AND DISTRIBUTION
Page 44
Vesting of Units.
-----------------
Each Company Contribution credited to a Participant's Account under Section 3.1
shall become vested over three (3) years, with one-third (1/3) vesting at the
end of each year after the Company Contribution is credited, during which the
Participant is continuously employed by a Participating Company.
Amounts credited to a Participant's Account under Section 3.2 shall always be
fully vested. Any unvested amounts shall become fully vested upon a Change in
Control. Upon a Participant's Termination of Employment for any reason, all
unvested amounts shall be forfeited.
Notwithstanding the foregoing, all amounts credited to a Participant's Account,
whether vested or unvested, shall be forfeited upon the Participant's
Termination of Employment for Cause.
Distribution of Account Upon Termination of Employment.
-------------------------------------------------------
Following a Participant's Termination of Employment for any reason, the
Participant's vested Account shall be distributed in a single lump sum as soon
as practicable. Notwithstanding the foregoing, the vested Account of a
Participant who is a "key employee" as such term as defined in section 416(i) of
the Code, without regard to paragraph (5) thereof, may not be distributed before
the date which is six (6) months after the date of the Termination of
Employment.
AMENDMENT OR TERMINATION
Amendment or Termination. The Company reserves the right to amend or terminate
the Plan at any time and for any reason by action of the Committee.
Effect of Amendment or Termination. No amendment or termination of the Plan
shall divest any Participant or beneficiary of the amounts credited to the
Participant's Account, or of any rights to which the Participant would have been
entitled if the Participant had a Termination of Employment immediately prior to
the effective date of such amendment. Upon termination of the Plan, distribution
of Participants' Accounts shall be made to Participants or their beneficiaries
in the manner elected by such Participants, unless the Company determines to
distribute all Accounts in some other manner.
GENERAL PROVISIONS
Participants' Rights Unsecured. The Plan at all times shall be entirely unfunded
and no provision shall at any time be made with respect to segregating any
assets of the Company for payment of any benefits hereunder. The right of a
Participant or the Participant's beneficiary to receive a distribution of the
Participant's Account hereunder shall be an unsecured claim against the general
assets of the Company, and neither the Participant nor a beneficiary shall have
any rights in or against any specific assets of the Company.
No Guaranty of Benefits. Nothing contained in the Plan shall constitute a
guaranty by the Company, any Participating Company or any other person or entity
that the assets of the Company or a Participating Company will be sufficient to
pay any benefit hereunder. No Participant or other person shall have any right
to receive a benefit or a distribution of Accounts under the Plan except in
accordance with the terms of the Plan.
No Enlargement of Employee Rights. Establishment of the Plan shall not be
construed to give any Participant the right to be retained in the service of a
Participating Company.
Spendthrift Provision. No interest of any person or entity in, or right to
receive a distribution under, the Plan shall be subject in any manner to sale,
transfer, assignment, pledge, attachment, garnishment, or other alienation or
encumbrance of any kind; nor may such interest or right to receive a
distribution be taken, either voluntarily or involuntarily for the satisfaction
of the debts of, or other obligations or claims against, such person or entity,
including claims for alimony, support, separate maintenance and claims in
bankruptcy proceedings.
Applicable Law. The Plan shall be construed and administered under the laws of
the Commonwealth of Pennsylvania except to the extent preempted by federal law.
Designation of Beneficiary. A Participant may designate, in the form and manner
approved by the Committee, a beneficiary or beneficiaries to receive the
benefits payable after the Participant's death under Section 4.1.
Page 45
Incapacity of Recipient. Subject to applicable state law, if any person entitled
to a payment under the Plan is deemed by the Committee to be incapable of
personally receiving and giving a valid receipt for such payment, then the
Committee may provide for such payment or any part thereof to be made to any
other person or institution then contributing toward or providing for the care
and maintenance of such person. Any such payment shall be a payment for the
account of such person and a complete discharge of any liability of the Company
and the Plan.
Limitations on Liability. Notwithstanding any other provision of the Plan, none
of the Company, any Participating Company any member of the Committee, any
individual acting as an employee or agent of the Company, any Participating
Company or the Committee, shall be liable to any Participant, former Participant
or any beneficiary or other person for any claim, loss, liability or expense
incurred in connection with the Plan.
Claims Procedure. In the event that a Participant's claim for benefits under the
Plan is denied in whole or in part by the Committee, the Committee will notify
the Participant (or beneficiary) of the denial. Such notification will be made
in writing, within 90 days of the date the claim is received by the Committee.
The notification will comply with applicable Department of Labor regulations.
The Participant (or beneficiary) has 60 days from the date he receives
notice of a claim denial to file a written request for review of the denial with
the Committee. The Committee will review the claim denial and inform the
Participant (or beneficiary) in writing of its decision within 60 days of the
date the claim review request is received by the Committee. Such notification
will comply with applicable Department of Labor regulations. This decision will
be final.
Tax Liability. The Company or Participating Company may withhold from any
payment of benefits hereunder any taxes required to be withheld and such sum as
such employer may reasonably estimate to be necessary to cover any taxes for
which the Company or Participating Company may be liable and which may be
assessed with regard to such payment.
Compliance with Securities Laws. The Committee shall have the power to make the
crediting of amounts and deferral of Compensation under the Plan subject to such
conditions as it deems necessary or appropriate to comply with the then-existing
requirements of the Securities Act of 1933, as amended, the Securities Exchange
Act of 1934, as amended, and the Investment Company Act of 1940, as amended, or
any applicable laws governing the offering and sale of securities in any other
jurisdiction.
USERRA. Notwithstanding any provision of the Plan to the contrary,
contributions, benefits and service credit with respect to "qualified military
service" will be provided in accordance with section 414(u) of the Code.
REPUBLIC FIRST BANCORP, INC.
By
-------------------------------------------------
Date
-----------------------------------------------
Page 46