UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (THE “EXCHANGE
ACT”)
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For the
fiscal year ended December 31, 2007
Commission
file number:
000-17007
REPUBLIC FIRST BANCORP,
INC.
(Exact
name of registrant as specified in charter)
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Pennsylvania
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23-2486815
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(State
or Other Jurisdiction of Incorporation or Organization)
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(I.R.S.
Employer Identification No.)
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50
South 16
th
Street, Suite 2400, Philadelphia, PA
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19102
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(Address
of Principal Executive offices)
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(Zip
Code)
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Issuer’s
telephone number, including area code: (215)
735-4422
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par
value
(Title of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
YES
____ NO
__X_
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 (d) of the Act.
YES
_
NO
__X__
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES
X
NO ____
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K [
X
]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer
____ Accelerated
filer
__X__
Non-accelerated
filer ____ (Do not check if a smaller reporting
company) Smaller
Reporting Company _____
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
YES
_
NO
__X__
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of June
30, 2007. The aggregate market value of $82,852,115 was based on the average of
the bid and asked prices on the National Association of Securities Dealers
Automated Quotation System on June 30, 2007.
APPLICABLE
ONLY TO CORPORATE REGISTRANTS
Indicate
the number of shares outstanding of each of the Registrant’s classes of common
stock, as of the latest practicable date.
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Common
Stock $0.01 Par Value
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10,800,566
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Title
of Class
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Number
of Shares Outstanding as of March 4,
2008
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Documents incorporated by
reference
Part III
incorporates certain information by reference from the registrant’s Proxy
Statement for the 2008 Annual Meeting of Shareholders to be held on April 22,
2008.
REPUBLIC
FIRST BANCORP, INC.
Form
10-K
INDEX
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PART
I
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Page
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Item
1
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Description
of Business
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Item
1A
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Risk
Factors
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Item
1B
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Unresolved
Staff Comments
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Item
2
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Description
of Properties
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Item
3
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Legal
Proceedings
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Item
4
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Submission
of Matters to a Vote of Security Holders
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PART
II
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Item
5
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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Item
6
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Selected
Financial Data
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Item
7
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Management’s
Discussion and Analysis of Results of Operations and Financial
Condition
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Item
7A
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Quantitative
and Qualitative Disclosure about Market Risk (Item 305 of Reg
S-K)
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Item
8
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Financial
Statements and Supplementary Data
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Item
9
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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Item
9A
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Controls
and Procedures
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Item
9B
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Other
Information
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PART
III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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Item
11
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Executive
Compensation
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Item
12
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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Item
13
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Certain
Relationships and Related Transactions, and Directors
Independence
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Item
14
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Principal
Accounting Fees and Services
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PART
IV
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Item
15
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Exhibits
and Financial Statement Schedules
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Signatures
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PART
I
Item
1: Description
of Business
The
Company’s website address is rfbkonline.com. The Company’s annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other
documents filed by the Company with the Securities and Exchange Commission
(“SEC”) are available free of charge on the Company’s website under the Investor
Relations menu. Such documents are available on the Company’s website as soon as
reasonably practicable after they have been filed electronically with the
SEC.
Forward Looking
Statements
This
document contains forward-looking statements, which can be identified by
reference to a future period or periods or by the use of words such as “would
be,” “could be,” “may,” “will,” “estimate,” “project,” “believe,” “intend,”
“anticipate,” “plan,” “seek,” “expect” and similar expressions or the negative
thereof. These forward-looking statements include:
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statements
of goals, intentions and
expectations;
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statements
regarding prospects and business
strategy;
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statements
regarding asset quality and market risk;
and
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estimates
of future costs, benefits and
results.
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These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following: (1)
general economic conditions, (2) competitive pressure among financial
services companies, (3) changes in interest rates, (4)
deposit flows, (5) loan demand, (6) changes in legislation or
regulation, (7) changes in accounting principles, policies and
guidelines, (8) litigation liabilities, including costs, expenses,
settlements and judgments and (9) other economic,
competitive, governmental, regulatory and technological factors
affecting the Company’s operations, pricing, products and services.
Because
of these and other uncertainties, our actual future results may be materially
different from the results indicated by these forward-looking
statements. We have no obligation to update or revise any
forward-looking statements to reflect any changed assumptions, any unanticipated
events or any changes in the future. Factors which could have a
material adverse effect on the operations and future prospects of the Company
are detailed in the “Risk Factors” section included under Item 1A of Part I of
this form 10-K.
Republic
First Bancorp, Inc.
Republic
First Bancorp, Inc. (the “Company”), was established in 1987. At December 31,
2004, the Company was a two-bank holding company organized and incorporated
under the laws of the Commonwealth of Pennsylvania. Its wholly-owned
subsidiaries, Republic First Bank (“Republic”) and First Bank of Delaware
(“FBD”), offered a variety of credit and depository banking services. Such
services were offered to individuals and businesses primarily in the Greater
Philadelphia and Delaware area through their ten offices and branches in
Philadelphia and Montgomery Counties in Pennsylvania and New Castle County,
Delaware, but also through the national consumer loan products offered by the
First Bank of Delaware.
The First
Bank of Delaware was spun off by the Company, on January 31,
2005. All assets, liabilities and equity of FBD were spun off as an
independent company, trading on the OTC market under
“FBOD”. Shareholders received one share of stock in FBD, for every
share owned of the Company. After that date, the Company became a one
bank holding company.
As of
December 31, 2007, the Company had total assets of approximately $1.0 billion,
total shareholder’s equity of approximately $80.5 million, total deposits of
approximately $780.9 million and net loans receivable outstanding of
approximately $813.0 million. The majority of such loans were made
for commercial purposes.
The
Company provides banking services through Republic and does not presently engage
in any activities other than banking activities. The principal
executive office of the Company is located at Two Liberty Place, 50 South 16th
Street, Suite 2400, Philadelphia, PA 19102, telephone number (215)
735-4422.
At
December 31, 2007 the Company and Republic had a total of 146 full-time
equivalent employees.
Republic
First Bank
Republic
First Bank is a commercial bank chartered pursuant to the laws of the
Commonwealth of Pennsylvania, and is subject to examination and comprehensive
regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the
Pennsylvania Department of Banking. The deposits held by Republic are insured up
to applicable limits by the Bank Insurance Fund of the FDIC. Republic presently
conducts its principal banking activities through its five Philadelphia offices
and six suburban offices in Ardmore, Plymouth Meeting, Bala Cynwyd and Abington,
located in Montgomery County, Media, located in Delaware County, and Voorhees,
located in southern New Jersey.
As of
December 31, 2007, Republic had total assets of approximately $1.0 billion,
total shareholder’s equity of approximately $91.3 million, total deposits of
approximately $781.1 million and net loans receivable of approximately $813.0
million. The majority of such loans were made for commercial
purposes.
Services
Offered
Republic
offers many commercial and consumer banking services with an emphasis on serving
the needs of individuals, small and medium-sized businesses, executives,
professionals and professional organizations in their service area.
Republic
attempts to offer a high level of personalized service to both their small and
medium-sized businesses and consumer customers. Republic offers both
commercial and consumer deposit accounts, including checking accounts,
interest-bearing demand accounts, money market accounts, certificates of
deposit, savings accounts, sweep accounts, lockbox services and individual
retirement accounts (and other traditional banking
services). Republic actively solicits both non-interest and
interest-bearing deposits from its borrowers.
Republic
offers a broad range of loan and credit facilities to the businesses and
residents of its service area, including secured and unsecured commercial loans,
commercial real estate and construction loans, residential mortgages, automobile
loans, home improvement loans, home equity and overdraft lines of credit, and
other products.
Republic
manages credit risk through loan application evaluation and monitoring for
adherence with credit policies. Since its inception, Republic has had
a senior officer monitor compliance with Republic’s lending policies and
procedures by Republic’s loan officers.
Republic
also maintains an investment securities portfolio. Investment
securities are purchased by Republic in compliance with Republic’s Investment
Policies, which are approved annually by Republic’s Board of
Directors. The Investment Policies address such issues as permissible
investment categories, credit quality, maturities and
concentrations. At December 31, 2007 and 2006, approximately 63% and
71%, respectively, of the aggregate dollar amount of the investment securities
consisted of either U.S. Government debt securities or U.S. Government agency
issued mortgage backed securities. Credit risk associated with these
U.S. Government debt securities and the U.S. Government Agency securities is
minimal, with risk-based capital weighting factors of 0% and 20%,
respectively. The remainder of the securities portfolio consists of
municipal securities, trust preferred securities, corporate bonds, and Federal
Home Loan Bank (FHLB) securities.
Service
Area/Market Overview
Republic’s
primary business banking service area consists of the Greater Philadelphia
region, including Center City Philadelphia and the northern and western suburban
communities located principally in Montgomery and Delaware Counties in
Pennsylvania and northern Delaware. Republic also serves the surrounding
counties of Bucks and Chester in Pennsylvania, southern New Jersey and southern
Delaware.
Competition
There is
substantial competition among financial institutions in Republic’s business
banking service area. Competitors include but are not restricted to
the following banks: Wachovia, Citizens, PNC, Sovereign, Commerce,
Royal Bank of Pennsylvania, and the Bancorp Bank. Republic competes
with new and established local commercial banks, as well as numerous regionally
based and super-regional commercial banks. In addition to competing with new and
established commercial banking institutions for both deposits and loan
customers, Republic competes directly with savings banks, savings and loan
associations, finance companies, credit unions, factors, mortgage brokers,
insurance companies, securities brokerage firms, mutual funds, money market
funds, private lenders and other institutions for deposits, commercial loans,
mortgages and consumer loans, as well as other services. Competition
among financial institutions is based upon a number of factors,
including,
but not limited to, the quality of services rendered, interest rates offered on
deposit accounts, interest rates charged on loans and other credit services,
service charges, the convenience of banking facilities, locations and hours of
operation and, in the case of loans to larger commercial borrowers, relative
lending limits. It is the view of Management that a combination of
many factors, including, but not limited to, the level of market interest rates,
has increased competition for loans and deposits.
Many of
the banks with which Republic competes have greater financial resources than
Republic and offer a wider range of deposit and lending instruments with higher
legal lending limits. Republic’s legal lending limit was approximately $15.0
million at December 31, 2007. Loans above these amounts may be made
if the excess over the lending limit is participated to other institutions.
After the spin off, Republic and FBD have continued to sell each other such
participations. Republic is subject to potential intensified competition from
new branches of established banks in the area as well as new banks that could
open in its market area. Several new banks with business strategies similar to
those of Republic have opened since Republic’s inception. There are banks and
other financial institutions which serve surrounding areas, and additional
out-of-state financial institutions, which currently, or in the future, may
compete in Republic’s market. Republic competes to attract deposits and loan
applications both from customers of existing institutions and from customers new
to the greater Philadelphia area. Republic anticipates a continued increase in
competition in their market area.
Operating Strategy for Business
Banking
Following
the spin off of FBD, the Company’s business banking objective has been for
Republic to become the primary alternative to the large banks that dominate the
Greater Philadelphia market. The Company’s management team has developed a
business strategy consisting of the following key elements to achieve this
objective:
Providing
Attentive and Personalized Service
The
Company believes that a very attractive niche exists serving small to
medium-sized business customers not adequately served by Republic’s larger
competitors. The Company believes this segment of the market responds very
positively to the attentive and highly personalized service provided by
Republic. Republic offers individuals and small to medium-sized businesses a
wide array of banking products, informed and professional service, extended
operating hours, consistently applied credit policies, and local, timely
decision making. The banking industry is experiencing a period of rapid
consolidation, and many local branches have been acquired by large out-of-market
institutions. The Company is positioned to respond to these dynamics by offering
a community banking alternative and tailoring its product offerings to fill
voids created as larger competitors increase the price of products and services
or de-emphasize such products and services.
Attracting and Retaining Highly
Experienced Personnel
Republic’s
officers and other personnel have substantial experience acquired at larger
banks in the region. Additionally, Republic extensively screens and trains its
staff to instill a sales and service oriented culture and maximize cross-selling
opportunities and business relationships. Republic offers meaningful sales-based
incentives to certain customer contact employees.
Capitalizing on Market
Dynamics
In recent
years, banks controlling large amounts of the deposits in Republic’s primary
market areas have been acquired by large and super-regional bank holding
companies. The ensuing cultural changes in these banking institutions have
resulted in changes in their product offerings and in the degree of personal
attention they provide. The Company has sought to capitalize on these changes by
offering a community banking alternative. As a result of continuing
consolidations and its marketing efforts, the Company believes it has a
continuing opportunity to increase its market share.
Products
and Services
Republic
offers a range of competitively priced commercial and other banking services,
including secured and unsecured commercial loans, real estate loans,
construction and land development loans, automobile loans, home improvement
loans, mortgages, home equity and overdraft lines of credit, and other products.
Republic offers both commercial and consumer deposit accounts, including
checking accounts, interest-bearing demand accounts, money market accounts,
certificates of deposit, savings accounts, sweep accounts, lockbox services and
individual retirement accounts (and other traditional banking services).
Republic’s commercial loans typically range between $250,000 and $5.0 million
but customers may borrow significantly larger amounts up to Republic’s legal
lending limit of approximately $15.0 million. Individual customers
may
have
several loans, often secured by different collateral, which are in total subject
to that lending limit. Relationships in excess of $8.8 million at December 31,
2007, amounted to $372.9 million. The $8.8 million threshold approximates 10% of
total capital and reserves and reflects an additional internal monitoring
guideline.
Republic
attempts to offer a high level of personalized service to both their commercial
and consumer customers. Republic is a member of the STAR™ and PLUS™ automated
teller (“ATM”) networks in order to provide customers with access to ATMs
worldwide. Republic currently has eleven proprietary ATMs at branch locations
and two additional ATMs at a location in Southern New Jersey.
Republic’s
lending activities generally are focused on small and medium sized businesses
within the professional community. Commercial and construction loans are the
most significant category of Republic’s outstanding loans, representing
approximately 96% of total loans outstanding at December 31,
2007. Repayment of these loans is, in part, dependent on general
economic conditions affecting the community and the various businesses within
the community. Although management continues to follow established
underwriting policies, and monitors loans through Republic’s loan review
officer, credit risk is still inherent in the portfolio. Although the
majority of Republic’s loan portfolio is collateralized with real estate or
other collateral, a portion of the commercial portfolio is unsecured,
representing loans made to borrowers considered to be of sufficient strength to
merit unsecured financing. Republic makes both fixed and variable
rate loans with terms ranging from one to five years. Variable rate loans are
generally tied to the national prime rate of interest.
Branch
Expansion Plans and Growth Strategy
A branch
was opened by Republic in Center City Philadelphia in third quarter
2007. One additional branch is planned for 2008 in Northeast
Philadelphia. A branch was opened in third quarter 2007 in Bala
Cynwyd, Pennsylvania to replace the 4190 City Line Avenue, Philadelphia
location. Another branch was opened in third quarter 2007 in Plymouth
Meeting, Pennsylvania to replace the East Norriton, Pennsylvania
location. The Graduate Hospital location was closed in third quarter
2007. Additional locations may also be pursued.
Supervision
and Regulation
Various
requirements and restrictions under the laws of the United States and the
Commonwealth of Pennsylvania affect the Company and Republic.
General
Republic,
a Pennsylvania chartered bank, is subject to supervision and regulation by the
FDIC and the Pennsylvania Department of Banking. The Company is a bank holding
company subject to supervision and regulation by the Federal Reserve Bank of
Philadelphia (“FRB”) under the federal Bank Holding Company Act of 1956, as
amended (the “BHC Act”). As a bank holding company, the Company’s activities and
those of Republic are limited to the business of banking and activities closely
related or incidental to banking, and the Company may not directly or indirectly
acquire the ownership or control of more than 5% of any class of voting shares
or substantially all of the assets of any company, including a bank, without the
prior approval of the FRB.
Republic
is also subject to requirements and restrictions under federal and state law,
including requirements to maintain reserves against deposits, restrictions on
the types and amounts of loans that may be granted and the interest that may be
charged thereon, and limitations on the types of investments that may be made
and the types of services that may be offered. Various consumer laws and
regulations also affect the operations of Republic. In addition to the impact of
regulation, commercial banks are affected significantly by the actions of the
FRB in attempting to control the money supply and credit availability in order
to influence market interest rates and the national economy.
Holding Company Structure
Republic
is subject to restrictions under federal law which limits its ability to
transfer funds to the Company, whether in the form of loans, other extensions of
credit, investments or asset purchases. Such transfers by Republic to the
Company are generally limited in amount to 10% of Republic’s capital and
surplus. Furthermore, such loans and extensions of credit are required to be
secured in specific amounts, and all transactions are required to be on an arm’s
length basis. Republic has never made any loans or extensions of credit to the
Company or purchased any assets from the Company.
Under
regulatory policy, the Company is expected to serve as a source of financial
strength to Republic and to commit resources to support Republic. This support
may be required at times when, absent such policy, the Company might not
otherwise provide such support. Any capital loans by the Company to Republic are
subordinate in right of payment to deposits and to certain other indebtedness of
Republic. In the event of the Company’s bankruptcy, any commitment by the
Company to a federal bank regulatory agency to maintain the capital of Republic
will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
Gramm-Leach-Bliley Act
On
November 12, 1999, the federal Gramm-Leach-Bliley Act (the “GLB Act”) was
enacted. The GLB Act did three fundamental things:
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(a)
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repealed
the key provisions of the Glass Steagall Act so as to permit commercial
banks to affiliate with investment banks (securities
firms);
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(b)
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amended
the BHC Act to permit qualifying bank holding companies to engage in any
type of financial activities that were not permitted for banks themselves;
and
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(c)
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permitted
subsidiaries of banks to engage in a broad range of financial activities
that were not permitted for banks
themselves.
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The
result was that banking companies would generally be able to offer a wider range
of financial products and services and would be more readily able to combine
with other types of financial companies, such as securities and insurance
companies.
The GLB
Act created a new kind of bank holding company called a “financial holding
company” (an “FHC”). An FHC is authorized to engage in any activity
that is “financial in nature or incidental to financial activities” and any
activity that the Federal Reserve determines is “complementary to financial
activities” and does not pose undue risks to the financial
system. Among other things, “financial in nature” activities include
securities underwriting and dealing, insurance underwriting and sales, and
certain merchant banking activities. A bank holding company qualifies
to become an FHC if each of its depository institution subsidiaries is “well
capitalized,” “well managed,” and CRA-rated “satisfactory” or
better. A qualifying bank holding company becomes an FHC by filing
with the Board of Governors of the Federal Reserve System (the “Federal
Reserve”) an election to become an FHC. If an FHC at any time fails
to remain “well capitalized” or “well managed,” the consequences can be
severe. Such an FHC must enter into a written agreement with the
Federal Reserve to restore compliance. If compliance is not restored
within 180 days, the Federal Reserve can require the FHC to cease all its newly
authorized activities or even to divest itself of its depository
institutions. On the other hand, a failure to maintain a CR rating of
“satisfactory” will not jeopardize any then existing newly authorized
activities; rather, the FHC cannot engage in any additional newly authorized
activities until a “satisfactory” CRA rating is restored.
In
addition to activities currently permitted by law and regulation for bank
holding companies, an FHC may engage in virtually any other kind of financial
activity. Under limited circumstances, an FHC may even be authorized
to engage in certain non-financial activities. The most important of
these authorized activities are as follows:
(a)
Securities
underwriting and dealing;
(b)
Insurance
underwriting and sales;
(c)
Merchant
banking activities;
(d)
Activities
determined by the Federal Reserve to be “financial in nature” and incidental
activities; and
(e)
Activities
determined by the Federal Reserve to be “complementary” to financial
activities.
Bank
holding companies that do not qualify or elect to become FHCs will be limited in
their activities to those previously permitted by law and
regulation. The Company has not elected to become a FHC but has not
precluded the possibility of doing so in the future.
The GLB
Act also authorized national banks to create “financial
subsidiaries.” This is in addition to the present authority of
national banks to create “operating subsidiaries”. A “financial
subsidiary” is a direct subsidiary of a national bank that satisfies the same
conditions as an FHC, plus certain other conditions, and is approved in advance
by the Office of the Comptroller of the Currency (the “OCC”). A
national bank’s “financial subsidiary” can engage in most, but not all, of the
newly authorized activities.
In
addition, the GLB Act provided significant new protections for the privacy of
customer information. These provisions apply to any company the
business of which is engaging in activities permitted for an FHC, even if it is
not itself an FHC. The
GLB Act
subjected a financial institution to four new requirements regarding non-public
information about a customer. The financial institution must (1)
adopt and disclose a privacy policy; (2) give customers the right to “opt out”
of disclosures to non-affiliated parties; (3) not disclose any information to
third party marketers; and (4) follow regulatory standards (to be adopted in the
future) to protect the security and confidentiality of customer
information.
Although
the long-range effects of the GLB Act cannot be predicted with certainty, it
will probably further narrow the differences and intensify competition between
and among commercial banks, investment banks, insurance firms and other
financial service companies.
Sarbanes-Oxley Act of
2002
The following is a brief summary of
some of the provisions of the Sarbanes-Oxley Act of 2002 (“SOX”) that affect the
Company. It is not intended as an exhaustive description of SOX or
its impact on the Company.
SOX instituted or increased various
requirements for corporate governance, board of director and audit committee
composition and membership, board duties, auditing standards, external audit
firm standards, additional disclosure requirements, including CEO and CFO
certification of financial statements and related controls, and other new
requirements.
Boards of directors are now required to
have a majority of independent directors, and the audit committees are required
to be wholly independent, with greater financial expertise. Such
independent directors are not allowed to receive compensation from the company
on whose board they serve except for directors’ fees. Additionally,
requirements for auditing standards and independence of external auditors were
increased and included independent audit partner review, audit partner rotation
and limitations over non-audit services. Penalties for non-compliance
with existing and new requirements were established or increased.
In addition, Section 404 of SOX
required that by each year end, our management perform a detailed assessment of
internal controls and report thereon as follows:
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1.
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We
must state that we accept the responsibility for maintaining an adequate
internal control structure and procedures for financial
reporting;
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2.
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We
must present an assessment, at each year end, of the effectiveness of the
internal control structure and procedures for our financial reporting;
and
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3.
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We
must have our auditors audit our internal control over financial reporting
and provide an opinion that we have maintained, in all material respects,
effective internal control over financial reporting as of December 31,
2007. The audit must be made in accordance with standards
issued or adopted by the Public Company Accounting Oversight
Board.
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We had taken necessary steps with
respect to achieving compliance and have updated our assessment and reporting on
internal controls through the end of 2007.
Regulatory Restrictions on
Dividends
Dividend
payments by Republic to the Company are subject to the Pennsylvania Banking Code
of 1965 (the “Banking Code”) and the Federal Deposit Insurance Act (the “FDIA”).
Under the Banking Code, no dividends may be paid except from “accumulated net
earnings” (generally, undivided profits). Under the FDIA, an insured bank may
pay no dividends if the bank is in arrears in the payment of any insurance
assessment due to the FDIC. Under current banking laws, Republic would be
limited to $56.8 million of dividends payable plus an additional amount equal to
its net profit for 2008, up to the date of any such dividend declaration.
However, dividends would be further limited in order to maintain capital ratios
as discussed in “Regulatory Capital Requirements”. The Company may consider
dividend payments in 2008.
State and
federal regulatory authorities have adopted standards for the maintenance of
adequate levels of capital by banks, which may vary. Adherence to such standards
further limits the ability of Republic to pay dividends to the
Company.
Dividend Policy
The
Company has not paid any cash dividends on its Common Stock. The Company may
consider dividend payments in 2008.
FDIC Insurance Assessments
The FDIC
has implemented a risk-related premium schedule for all insured depository
institutions that results in the assessment of premiums based on capital and
supervisory measures.
Under the
risk-related premium schedule, the FDIC, on a semiannual basis, assigns each
institution to one of three capital groups (well capitalized, adequately
capitalized or under capitalized) and further assigns such institution to one of
three subgroups within a capital group corresponding to the FDIC’s judgment of
the institution’s strength based on supervisory evaluations, including
examination reports, statistical analysis and other information relevant to
gauging the risk posed by the institution. Only institutions with a total
capital to risk-adjusted assets ratio of 10.00% or greater, a Tier 1 capital to
risk-adjusted assets ratio of 6.00% or greater and a Tier 1 leverage ratio of
5.00% or greater, are assigned to the well capitalized group.
Capital Adequacy
The FRB
has adopted risk-based capital guidelines for bank holding companies, such as
the Company. The required minimum ratio of total capital to risk-weighted assets
(including off-balance sheet activities, such as standby letters of credit) is
8.0%. At least half of the total capital is required to be Tier 1 capital,
consisting principally of common shareholders’ equity, non-cumulative perpetual
preferred stock and minority interests in the equity accounts of consolidated
subsidiaries, less goodwill. The remainder, Tier 2 capital, may consist of a
limited amount of subordinated debt and intermediate-term preferred stock,
certain hybrid capital instruments and other debt securities, perpetual
preferred stock, and a limited amount of the general loan loss
allowance.
In
addition to the risk-based capital guidelines, the FRB has established minimum
leverage ratio (Tier 1 capital to average total assets) guidelines for bank
holding companies. These guidelines provide for a minimum leverage ratio of 3%
for those bank holding companies that have the highest regulatory examination
ratings and are not contemplating or experiencing significant growth or
expansion. All other bank holding companies are required to maintain a leverage
ratio of at least 1% to 2% above the 3% stated minimum. The Company is in
compliance with these guidelines. The FDIC subjects Republic to similar capital
requirements.
The
risk-based capital standards are required to take adequate account of interest
rate risk, concentration of credit risk and the risks of non-traditional
activities.
Interstate Banking
The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995 (the
“Interstate Banking Law”) amended various federal banking laws to provide for
nationwide interstate banking, interstate bank mergers and interstate branching.
The interstate banking provisions allow for the acquisition by a bank holding
company of a bank located in another state.
Interstate
bank mergers and branch purchase and assumption transactions were allowed
effective September 1, 1998; however, states may “opt-out” of the merger
and purchase and assumption provisions by enacting a law that specifically
prohibits such interstate transactions. States could, in the alternative, enact
legislation to allow interstate merger and purchase and assumption transactions
prior to September 1, 1999. States could also enact legislation to allow
for de novo interstate branching by out of state banks. In July 1997,
Pennsylvania adopted “opt-in” legislation that allows interstate merger and
purchase and assumption transactions.
Profitability,
Monetary Policy and Economic Conditions
In
addition to being affected by general economic conditions, the earnings and
growth of Republic will be affected by the policies of regulatory authorities,
including the Pennsylvania Department of Banking, the FRB and the
FDIC. An important function of the FRB is to regulate the supply of
money and other credit conditions in order to manage interest
rates. The monetary policies and regulations of the FRB have had a
significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. The effects of such
policies upon the future business, earnings and
growth of
the Bank cannot be determined. See “Management’s Discussion and
Analysis of Operations and Financial Condition - Results of
Operations”.
Republic
is not considered to be a “well known seasoned issuer.”
|
Item
1A:
|
Risk
Factors
|
In
addition to factors discussed elsewhere in this report and in “Management’s
Discussion and Analysis of Results of Operations and Financial Condition,” the
following are some of the important factors that could materially and adversely
affect our business, financial condition and results of operations.
Our
earnings are sensitive to fluctuations in interest rates.
The
earnings of the Company depend on the earnings of Republic. Republic is
dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the operations of Republic are subject
to risks and uncertainties surrounding their exposure to change in the interest
rate environment.
Our
earnings may be negatively impacted by a general economic downturn or changes in
the credit risk of our borrowers.
Republic’s
results of operations are affected by the ability of its borrowers to repay
their loans. Lending money is an essential part of the banking
business. However, borrowers do not always repay their
loans. The risk of non-payment is affected by credit risks of a
particular borrower, changes in economic conditions, the duration of the loan
and in the case of a collateralized loan, uncertainties as to the future value
of the collateral.
Our
allowance for loan losses may not be sufficient to absorb actual loan
losses.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America require management to make
significant estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
Significant
estimates are made by management in determining the allowance for loan losses,
carrying values of other real estate owned, and income taxes. Consideration is
given to a variety of factors in establishing these estimates. There is no
precise method of predicting loan losses. Republic can give no
assurance that its allowance for loan losses is or will be sufficient to absorb
actual loan losses. Loan losses could have a material adverse effect
on Republic’s financial condition and results of operations. Republic
attempts to maintain an appropriate allowance for loan losses to provide for
estimated losses in its loan portfolio. In estimating the allowance
for loan losses, management considers current economic conditions,
diversification of the loan portfolio, delinquency statistics, results of
internal loan reviews, borrowers’ perceived financial and managerial strengths,
the adequacy of underlying collateral, if collateral dependent, or present value
of future cash flows and other relevant factors. Since the allowance for loan
losses and carrying value of real estate owned are dependent, to a great extent,
on the general economy and other conditions that may be beyond Republic’s
control, it is at least reasonably possible that the estimates of the allowance
for loan losses and the carrying values of the real estate owned could differ
materially in the near term.
We
face increasing competition in our market from other banks and financial
institutions.
Republic
may not be able to compete effectively in its markets, which could adversely
affect its results of operations. The banking and financial services
industry in Republic’s market area is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems, and the accelerated pace of
consolidation among financial service providers. Such larger
institutions have greater access to capital markets, with higher lending limits
and a broader array of services. Competition may require increases in
deposit rates and decreases in loan rates.
Our
governing documents contain provisions which may reduce the likelihood of a
change in control transaction.
The
Company’s Articles of Incorporation and Bylaws contain certain anti-takeover
provisions that may make it more difficult or expensive or may discourage a
tender offer, change in control or takeover attempt that is opposed by its Board
of Directors. In particular, the Articles of Incorporation and
Bylaws: classify the Board of Directors into three groups, so that shareholders
elect only one-third of the Board each year; permit shareholders to
remove directors only for cause and only upon the vote of the holders of at
least 75% of the voting shares; require shareholders to give the Company advance
notice to nominate candidates for election to the Board of Directors or to make
shareholder proposals at a shareholders’ meeting; and require the vote of the
holders of at least 60% of the Company’s voting shares for stockholder
amendments to the Company’s
Bylaws. These
provisions of the Company’s Articles of Incorporation and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control, even though a majority of the Company’s shareholders may consider
such proposals desirable. Such provisions could also make it more
difficult for third parties to remove and replace the members of the Company’s
Board of Directors. Moreover, these provisions could diminish the
opportunities for shareholders to participate in certain tender offers,
including tender offers at prices above the then-current market value of the
Company’s common stock, and may also inhibit increases in the trading price of
the Company’s common stock that could result from takeover attempts or
speculation.
In
addition, in the event of certain hostile fundamental changes, all of our senior
officers are entitled to receive payments equal to two times such officers’ base
annual salary in the event they determine not to continue their
employment.
Government
regulation restricts the scope of our operations.
The
Company and Republic operate in a highly regulated environment and are subject
to supervision and regulation by several governmental regulatory agencies,
including the FDIC and the Pennsylvania Department of Banking. The
Company and Republic 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. Regulations that apply to the Company and Republic are
generally intended to provide protection for depositors and customers rather
than for investors. The Company and Republic will remain subject to
these regulations, and to the possibility of changes in federal and state laws,
regulations, governmental policies, income tax laws and accounting
principles. Changes in the regulatory environment in which the
Company and Republic operate could adversely affect the banking industry as a
whole and the Company and Republic’s operations in particular. For
example, regulatory changes could limit our growth and our return to investors
by restricting such activities as the payment of dividends, mergers with or
acquisitions by other institutions, investments, loans and interest rates, and
providing securities, insurance or trust services. Such regulations
and the cost of adherence to such regulations can have a significant impact on
earnings and financial condition.
Also,
legislation may change present capital requirements, which could restrict the
Company and Republic’s activities and require the Company and Republic to
maintain additional capital. The Company and Republic cannot predict
what changes, if any, legislators and federal and state agencies will make to
existing federal and state legislation and regulations or the effect that such
changes may have on the Company and Republic’s business.
Our
business is concentrated in and dependent upon the continued growth and welfare
of our primary market area.
We
operate primarily in the Philadelphia geographic market. Our success
depends upon the business activity, population, income levels, deposits and real
estate activity in this market. Although our customers’ business and financial
interests may extend well beyond this market area, adverse economic conditions
that affect our home market could reduce our growth rate, affect the ability of
our customers to repay their loans to us and generally affect our financial
condition and results of operations. Because of our geographic concentration, we
are less able than other regional or national financial institutions to
diversify our credit risks across multiple markets.
We
may experience difficulties in managing our growth and our growth strategy
involves risks that may negatively impact our net income.
As
part of our general growth strategy, we may expand into additional communities
or attempt to strengthen our position in our current markets by opening new
branches and acquiring existing branches of other financial institutions. To the
extent that we undertake additional branch openings and acquisitions, we are
likely to continue to experience the effects of higher operating expenses
relative to operating income from the new operations, which may have an adverse
effect on our levels of reported net income, return on average equity and return
on average assets. Other effects of engaging in such growth strategies may
include potential diversion of our management’s time and attention and general
disruption to our business.
Although
we do not have any current plans to do so, we may also acquire banks and related
businesses that we believe provide a strategic fit with our
business. We may also engage in de novo bank formations. To the
extent that we grow through acquisitions and de novo bank formations, we cannot
assure you that we will be able to adequately and profitably manage this growth.
Acquiring other banks and businesses will involve similar risks to those
commonly associated with branching, but may also involve additional risks,
including:
|
•
|
potential
exposure to unknown or contingent liabilities of banks and businesses we
acquire;
|
|
•
|
exposure
to potential asset quality issues of the acquired bank or related
business;
|
|
•
|
difficulty
and expense of integrating the operations and personnel of banks and
businesses we acquire; and
|
|
•
|
the
possible loss of key employees and customers of the banks and businesses
we acquire.
|
Our
growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
We are
required by federal and state regulatory authorities to maintain adequate levels
of capital to support our operations. We anticipate that our existing capital
resources will satisfy our capital requirements for the foreseeable future.
However, we may at some point need to raise additional capital to support our
continued growth. Our ability to raise additional capital, if needed, will
depend on conditions in the capital markets at that time, which are outside our
control, and on our financial performance. Accordingly, we cannot assure you of
our ability to raise additional capital, if needed, on terms acceptable to us.
If we cannot raise additional capital when needed, our ability to further expand
our operations through internal growth, branching, de novo bank formations
and/or acquisitions could be materially impaired.
Our
community banking strategy relies heavily on our management team, and the
unexpected loss of key managers may adversely affect our
operations.
Much of
our success to date has been influenced strongly by our ability to attract and
to retain senior management experienced in banking and financial services and
familiar with the communities in our market. Our ability to retain executive
officers, the current management teams, branch managers and loan officers of our
bank subsidiary will continue to be important to the successful implementation
of our strategy. It is also critical, as we grow, to be able to attract and
retain qualified additional management and loan officers with the appropriate
level of experience and knowledge about our market areas to implement our
community-based operating strategy. The unexpected loss of services of any key
management personnel, or the inability to recruit and retain qualified personnel
in the future, could have an adverse effect on our business, financial condition
and results of operations.
We
have a continuing need for technological change and we may not have the
resources to effectively implement new technology.
The
financial services industry is constantly undergoing rapid technological changes
with frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part upon our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations as we continue to grow and expand in our market. Many of our
larger competitors have substantially greater resources to invest in
technological improvements. As a result, they may be able to offer additional or
superior products to those that we will be able to offer, which would put us at
a competitive disadvantage. Accordingly, we cannot provide you with assurance
that we will be able to effectively implement new technology-driven products and
services or be successful in marketing such products and services to our
customers.
There
is a limited trading market for our common shares, and you may not be able to
resell your shares at or above the price shareholders paid for
them.
Although
our common shares are listed for trading on the NASDAQ Stock Market, the trading
in our common shares has less liquidity than many other companies quoted on the
NASDAQ. A public trading market having the desired characteristics of depth,
liquidity and orderliness depends on the presence in the market of willing
buyers and sellers of our common shares at any given time. This presence depends
on the individual decisions of investors and general economic and market
conditions over which we have no control. We cannot assure you that volume of
trading in our common shares will increase in the future.
System
failure or breaches of our network security could subject us to increased
operating costs as well as litigation and other liabilities.
The
computer systems and network infrastructure we use could be vulnerable to
unforeseen problems. Our operations are dependent upon our ability to protect
our computer equipment against damage from physical theft, fire, power loss,
telecommunications failure or a similar catastrophic event, as well as from
security breaches, denial of service attacks, viruses, worms and other
disruptive problems caused by hackers. Any damage or failure that causes an
interruption in our operations could have a material adverse effect on our
financial condition and results of operations. Computer break-ins, phishing and
other disruptions could also jeopardize the security of information stored in
and transmitted through our computer systems and
network
infrastructure, which may result in significant liability to us and may cause
existing and potential customers to refrain from doing business with us.
Although we, with the help of third-party service providers, intend to continue
to implement security technology and establish operational procedures to prevent
such damage, there can be no assurance that these security measures will be
successful. In addition, advances in computer capabilities, new discoveries in
the field of cryptography or other developments could result in a compromise or
breach of the algorithms we and our third-party service providers use to encrypt
and protect customer transaction data. A failure of such security measures could
have a material adverse effect on our financial condition and results of
operations.
We
are subject to certain operational risks, including, but not limited to,
customer or employee fraud and data processing system failures and
errors.
Employee
errors and misconduct could subject us to financial losses or regulatory
sanctions and seriously harm our reputation. Misconduct by our employees could
include hiding unauthorized activities from us, improper or unauthorized
activities on behalf of our customers or improper use of confidential
information. It is not always possible to prevent employee errors and
misconduct, and the precautions we take to prevent and detect this activity may
not be effective in all cases. Employee errors could also subject us to
financial claims for negligence.
We
maintain a system of internal controls and insurance coverage to mitigate
operational risks, including data processing system failures and errors and
customer or employee fraud. Should our internal controls fail to prevent or
detect an occurrence, or if any resulting loss is not insured or exceeds
applicable insurance limits, it could have a material adverse effect on our
business, financial condition and results of operations.
|
Item
1B:
|
Unresolved
Staff Comments
|
|
|
None
|
Item
2: Description
of Properties
Republic
entered into a lease agreement that commenced June 1, 2007 for approximately
53,275 square feet on two floors of Two Liberty Place, 1601 Chestnut St.,
Philadelphia, Pennsylvania, as its new headquarter facilities. The
space is occupied by the Company, the executive offices of Republic and FBD
which will assume its proportionate share of related costs. Bank
office operations of Republic and the commercial bank lending department of
Republic is also located therein. The initial thirteen year, seven
month lease term contains two five year renewal options and the initial lease
term will expire on December 31, 2020. Annual rent expense commenced
at $750,245 less the following abatement periods: (1) the first twenty-eight
months for 5,815 square feet of space and (2) the following periods for the
remaining rentable area: (a) the first six months of the first lease year, (b)
the first four months of the second lease year, and (c) the first four months of
the third lease year.
Republic
leases approximately 1,829 square feet on the ground floor at 1601 Market Street
in Center City, Philadelphia. This space contains a banking area and
vault and represents Republic’s main office. The initial ten year term of the
lease expired March 2003 and contains five-year and ten-year renewal options
that have been exercised and also contains an additional five-year option. The
annual rent for such location is $99,985 payable in monthly
installments.
Republic
leases approximately 1,743 square feet of space on the ground floor at 1601
Walnut Street, Center City Philadelphia, PA. This space contains a
banking area and vault. The initial ten-year term of the lease
expired August 2006. The lease has been extended to August 2014 and
contains an additional five-year renewal option. The annual rent for
such location is $130,191, payable in monthly installments.
Republic
leases approximately 798 square feet of space on the ground floor and 903 square
feet on the 2nd floor at 233 East Lancaster Avenue, Ardmore,
PA. The space contains a banking area and business development
office. The initial ten-year term of the lease expired in August
2005, and contains a five year renewal option that has been exercised and also
contains an additional five-year option. The annual rental at such
location is $59,514, payable in monthly installments.
Republic
entered into a lease agreement that commenced May 1, 2007 for approximately
1,574 square feet for its Bala Cynwyd office at Two Bala Plaza, Bala Cynwyd,
Pennsylvania. The space contains a banking area. The
initial six-year, four month lease term contains two five-year renewal options
and the initial lease term will expire on August 31, 2013. The annual
rent at such location is $49,319, payable in monthly installments.
Republic
entered into a lease agreement that commenced April 27, 2007 for approximately
2,820 square feet for its Plymouth Meeting office at 421 Germantown Pike,
Plymouth Meeting, Pennsylvania. The space contains a banking area and
a business development office. The initial seven-year, five month
lease term contains one six-year renewal option and the initial lease terms will
expire on September 30, 2014. The annual rent at such location is
$93,295, payable in monthly installments.
Republic
owns an approximately 2,800 square foot facility for its Abington, Montgomery
County office at 1480 York Road, Abington, Pennsylvania. This space
contains a banking area and a business development office.
Republic
leases approximately 1,822 square feet on the ground floor at 1818 Market St.
Philadelphia, Pennsylvania. The space contains a banking area and a vault. The
initial ten-year term of the lease expires in August 2008, has been extended for
fifteen years to August 2023, and contains an additional five-year renewal
option. The annual rent for such location is $104,461, payable in monthly
installments.
Republic
leases approximately 4,700 square feet of space on the first, second, and third
floor, at 436 East Baltimore Avenue, Media, Pennsylvania. The space
contains a banking area and business development office. The initial
five-year term of the lease expires October 2009 with four five-year renewal
options. The annual rent is $75,106 payable in monthly
installments.
Republic
leases an approximately 6,000 square feet facility for its Northeast
Philadelphia office at Mayfair and Cottman Avenues, Philadelphia,
Pennsylvania. The space contains a banking area and a business
development office. The initial fifteen-year term of the lease
expires June 2021 with two five-year renewal options. The annual rent
is $96,000 payable in monthly installments.
Republic
leases an approximately 1,850 square feet facility for its Voorhees office at
342 Burnt Mill Road, Voorhees, New Jersey. The space contains a
banking area. The initial fifteen-year term of the lease expires May
2021 with two five-year renewal options. The annual rent is $42,600
payable in monthly installments.
Republic
entered into a lease agreement that commenced September 1, 2007 for
approximately 2,467 square feet at 833 Chestnut Street, Philadelphia,
Pennsylvania. The space contains a banking area and a business
development office. The initial fifteen-year term of the lease
expires August 2022 with three five-year renewal options. The annual
rent is $71,954, payable in monthly installments.
Republic
entered into a lease agreement that commenced December 26, 2007 for
approximately 2,710 square feet for its Torresdale location, to be opened in
2008, at 8764 Frankford Avenue, Philadelphia, Pennsylvania. The space
contains a banking area and business development office. The initial
fifteen-year term of the lease expires December 2022 with two five-year renewal
options. The annual rent is $120,000, payable in monthly
installments.
Item
3: Legal
Proceedings
The
Company and Republic are from time to time parties (plaintiff or defendant) to
lawsuits in the normal course of business. While any litigation involves an
element of uncertainty, management, after reviewing pending actions with its
legal counsel, is of the opinion that the liability of the Company and Republic,
if any, resulting from such actions will not have a material effect on the
financial condition or results of operations of the Company and
Republic.
Item
4: Submission
of Matters to a Vote of Security Holders
Not
applicable.
PART
II
Item
5: Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market
Information
Shares of
the Common Stock are quoted on Nasdaq under the symbol “FRBK.” The
table below presents the range of high and low trade prices reported for the
Common Stock on Nasdaq for the periods indicated. Market quotations
reflect inter-dealer prices, without retail mark-up, markdown, or commission,
and may not necessarily reflect actual transactions. As of December
31, 2007, there were approximately 2,100 holders of record of the Common
Stock. On March 4, 2008, the closing price of a share of Common Stock
on Nasdaq was $6.15. 2006 information has been restated for a 10%
stock dividend declared during 2007.
|
Year
|
Quarter
|
High
|
Low
|
|
|
2007
|
4
th
|
$ 8.94
|
$ 6.77
|
|
|
3
rd
|
9.92
|
7.25
|
||
|
2
nd
|
11.93
|
9.45
|
||
|
1
st
|
12.09
|
11.09
|
||
|
2006
|
4
th
|
$12.37
|
$11.36
|
|
|
3
rd
|
12.53
|
11.36
|
||
|
2
nd
|
12.95
|
11.90
|
||
|
1
st
|
12.29
|
10.55
|
||
Common
Stock Performance
The
following line graph compares the yearly percentage change in the cumulative
stockholder return on the Company’s common stock to the NASDAQ Market Index and
the SNL Bank Index over the five-year period beginning December 31, 2002, and
ending December 31, 2007. Cumulative stockholder return has been
measured on a weighted-average basis based on market capitalizations of the
component companies comprising the peer group index at the close of trading on
the last trading day preceding the beginning of each year assuming an initial
investment of $100 and reinvestment of dividends.
|
Period Ending
|
||||||
|
Index
|
12/31/02
|
12/31/03
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
|
Republic
First Bancorp, Inc.
|
100.00
|
187.51
|
258.88
|
322.50
|
349.34
|
206.24
|
|
NASDAQ
Composite
|
100.00
|
150.01
|
162.89
|
165.13
|
180.85
|
198.60
|
|
SNL
Bank Index
|
100.00
|
134.90
|
151.17
|
153.23
|
179.24
|
139.28
|
Issuer
Purchases of Equity Securities
|
Total
|
Maximum
|
||||||||
|
Number
of
|
Number
|
||||||||
|
Shares
|
of
Shares
|
||||||||
|
Purchased
as
|
that
|
||||||||
|
Total
|
Part
of
|
May
Yet Be
|
|||||||
|
Number
of
|
Average
|
Publically
|
Purchased
|
||||||
|
Shares
|
Price
Paid per
|
Announced
|
Under
the
|
||||||
|
Period
|
Purchased
|
Share
|
Program
|
Program (a) (b) (c)
|
|||||
|
June
20 through
|
|||||||||
|
June
29, 2007
|
44,500
|
$ 9.79
|
44,500
|
455,500
|
|||||
|
July
3 through
|
|||||||||
|
July
31, 2007
|
60,800
|
$ 9.51
|
60,800
|
394,700
|
|||||
|
August
1 through
|
|||||||||
|
August
22, 2007
|
35,400
|
$ 8.21
|
35,400
|
359,300
|
|||||
|
(a)
The implementation of the Stock Repurchase Program was announced on June
13, 2007.
|
|||||||||
|
(b)
The amount of shares to be repurchased will not exceed 5%, or
approximately 500,000 shares.
|
|||||||||
|
(c)
The repurchase program is in effect from June 14, 2007 through June 30,
2008.
|
|||||||||
Dividend
Policy
The
Company has not paid any cash dividends on its Common Stock
.
The Company may consider
dividend payments in 2008.
The payment of
dividends in the future, if any, will depend upon earnings, capital levels, cash
requirements, the financial condition of the Company and Republic, applicable
government regulations and policies and other factors deemed relevant by the
Company’s Board of Directors, including the amount of cash dividends payable to
the Company by Republic. The principal source of income and cash flow
for the Company, including cash flow to pay cash dividends on the Common Stock,
is dividends from Republic. Various federal and state laws, regulations and
policies limit the ability of Republic to pay cash dividends to the
Company. For certain limitations on Republic’s ability to pay cash
dividends to the Company, see “Description of Business - Supervision and
Regulation”.
Item
6: Selected Financial
Data
|
(1)
|
Reflects
the spin off of First Bank of Delaware, presented as discontinued
operations for years prior to 2005.
|
|
(2)
|
Restated
for 10% stock dividend declared in March
2007
|
|
(3)
|
Years
prior to 2005 include First Bank of
Delaware
|
|
(4)
|
Includes
loans held for sale
|
|
(5)
|
Includes
restricted stock
|
Item
7: Management’s Discussion and
Analysis of Results of Operations and Financial Condition
The
following is management’s discussion and analysis of the significant changes in
the Company’s results of operations, financial condition and capital resources
presented in the accompanying consolidated financial statements of Republic
First Bancorp, Inc. This discussion should be read in conjunction
with the accompanying notes to the consolidated financial
statements.
Certain
statements in this document may be considered to be “forward-looking statements”
as that term is defined in the U.S. Private Securities Litigation Reform Act of
1995, such as statements that include the words “may”, “believes”, “expect”,
“estimate”, “project”, “anticipate”, “should”, “would”, “intend”, “probability”,
“risk”, “target”, “objective” and similar expressions or variations on such
expressions. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected in the forward-looking
statements. For example, risks and uncertainties can arise with
changes in: general economic conditions, including their impact on
capital expenditures; business conditions in the financial services industry;
the regulatory environment, including evolving banking industry standards;
rapidly changing technology and competition with community, regional and
national financial institutions; new service and product offerings by
competitors, price pressures; and similar items. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management’s analysis only as of the date hereof. The Company
undertakes no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after the date
hereof. Readers should carefully review the risk factors described in
other documents the Company files from time to time with the Securities and
Exchange Commission, including the Company’s Annual Report on Form 10-K for the
year ended December 31, 2007, Quarterly Reports on Form 10-Q filed by the
Company in 2007 and any Current Reports on Form 8-K filed by the Company, as
well as similar filings in 2007.
Critical
Accounting Policies, Judgments and Estimates
Discontinued Operations -
In
accordance with SFAS No. 144, the Company has presented the operations of First
Bank of Delaware as discontinued operations starting with the first quarter
2005. On January 31, 2005 the First Bank of Delaware was spun off, effective
January 1, 2005. All assets, liabilities and equity of First Bank of
Delaware were spun off as an independent company, trading on the OTC market
under the stock symbol “FBOD”. Shareholders received one share of
stock in First Bank of Delaware, for every share owned of the
Company. The short-term loan and tax refund lines of business were
accordingly transferred after that date. Republic continued to
purchase tax refund anticipation loans from the First Bank of Delaware through
2006. However, First Bank of Delaware decided not to continue with
this program in 2007.
In
reviewing and understanding financial information for the Company you are
encouraged to read and understand the significant accounting policies used in
preparing our consolidated financial statements. These policies are described in
Note 2 of the notes to our unaudited consolidated financial statements. The
accounting and financial reporting policies of the Company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. The preparation of the Company’s
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Management evaluates these estimates and assumptions on an ongoing basis
including those related to the allowance for loan losses, other-than-temporary
impairment of securities and deferred income taxes. Management bases its
estimates on historical experience and various other factors and assumptions
that are believed to be reasonable under the circumstances. These form the bases
for making judgments on the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Allowance for Loan Losses—
The
allowance for loan losses is increased by charges to income through the
provision for loan losses and decreased by charge-offs (net of recoveries). The
allowance is maintained at a level that management considers adequate to provide
for losses based upon evaluation of the known and inherent risks in the loan
portfolio. Management’s periodic evaluation of the adequacy of the allowance is
based on the Company’s past loan loss experience, the volume and composition of
lending conducted by the Company, adverse situations that may affect a
borrower’s ability to repay, the estimated value of any underlying collateral,
current economic conditions and other factors affecting the known and inherent
risk in the portfolio. This evaluation is inherently subjective as it requires
material estimates including, among others, the amount and timing of expected
future cash flows on impacted loans, exposure at default, value of collateral,
and estimated losses on our commercial and residential loan portfolios. All of
these estimates may be susceptible to significant change.
The
allowance consists of specific allowances for both impaired loans and all
classified loans which are not impaired and a general allowance on the remainder
of the portfolio. Although we determine the amount of each element of the
allowance separately, the entire allowance for loan losses is available for the
entire portfolio.
We
establish an allowance on certain impaired loans for the amount by which the
discounted cash flows, observable market price or fair value of collateral if
the loan is collateral dependent is lower than the carrying value of the loan. A
loan is considered to be impaired when, based upon current information and
events, it is probable that the Company will be unable to collect all amounts
due according to the contractual terms of the loan. An insignificant delay or
insignificant shortfall in amount of payments does not necessarily result in the
loan being identified as impaired.
We also
establish a specific valuation allowance on classified loans which are not
impaired. We segregate these loans by category and assign allowances to each
loan based on inherent losses associated with each type of lending and
consideration that these loans, in the aggregate, represent an above-average
credit risk and that more of these loans will prove to be uncollectible compared
to loans in the general portfolio. The categories used by the Company include
“Doubtful,” “Substandard” and “Special Mention.” Classification of a loan within
such categories is based on identified weaknesses that increase the credit risk
of the loan.
We
establish a general allowance on non-classified loans to recognize the inherent
losses associated with lending activities, but which, unlike specific
allowances, have not been allocated to particular problem loans. This general
valuation allowance is determined by segregating the loans by loan category and
assigning allowance percentages based on our historical loss experience,
delinquency trends, and management’s evaluation of the collectibility of the
loan portfolio.
The
allowance is adjusted for significant factors that, in management’s judgment,
affect the collectibility of the portfolio as of the evaluation date. These
significant factors may include changes in lending policies and procedures,
changes in existing general economic and business conditions affecting our
primary lending areas, credit quality trends, collateral value, loan volumes and
concentrations, seasoning of the loan portfolio, loss experience in particular
segments of the portfolio, duration of the current business cycle, and bank
regulatory examination results. The applied loss factors are reevaluated each
reporting period to ensure their relevance in the current economic
environment.
While
management uses the best information available to make loan loss allowance
valuations, adjustments to the allowance may be necessary based on changes in
economic and other conditions, changes in the composition of the loan portfolio
or changes in accounting guidance. In times of economic slowdown, either
regional or national, the risk inherent in the loan portfolio could increase
resulting in the need for additional provisions to the allowance for loan losses
in future periods. An increase could also be necessitated by an increase in the
size of the loan portfolio or in any of its components even though the credit
quality of the overall portfolio may be improving. Historically, our estimates
of the allowance for loan loss have approximated actual losses incurred. In
addition, the Pennsylvania Department of Banking and the FDIC, as an integral
part of their examination processes, periodically review our allowance for loan
losses. The Pennsylvania Department of Banking or the FDIC may require the
recognition of adjustment to the allowance for loan losses based on their
judgment of information available to them at the time of their examinations. To
the extent that actual outcomes differ from management’s estimates, additional
provisions to the allowance for loan losses may be required that would adversely
impact earnings in future periods.
Other-Than-Temporary Impairment of
Securities
—Securities are evaluated on at least a quarterly basis, and
more frequently when market conditions warrant such an evaluation, to determine
whether a decline in their value is other-than-temporary. To determine whether a
loss in value is other-than-temporary, management utilizes criteria such as the
reasons underlying the decline, the magnitude and duration of the decline and
the intent and ability of the Company to retain its investment in the security
for a period of time sufficient to allow for an anticipated recovery in the fair
value. The term “other-than-temporary” is not intended to indicate that the
decline is permanent, but indicates that the prospects for a near-term recovery
of value is not necessarily favorable, or that there is a lack of evidence to
support a realizable value equal to or greater than the carrying value of the
investment. Once a decline in value is determined to be other-than-temporary,
the value of the security is reduced and a corresponding charge to earnings is
recognized.
Income Taxes—
Management makes
estimates and judgments to calculate various tax liabilities and determine the
recoverability of various deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenues and
expenses. Management also estimates a reserve for deferred tax assets if, based
on the available evidence, it is more likely than not that some portion or all
of the recorded deferred tax assets will not be realized in future periods.
These estimates and judgments are inherently subjective. Historically, our
estimates and judgments to calculate our deferred tax accounts have not required
significant revision.
In
evaluating our ability to recover deferred tax assets, management considers all
available positive and negative evidence, including our past operating results
and our forecast of future taxable income. In determining future taxable income,
management makes assumptions for the amount of taxable income, the reversal of
temporary differences and the implementation of feasible and prudent tax
planning strategies. These assumptions require us to make judgments about our
future taxable income and are consistent with the plans and estimates we use to
manage our business. Any reduction in estimated future taxable income may
require us to record a valuation allowance against our deferred tax assets. An
increase in the valuation allowance would result in additional income tax
expense in the period and could have a significant impact on our future
earnings.
Recent
Accounting Pronouncements
In February 2006, the FASB issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments. This statement
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interest in Securitized Financial Assets. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The Company adopted this guidance on January 1, 2007. The adoption did not
have any effect on the Company’s consolidated financial position or results of
operations.
In March 2006, the FASB issued SFAS No.
156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement
No. 140. This statement amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, with respect to
the accounting for separately recognized servicing assets and servicing
liabilities. This statement requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value, if
practicable. It also permits, but does not require, the subsequent measurement
of servicing assets and servicing liabilities at fair value. The Company adopted
this statement effective January 1, 2007. The adoption did not have a material
effect on the Company’s consolidated financial position or results of
operations.
In July 2006, the FASB issued FASB
Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, Accounting for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The adoption did not have any impact on the Company’s
consolidated financial position or results of operations.
In September 2006, the FASB ratified
the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to life
insurance arrangements that provide an employee with a specified benefit that is
not limited to the employee’s active service period, including certain
bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to
recognize a liability and related compensation costs for future benefits that
extend to postretirement periods. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007, with earlier application permitted. The
Company is continuing to evaluate the impact of this consensus, which may
require the Company to recognize an additional liability and compensation
expense related to its deferred compensation agreements.
In September 2006, the FASB ratified
the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of
Life Insurance – Determining the Amount That Could Be Realized in Accordance
with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance. Technical Bulletin No. 85-4 states that an entity should report as an
asset in the statement of financial position the amount that could be realized
under the insurance contract. EITF 06-5 clarifies certain factors
that should be considered in the determination of the amount that could be
realized. EITF 06-5 is effective for fiscal years beginning after December 15,
2006, with earlier application permitted under certain circumstances. The
Company adopted this guidance on January 1, 2007. The adoption did
not have any effect on the Company’s consolidated financial position or results
of operations.
In September 2006, the FASB issued FASB
Statement No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value under GAAP, and expands
disclosures about fair value measurements. FASB Statement No. 157 applies
to other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and for interim
periods
within those fiscal years. The Company does not anticipate any material impact
on its consolidated financial position or results of operations.
In December 2007, the FASB issued
proposed FASB Staff Position (FSP) 157-b, Effective Date of FASB Statement
No. 157, that would permit a one-year deferral in applying the measurement
provisions of statement No. 157 to non-financial assets and non-financial
liabilities (non-financial items) that are not recognized or disclosed at fair
value in an entity’s financial statements on a recurring basis (at least
annually). Therefore, if the change in fair value of a non-financial item is not
required to be recognized or disclosed in the financial statements on an annual
basis or more frequently, the effective date of application of statement 157 to
that item is deferred until fiscal years beginning after November 15, 2008
and interim periods within those fiscal years. This deferral does not apply,
however, to an entity that applies statement 157 in interim or annual financial
statements before proposed FSP 157-b is finalized. The Company is currently
evaluating the impact, if any, that the adoption of FSP 157-b will have on the
Company’s consolidated financial position or results of operations.
In September 2006, the SEC issued SAB
No. 108, Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB No. 108, companies might evaluate the materiality of
financial-statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new
misstatements added in the current year, and the balance sheet approach focusing
on the cumulative amount of misstatement present in a company’s balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB No. 108 now
requires that companies view financial statement misstatements as material if
they are material according to either the income statement or balance sheet
approach. The Company adopted this guidance on January 1, 2007. The
adoption did not have any effect on the Company’s consolidated financial
position or results of operations.
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. An entity shall report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. This statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
The Company does not anticipate any material impact on its consolidated
financial position or results of operations.
In March 2007, the FASB ratified
Emerging Issues Task Force Issue No. 06-10, Accounting for Collateral Assignment
Split-Dollar Life Insurance Agreements (EITF 06-10). EITF 06-10 provides
guidance for determining a liability for the postretirement benefit obligation
as well as recognition and measurement of the associated asset on the basis of
the terms of the collateral assignment agreement. EITF 06-10 is effective for
fiscal years beginning after December 15, 2007. The Company is currently
assessing the impact of EITF 06-10 on its consolidated financial position and
results of operations.
In December 2007, the FASB issued SFAS
No. 141 (R), Business Combinations. This statement establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The guidance will become effective as of the beginning of
a company’s fiscal year beginning after December 15, 2008. This new
pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51. This statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the
beginning of a company’s fiscal year beginning after December 15, 2008. The
Company is currently evaluating the potential impact the new pronouncement will
have on its consolidated financial statements.
In December 2007, the SEC issued SAB
No. 110 which amends and replaces Question 6 of Section D.2 of Topic 14,
Share-Based Payment, of
the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the
“simplified”
method for estimating the expected term of “plain vanilla” share option grants
after December 31, 2007. SAB 110 is effective January 1,
2008. The Company does not anticipate any material impact on its
consolidated financial position or results of operations.
In December 2007, the SEC issued SAB
No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings
expresses the views of the staff regarding written loan commitments that are
accounted for at fair value through earnings under generally accepted accounting
principles. To make the staff's views consistent with current authoritative
accounting guidance, the SAB revises and rescinds portions of SAB No. 105,
Application of Accounting Principles to Loan
Commitments. Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its consolidated
financial statements.
In June 2007, the EITF reached a
consensus on Issue No. 06-11, Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 states
that an entity should recognize a realized tax benefit associated with dividends
on nonvested equity shares, nonvested equity share units and outstanding equity
share options charged to retained earnings as an increase in additional paid in
capital. The amount recognized in additional paid in capital should be
included in the pool of excess tax benefits available to absorb potential future
tax deficiencies on share-based payment awards. EITF 06-11 should be
applied prospectively to income tax benefits of dividends on equity-classified
share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The Company expects that EITF 06-11 will not have
an impact on its consolidated financial statements.
In May 2007, the FASB issued FASB Staff
Position (FSP) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48
(FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax
position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1,
2007. The implementation of this standard did not have a material impact on the
Company’s consolidated financial position or results of operations.
In February 2007, the FASB issued
FASB Staff Position (FSP) FAS 158-1, Conforming Amendments to the
Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the
Related Staff Implementation Guides. This FSP makes conforming amendments to
other FASB statements and staff implementation guides and provides technical
corrections to SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans. The conforming amendments in this FSP
were adopted as of the effective date of SFAS No. 158. The adoption
did not have a material impact on the Company’s consolidated financial
statements or disclosures.
Results
of Operations for the years ended December 31, 2007 and 2006
Overview
The Company’s net income decreased $3.2
million, or 32.0%, to $6.9 million or $0.65 per diluted share for the year ended
December 31, 2007, compared to $10.1 million, or $0.95 per diluted share for the
prior year. There was a $5.6 million, or 8.9%, increase in total
interest income, reflecting a 12.6% increase in average loans outstanding and a
67.4% increase in average investment securities while interest expense increased
$9.6 million reflecting a 11.6% increase in average interest bearing deposits
outstanding and higher rates as well as a 50.2% increase in average borrowings
outstanding. Accordingly, net interest income decreased $4.0
million. Contributing to the $4.0 million decrease in net interest
income was the impact of $1.6 million in net interest income related to tax
refund loans in 2006 which was not earned in 2007 due to the discontinuation of
the program. Also there were interest reductions due to the increase
in non-performing loans in 2007. The provision for loan losses in
2007 increased $226,000 to $1.6 million, compared to $1.4 million in 2006,
reflecting the impact of a 2007 increase in non-accrual loans as well as an
increase in reserves on certain loans due to a downturn in the housing market
which was offset by $283,000 in net tax refund recoveries in 2007 versus
$359,000 in net tax refund charge-offs in 2006. Non-interest income
decreased $567,000 to $3.1 million in 2007 compared to $3.6 million in
2006. Non-interest expenses increased $347,000 to $21.4 million
compared to $21.1 million in 2006. Return on average assets and
average equity of 0.71% and 8.86% respectively in 2007 compared to 1.19% and
14.59% respectively in 2006.
Analysis
of Net Interest Income
Historically, the Company’s earnings
have depended primarily upon Republic’s net interest income, which is the
difference between interest earned on interest-earning assets and interest paid
on interest-bearing liabilities. Net interest income is affected by changes in
the mix of the volume and rates of interest-earning assets and interest-bearing
liabilities. The following table provides an analysis of net interest income on
an annualized basis, setting forth for the periods (i) average assets,
liabilities, and shareholders’ equity, (ii) interest income earned on
interest-earning assets and interest expense on interest-bearing liabilities,
(iii) average yields earned on interest-earning assets and average rates on
interest-bearing liabilities, and (iv) Republic’s net interest margin (net
interest income as a percentage of average total interest-earning assets).
Averages are computed based on daily balances. Non-accrual loans are included in
average loans receivable. Yields are adjusted for tax equivalency in 2007 and
2006, as Republic had tax-exempt income. Republic had no tax exempt
income on securities in 2005.
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Rate
(1)
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Rate
(1)
|
Average
Balance
|
Interest
Income/
Expense
|
Yield/
Rate
(1)
|
||||||||||
|
(Dollars
in thousands)
|
For
the Year
Ended
December
31, 2007
|
For
the Year
Ended
December
31, 2006
|
For
the Year
Ended
December
31, 2005
|
|||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||
|
Federal funds sold and
other
|
||||||||||||||||||
|
interest-earning
assets
|
$ 13,923
|
$ 686
|
4.93%
|
$ 25,884
|
$ 1,291
|
4.99%
|
$ 36,587
|
$ 1,078
|
2.95%
|
|||||||||
|
Investment securities and
restricted
stock
|
95,715
|
5,752
|
6.01%
|
57,163
|
3,282
|
5.74%
|
51,285
|
1,972
|
3.85%
|
|||||||||
|
Loans
receivable
|
820,380
|
62,184
|
7.58%
|
728,754
|
58,254
|
7.99%
|
602,031
|
42,331
|
7.03%
|
|||||||||
|
Total
interest-earning
assets
|
930,018
|
68,622
|
7.38%
|
811,801
|
62,827
|
7.74%
|
689,903
|
45,381
|
6.58%
|
|||||||||
|
Other
assets
|
39,889
|
36,985
|
41,239
|
|||||||||||||||
|
Total
assets
|
$
969,907
|
$
848,786
|
$
731,142
|
|||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||
|
Demand - non-interest
bearing
|
$ 78,641
|
$ -
|
N/A
|
$ 82,233
|
$ -
|
N/A
|
$ 88,702
|
$ -
|
N/A
|
|||||||||
|
Demand –
interest-bearing
|
38,850
|
428
|
1.10%
|
53,073
|
565
|
1.06%
|
49,118
|
332
|
0.68%
|
|||||||||
|
Money market &
savings
|
266,706
|
11,936
|
4.48%
|
240,189
|
9,109
|
3.79%
|
238,786
|
6,026
|
2.52%
|
|||||||||
|
Time
deposits
|
361,120
|
18,822
|
5.21%
|
304,375
|
14,109
|
4.64%
|
211,972
|
6,789
|
3.20%
|
|||||||||
|
Total
deposits
|
745,317
|
31,186
|
4.18%
|
679,870
|
23,783
|
3.50%
|
588,578
|
13,147
|
2.23%
|
|||||||||
|
Total
interest-
|
||||||||||||||||||
|
bearing
deposits
|
666,676
|
31,186
|
4.68%
|
597,637
|
23,783
|
3.98%
|
499,876
|
13,147
|
2.63%
|
|||||||||
|
Other
borrowings
|
133,122
|
7,121
|
5.35%
|
88,609
|
4,896
|
5.53%
|
75,875
|
3,076
|
4.05%
|
|||||||||
|
Total
interest-bearing
|
||||||||||||||||||
|
liabilities
|
799,798
|
38,307
|
4.79%
|
686,246
|
28,679
|
4.18%
|
575,751
|
16,223
|
2.82%
|
|||||||||
|
Total
deposits and
|
||||||||||||||||||
|
other
borrowings
|
878,439
|
38,307
|
4.36%
|
768,479
|
28,679
|
3.73%
|
664,453
|
16,223
|
2.44%
|
|||||||||
|
Non-interest-bearing
|
||||||||||||||||||
|
Other
liabilities
|
13,734
|
10,981
|
8,242
|
|||||||||||||||
|
Shareholders’
equity
|
77,734
|
69,326
|
58,447
|
|||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||
|
Shareholders’
equity
|
$
969,907
|
$
848,786
|
$
731,142
|
|||||||||||||||
|
Net
interest income
(2)
|
$
30,315
|
$
34,148
|
$
29,158
|
|||||||||||||||
|
Net
interest
spread
|
2.59%
|
3.56%
|
3.76%
|
|||||||||||||||
|
Net
interest margin
(2)
|
3.26%
|
4.20%
|
4.23%
|
|||||||||||||||
__________
(1) Yields
on investments are calculated based on amortized cost.
(2) The
net interest margin is calculated by dividing net interest income by average
total interest earning assets. Both net interest income and net
interest margin were increased in 2007 and 2006 over the financial statement
amount, to adjust for tax equivalency.
Rate/Volume Analysis of Changes in Net
Interest Income
Net interest income may also be
analyzed by segregating the volume and rate components of interest income and
interest expense. The following table sets forth an analysis of volume and rate
changes in net interest income for the periods indicated. For purposes of this
table, changes in interest income and expense are allocated to volume and rate
categories based upon the respective changes in average balances and average
rates.
|
Year
ended December 31,
2007
vs. 2006
|
Year
ended December 31,
2006
vs. 2005
|
|||||||||||||||||||||||
|
Change
due to
|
Change
due to
|
|||||||||||||||||||||||
|
(Dollars
in thousands)
|
Average
Volume
|
Average
Rate
|
Total
|
Average
Volume
|
Average
Rate
|
Total
|
||||||||||||||||||
|
Interest
earned on:
|
||||||||||||||||||||||||
|
Federal funds sold and
other
|
||||||||||||||||||||||||
|
interest-earning
assets
|
$ | (589 | ) | $ | (16 | ) | $ | (605 | ) | $ | (534 | ) | $ | 747 | $ | 213 | ||||||||
|
Securities
|
2,317 | 153 | 2,470 | 337 | 973 | 1,310 | ||||||||||||||||||
|
Loans
|
6,945 | (3,015 | ) | 3,930 | 10,130 | 5,793 | 15,923 | |||||||||||||||||
|
Total
interest earning assets
|
$ | 8,673 | $ | (2,878 | ) | $ | 5,795 | $ | 9,933 | $ | 7,513 | $ | 17,446 | |||||||||||
|
Interest
expense of
|
||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||
|
Interest-bearing demand
deposits
|
$ | 157 | $ | (20 | ) | $ | 137 | $ | (42 | ) | $ | (191 | ) | $ | (233 | ) | ||||||||
|
Money market and
savings
|
(1,187 | ) | (1,640 | ) | (2,827 | ) | (53 | ) | (3,030 | ) | (3,083 | ) | ||||||||||||
|
Time deposits
|
(2,958 | ) | (1,755 | ) | (4,713 | ) | (4,283 | ) | (3,037 | ) | (7,320 | ) | ||||||||||||
|
Total
deposit interest expense
|
(3,988 | ) | (3,415 | ) | (7,403 | ) | (4,378 | ) | (6,258 | ) | (10,636 | ) | ||||||||||||
|
Other borrowings
|
(2,381 | ) | 156 | (2,225 | ) | (704 | ) | (1,116 | ) | (1,820 | ) | |||||||||||||
|
Total
interest expense
|
(6,369 | ) | (3,259 | ) | (9,628 | ) | (5,082 | ) | (7,374 | ) | (12,456 | ) | ||||||||||||
|
Net interest
income
|
$ | 2,304 | $ | (6,137 | ) | $ | (3,833 | ) | $ | 4,851 | $ | 139 | $ | 4,990 | ||||||||||
Net
Interest Income
The
Company’s tax equivalent net interest margin decreased 94 basis points to 3.26%
for 2007 compared to 4.20% in 2006. Excluding the impact of tax
refund loans, which were substantially all a first quarter 2006 event, the net
interest margin was 3.26% in 2007 and 4.04% in 2006.
While
yields on interest-bearing assets decreased 36 basis points to 7.38% in 2007
from 7.74% in 2006, the yield on total deposits and other borrowings increased
63 basis points to 4.36% in 2007 from 3.73% in 2006. The decrease in
yields on assets resulted primarily from the high yield tax refund loans
recorded in 2006 as well as interest reductions due to the increase in non
accrual loans in 2007 and rate reductions in the last four months of 2007 on
variable rate loans as a result of actions taken by the Federal
Reserve. The increase in yields on deposits was due to the repricing
of maturing time deposits at higher rates and increases in rates on money market
and savings deposits. The cost of overnight borrowings decreased
slightly as a result of actions taken by the Federal Reserve but those actions
had limited immediate impact in reducing the cost of deposits.
The
Company’s tax equivalent net interest income decreased $3.8 million, or 11.2%,
to $30.3 million for 2007 from $34.1 million for 2006. As shown in
the Rate Volume table above, the decrease in net interest income was due
primarily to higher rates on deposits and lower rates on loans as discussed in
the previous paragraph. These factors more than offset the impact of
the growth in average interest-earning assets, primarily
loans. Average interest-earning assets amounted to $930.0 million for
2007 and $811.8 million for 2006. The $118.2 million increase
resulted from loan growth of $91.6 million and securities growth of $38.6
million.
The
Company’s total tax equivalent interest income increased $5.8 million, or 9.2%,
to $68.6 million for 2007 from $62.8 million for 2006. Interest and
fees on loans increased $3.9 million, or 6.7%, to $62.2 million for 2007 from
$58.3 million for 2006. The increase in interest and fees on loans of
$3.9 million resulted from a 12.6% increase in average loans outstanding less
interest reductions due to an increase in non-performing loans in 2007 and rate
reductions on variable rate loans in the last four months of
2007. Also, $1.9 million in interest on tax refund loans was realized
in 2006. Interest and dividends on investment securities increased
$2.5 million to $5.8 million for 2007 from $3.3 million for 2006. The
increase reflected an increase in average securities outstanding of $38.6
million, or 67.4%, to $95.7 million for 2007 from $57.2 million for
2006. Interest on federal funds sold and other interest earning
assets decreased $605,000, or 46.9%, to $686,000 for 2007
from $1.3
million for 2006. The decrease reflected a $12.0 million decrease in
average balances to $13.9 million for 2007 from $25.9 million for
2006.
The
Company’s total interest expense increased $9.6 million, or 33.6%, to $38.3
million for 2007 from $28.7 million for 2006. Interest-bearing
liabilities averaged $799.8 million for 2007 from $686.2 million for 2006, or an
increase of $113.6 million. The increase reflected additional funding
for loan and securities growth. Average deposit balances increased
$65.4 million while there was a $44.5 million increase in average other
borrowings. The average rate paid on interest-bearing liabilities
increased 61 basis points to 4.79% for 2007 from 4.18% for
2006. Interest expense on time deposit balances increased $4.7
million to $18.8 million for 2007 from $14.1 million for 2006. Money
market and savings interest expense increased $2.8 million to $11.9 million for
2007 from $9.1 million for 2006. The majority of the increase in
interest expense on deposits reflected the higher average deposit balances as
well as the higher short term interest rate environment for the first eight
months of 2007. The 100 basis point decrease in short term interest
rates from September 2007 through December 2007 had minimal effect on deposit
rates in 2007. Accordingly, rates on total interest-bearing deposits
increased 70 basis points in 2007 compared to 2006.
Interest
expense on other borrowings increased $2.2 million to $7.1 million for 2007 from
$4.9 million for 2006, as a result of increased average
balances. Average other borrowings, primarily overnight FHLB
borrowings, increased $44.5 million, or 50.2%, between those respective
periods. Increases in balances were utilized to fund loan
growth. Rates on other borrowings, primarily due to the 100 basis
point decrease in short-term interest rates from September 2007 through December
2007 decreased to 5.35% for 2007 from 5.53% for 2006. Interest
expense on other borrowings also included the impact of $8.8 million of average
trust preferred securities.
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
inherent losses in the portfolio. The provision for loan losses
amounted to $1.6 million for 2007 compared to $1.4 million for
2006. The 2006 provision reflected $359,000 for net charge-offs of
tax refund loans, which were more than offset by $1.6 million in related net
revenues. The comparable 2007 provision reflected $283,000 for net
recoveries on tax refund loans. This favorable variance was more than
offset by an increase in the 2007 provision for loan losses of $1.4 million for
loans transferred to non-accrual status in 2007 and $638,000 for increases in
reserves on certain loans due to a downturn in the housing
market. Those increases were partially offset by the reversal of
reserves on loans which were paid down or otherwise disposed of. The
remaining provisions in both both periods also reflected amounts required to
increase the allowance for loan growth in accordance with the Company’s
methodology. Non-accrual loans increased from $6.9 million at
December 31, 2006 to $22.3 million at December 31, 2007.
Non-Interest Income
Total
non-interest income decreased $567,000 to $3.1 million for 2007 compared to $3.6
million for 2006, primarily due to a decrease of $292,000 related to service
fees on deposit accounts. The decrease in service fees on deposit
accounts reflected the termination of services to several large
customers. In addition, other income decreased $329,000 primarily due
to fee recoveries recorded in 2006. Loan advisory and servicing fees decreased
$57,000 which was partially offset by a $56,000 increase in bank owned life
insurance income and a $55,000 increase in gain on sales of other real estate
owned.
Non-Interest Expenses
Total
non-interest expenses increased $347,000, or 1.7%, to $21.4 million for 2007
from $21.0 million in 2006. Salaries and employee benefits decreased
$1.0 million, or 8.7%, to $10.6 million for 2007 from $11.6 million in
2006. That decrease reflected a reduction in bonuses and incentives
expense of $1.0 million.
Occupancy
expense increased $533,000, or 28.2%, to $2.4 million for 2007 compared to $1.9
million for 2006. The increase reflected two additional branches
which opened in the second and third quarters of 2006 as well as the corporate
headquarters move in second quarter 2007 and an additional branch which opened
in the third quarter of 2007.
Depreciation
expense increased $352,000, of 34.9%, to $1.4 million for 2007 compared to $1.0
million for 2006. The increase was primarily due to the impact of the
three additional branch locations and the corporate headquarters
move.
Legal
fees increased $96,000, or 14.7%, to $750,000 for 2007 compared to $654,000 for
2006 resulting from increased fees on a number of different
matters.
Advertising
expenses increased $9,000, or 1.8%, to $503,000 for 2007 compared to $494,000
for 2006. The increase was primarily due to higher levels of print
advertising.
Data
processing increased $197,000, or 39.7%, to $693,000 for 2007 compared to
$496,000 for 2006, primarily due to Check 21 related expenses and other system
enhancements.
Insurance
expense increased $45,000, or 12.7%, to $398,000 for 2007 compared to $353,000
for 2006, resulting from the overall growth of the Company.
Professional
fees decreased $20,000, or 3.6%, to $542,000 for 2007 compared to $562,000 for
2006, reflecting decreases in recruiting expenses.
Taxes,
other increased $79,000, or 10.7%, to $820,000 for 2007 compared to $741,000 for
2006. The increase reflected an increase in Pennsylvania shares tax,
which is assessed at an amount of 1.25% on a 6 year moving average of regulatory
capital. The full amount of the increase resulted from increased
capital.
Other
expenses increased $60,000, or 1.9%, to $3.2 million for 2007 compared to $3.2
million for 2006, which reflected the impact of the three additional branch
locations.
Provision
for Income Taxes
The
provision for income taxes decreased $1.9 million to $3.3 million from $5.2
million for 2006. That decrease was primarily the result of the
decrease in pre-tax income. The effective tax rates in those periods
were 32% amd 34%, respectively.
Results
of Operations for the years ended December 31, 2006 and 2005
Overview
The Company's net income increased $1.2
million, or 13.8%, to $10.1 million or $1.04 per diluted share for the year
ended December 31, 2006, compared to $8.9 million, or $0.93 per diluted share
for the prior year. The improvement reflected a $17.4 million, or 38.3%,
increase in total interest income, due primarily to a 21.0% increase in average
loans outstanding and secondarily to higher rates. Interest expense
increased $12.5 million, also reflecting higher rates, a 15.5% increase in
average deposits outstanding and a 16.8% in average borrowings
outstanding. Accordingly, net interest income increased $4.9
million. Partially offsetting the increase in net interest income
were the provision for loan losses (up approximately $200 thousand),
non-interest income (level with 2005 at $3.6 million), and non-interest expenses
(up $2.8 million). The decrease in return on average assets and
average equity from 1.19% and 14.59% respectively in 2006 compared to 1.22% and
15.22% respectively in 2005, resulted primarily from increased funding
costs.
Net
Interest Income
The
Company’s tax equivalent net interest margin decreased 3 basis points to 4.20%
for 2006 compared to 4.23% for 2005. While yields on interest-earning
assets increased 116 basis points to 7.74% in 2006 from 6.58% in 2005, the yield
on total deposits and other borrowings increased 129 basis points to 3.73% from
2.44% between 2006 and 2005. The increases in yields on assets and
cost of funds resulted primarily from the 300 basis points of increases in
short-term interest rates between the two periods. The resulting
decrease in margin reflected an increase in interest bearing assets of $121.9
million, while interest bearing liabilities increased $110.5
million.
The
Company's tax equivalent net interest income increased $5.0 million, or 17.1%,
to $34.1 million for 2006 from $29.2 million for 2005. As shown in the Rate
Volume table above, the increase in net interest income was due primarily to the
increased volume of loans. Higher rates on loans resulted primarily from
variable rate loans which immediately adjust to increases in the prime
rate. Interest expense increased primarily as a result of higher
rates, resulting from the higher short-term interest rate environment, and also
reflected the impact of the increase in higher cost time deposit
balances.
The
Company's total tax equivalent interest income increased $17.4 million, or
38.4%, to $62.8 million for 2006, from $45.4 million for 2005. Interest and fees
on loans increased $15.9 million to $58.3 million for 2006, from $42.3 million
for 2005. The majority of the increase resulted from a 21.0% increase
in average loan balances. For 2006, average loan balances amounted to $728.8
million, compared to $602.0 million in 2005. The balance of the increase in
interest on loans resulted
primarily
from the repricing of the variable rate loan portfolio to higher short term
market interest rates. Tax equivalent interest and dividends on
investment securities increased $1.2 million to $3.3 million for 2006, from $2.0
million for 2005. This increase reflected rate increases on variable rate
securities as well as an increase in average securities outstanding to $57.2
million for 2006 from $51.3 million for 2005. Interest on
federal funds sold and other interest-earning assets increased $213,000, or
19.8%, to $1.3 million for 2006 from $1.1 million for 2005 as increases in short
term market interest rates more than offset the $10.7 million
decrease in average balances to $25.9 million for 2006 from $36.6 million for
2005.
The
Company's total interest expense increased $12.5 million, or 76.8%, to $28.7
million for 2006, from $16.2 million for 2005. Interest-bearing
liabilities averaged $686.2 million for 2006, from $575.8 million for 2005, an
increase of $110.5 million. The increase reflected additional funding utilized
for loan growth. Average time deposit (certificates of deposit) balances
increased $92.4 million, or 43.6%, to $304.4 million for 2006 from $212.0
million in 2005 while lower cost average transaction account balances declined
$1.1 million, or 0.3%, to $375.5 million for 2006 from $376.6 million for
2005. The average rate paid on interest-bearing liabilities increased
136 basis points to 4.18% for 2006. Money market and savings expense
increased $3.1 million to $9.1 million for 2006 from $6.0 million for 2005, due
almost entirely to increases in short-term rates as average balances increased
$1.4 million, or 0.6%. Interest expense on time deposits increased
$7.3 million, or 107.8%, to $14.1 million for 2006 from $6.8 million for 2005,
primarily as a result of the increased average balances as well as
rates. As time deposits mature, they frequently reprice at market
rates which are currently 5% or more. Interest expense on other
borrowings increased $1.8 million to $4.9 million for 2006 from $3.1 million for
2005, primarily as a result of higher short term rates. Average other
borrowings, primarily overnight FHLB borrowings, increased $12.7 million, or
16.8%, to $88.6 million for 2006 from $75.9 million for 2005. Rates
on overnight borrowings reflected the higher short-term interest rate
environment as the rate on other borrowings increased to 5.53% for 2006 from
4.05% for 2005. Interest expense on other borrowings also includes
the interest expense on $6.2 million of trust preferred securities which was
approximately $525,000 and $444,000 in 2006 and 2005, respectively.
Provision for Loan
Losses
The
provision for loan losses is charged to operations in an amount necessary to
bring the total allowance for loan losses to a level that reflects the known and
estimated inherent losses in the portfolio. The provision for loan losses
amounted to $1.4 million in 2006. The provision reflected $359,000 for net
losses on tax refund loans, which were more than offset by $1.6 million in
related revenues, and amounts required to increase the allowance for loan growth
in accordance with the Company’s methodology. The prior year provision of $1.2
million reflected $496,000 for net losses on tax refund loans, which more than
offset by $1.2 million in related revenues. In addition, the 2005
provision was reduced as a result of a $250,000 recovery on a commercial loan
which had been charged off in the prior year. That recovery resulted
in an allowance balance which exceeded the level deemed necessary by the
Company’s methodology and the provision was reduced accordingly.
Non-Interest Income
Total
non-interest income increased $26,000 to $3.6 million for 2006. A
$661,000 increase in loan advisory and servicing fees and a $130,000 gain on the
sale of other real estate owned were offset by a decrease of $521,000 in service
fees on deposit accounts, a one time $251,000 award in a lawsuit recorded in
2005, and a $97,000 gain on call of security also recorded in
2005. The $521,000 decrease in service fees on deposit accounts
reflected the termination of services to several large customers.
Non-Interest Expenses
Total
non-interest expenses increased $2.8 million or 15.4% to $21.0 million for 2006,
from $18.2 million for 2005. Salaries and employee benefits increased $2.1
million or 21.5%, to $11.6 million for 2006, from $9.6 million for 2005. That
increase reflected additional salary expense related to commercial loan and
deposit production, including related support staff, and staff for two new
branches. It also reflected annual merit increases which are targeted at
approximately 3.5%.
Occupancy
expense increased $321,000, or 20.5%, to $1.9 million for 2006, versus $1.6
million for 2005. The increase reflected two additional branch locations which
opened in 2006.
Depreciation
expense increased $17,000 or 1.7% to $1.0 million for 2006. 2006
expense reflected the impact of the two additional branch locations, which was
partially offset by the 2005 write-off assets determined to have shorter lives
than originally expected.
Legal
fees decreased $19,000, or 2.8%, to $654,000 in 2006, compared to $673,000 in
2005, resulting from reduced fees on a number of different matters.
Other
real estate expense decreased $34,000, or 77.3%, to $10,000 in 2006, compared to
$44,000 in 2005. The decrease resulted from the timing of property
tax payments.
Advertising
expense increased $302,000, or 157.3%, to $494,000 in 2006, compared to $192,000
in 2005. The increase was primarily due to higher levels of TV,
radio, print, and direct mail advertising including advertising two new branches
and deposit promotions.
Data
processing expense decreased $8,000, or 1.6%, to $496,000 in 2006, compared to
$504,000 in 2005.
Insurance
expense increased $57,000 or 19.3% to $353,000 in 2006, compared to $296,000 in
2005. The increase was primarily due the overall growth of the
Company.
Professional
fees decreased $207,000 or 26.9% to $562,000 in 2006, compared to $769,000 in
2005. The decrease reflected lower expenses connected with
Sarbanes-Oxley compliance.
Taxes,
other than income increased $53,000 or 7.7% to $741,000 for 2006 versus $688,000
for 2005. The increase reflected an increase in Pennsylvania shares tax
resulting from increases in the Company’s capital. The tax is
assessed at an annual rate of 1.25% on a 6 year moving average of regulatory
capital.
Other
expenses increased $268,000, or 9.2% to $3.2 million for 2006, from $2.9 million
for 2005, which reflected increases of $114,000 in training and development
expenses, $94,000 in expenses for the two additional branch locations and
$56,000 in loan production expense.
Provision for Income
Taxes
The
provision for income taxes for continuing operations increased $721,000, to $5.2
million for 2006, from $4.5 million for 2005. That increase was primarily the
result of the increase in pre-tax income. The effective tax rates in those
periods were comparable at 34.0% and 33.5% respectively.
Financial
Condition
December 31, 2007 Compared to
December 31, 2006
Total
assets increased $7.5 million to $1.016 billion at December 31, 2007, compared
to $1.009 billion at December 31, 2006. This net increase reflected a higher
balance in loans offset by lower balances in cash and cash equivalents and
investment securities.
Loans:
The loan
portfolio, which represents the Company’s largest asset, is its most significant
source of interest income. The Company’s lending strategy is to focus on small
and medium sized businesses and professionals that seek highly personalized
banking services. Total loans increased $29.5 million, or 3.7%, to $821.5
million at December 31, 2007, versus $792.1 million at December 31, 2006. The
increase reflected $26.4 million, or 3.4%, of growth in commercial and
construction loans. The loan portfolio consists of secured and unsecured
commercial loans including commercial real estate, construction loans,
residential mortgages, automobile loans, home improvement loans, home equity
loans and lines of credit, overdraft lines of credit and others. Republic’s
commercial loans typically range between $250,000 and $5,000,000 but customers
may borrow significantly larger amounts up to Republic’s legal lending limit of
approximately $15.0 million at December 31, 2007. Individual customers may have
several loans that are secured by different collateral which are in total
subject to that lending limit. The aggregate amount of those relationships that
exceeded $8.8 million at December 31, 2007, was $372.9 million. The $8.8 million
threshold approximates 10% of total capital and reflects an additional internal
monitoring guideline.
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, municipal securities and debt securities, which
include corporate bonds and trust preferred securities. Available-for-sale
securities totaled $83.7 million at December 31, 2007, a decrease of $18.4
million, or 18.0%, from year-end 2006. This decrease reflected $28.2 million in
proceeds from maturities and calls on securities partially offset by $9.6
million in purchases of primarily mortgage backed and municipal
securities. The purchases were made to decrease exposure to lower
interest rate environments, and enhance net interest income. At
December 31, 2007 and December 31, 2006, the portfolio had net unrealized gains
of $409,000 and $427,000, respectively.
Investment
securities held-to-maturity are investments for which there is the intent and
ability to hold the investment to maturity. These investments are carried at
amortized cost. The held-to-maturity portfolio consists primarily of debt
securities and stocks. At December 31, 2007, securities held to maturity totaled
$282,000, a decrease of $51,000 or 15.3%, from $333,000 at year-end 2006. The
decline reflected a reduction in the amount of debt securities. At both dates,
respective carrying values approximated market values.
Restricted
Stock:
Republic is required to maintain FHLB
stock in proportion to its outstanding debt to FHLB. When the debt is
repaid, the purchase price of the stock is refunded. At December 31,
2007, FHLB stock totaled $6.2 million, a decrease of $446,000, or 6.7%, from
$6.7 million at December 31, 2006.
Republic
is also required to maintain ACBB stock as a condition of a contingency line of
credit. At December 31, 2007 and 2006, ACBB stock totaled
$143,000.
Cash
and Cash Equivalents:
Cash and
due from banks, interest bearing deposits and federal funds sold comprise this
category which consists of the Company’s most liquid assets. The aggregate
amount in these three categories decreased by $9.9 million, to $73.2 million at
December 31, 2007, from $83.1 million at December 31, 2006, primarily due
to an $8.5 million decrease in cash and due from banks.
Fixed
Assets:
Bank
premises and equipment, net of accumulated depreciation totaled $11.3 million at
December 31, 2007 an increase of $5.6 million, or 99.9% from $5.6 million at
December 31, 2006, reflecting main office expenditures and branch
expansion.
Other
Real Estate Owned:
At
December 31, 2007, the Company had assets classified as other real estate owned
with a value of $3.7 million comprised of a tract development project for single
family homes with a value of $3.5 million, a commercial building with a value of
$109,000 and a parcel of land with a value of $42,000. At December
31, 2006, the Company had parcels of land classified as other real estate owned
with a value of $572,000, of which assets valued at $530,000 were sold in
2007.
Bank
Owned Life Insurance:
At
December 31, 2007, the value of the insurance was $11.7 million, an increase of
$424,000, or 3.8%, from $11.3 million at December 31, 2006. The
increase reflected income earned on the insurance policies.
Other
Assets:
Other
assets decreased by $1.6 million to $8.0 million at December 31, 2007, from $9.6
million at December 31, 2006, primarily due to the effect of a $2.5 million
adjustment to the deferred tax asset (offset in other liabilities) partially
offset by an increase of $649,000 in assets related to a deferred compensation
plan.
Deposits:
Deposits,
which include non-interest and interest-bearing demand deposits, money market,
savings and time deposits including some brokered deposits, are Republic’s major
source of funding. Deposits are generally solicited from the Company’s market
area through the offering of a variety of products to attract and retain
customers, with a primary focus on multi-product relationships.
Total
deposits increased by $26.1 million to $780.9 million at December 31, 2007, from
$754.8 million at December 31, 2006. Average transaction accounts
increased 2.3% or $8.7 million from the prior year end to $384.2 million in
2007. Time deposits increased $54.1 million, or 14.7%, to $422.9
million at December 31, 2007, versus $368.8 million at the prior
year-end.
FHLB
Borrowings and Overnight Advances:
FHLB
borrowings and overnight advances are used to supplement deposit generation.
Republic had no term borrowings at December 31, 2007 and December 31, 2006,
respectively. Republic had short-term borrowings (overnight) of $133.4 million
at December 31, 2007 versus $159.7 million at the prior year-end.
Subordinated
Debt:
Subordinated
debt amounted to $11.3 million at December 31, 2007, compared to $6.2 million at
December 31, 2006, as a result of a $5.2 million issuance of trust preferred
securities in June 2007 at a rate of LIBOR plus 1.55%.
Shareholders’
Equity:
Total
shareholders’ equity increased $5.7 million to $80.5 million at December 31,
2007, versus $74.7 million at December 31, 2006. This increase was
primarily the result of 2007 net income of $6.9 million, partially offset by
$1.3 million for the purchase of treasury shares.
Commitments,
Contingencies and Concentrations
The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
Credit
risk is defined as the possibility of sustaining a loss due to the failure of
the other parties to a financial instrument to perform in accordance with the
terms of the contract. The maximum exposure to credit loss under commitments to
extend credit and standby letters of credit is represented by the contractual
amount of these instruments. The Company uses the same underwriting standards
and policies in making credit commitments as it does for on-balance-sheet
instruments.
Financial
instruments whose contract amounts represent potential credit risk are
commitments to extend credit of approximately $160.2 million and $163.2 million
and standby letters of credit of approximately $4.6 million and $7.3 million at
December 31, 2007 and 2006, respectively. Commitments often
expire without being drawn upon. The $160.2 million of commitments to extend
credit at December 31, 2007, were substantially all variable rate
commitments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and many require the
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained upon extension of
credit is based on management’s credit evaluation of the customer. Collateral
held varies but may include real estate, marketable securities, pledged
deposits, equipment and accounts receivable.
Standby
letters of credit are conditional commitments issued that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management’s credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable.
Contingencies
also include a standby letter of credit issued by an unrelated bank in the
amount of $170,000 which was required by a lessor.
C
ontractual obligations and other
commitments
The following table sets forth
contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2007:
|
(Dollars
in thousands)
|
Total
|
Less
than
One Year
|
One
to
Three
Years
|
Three
to
Five
Years
|
After
Five
Years
|
||||
|
Minimum
annual rentals or noncancellable
operating
leases
|
$ 44,926
|
$ 1,394
|
$ 3,426
|
$ 3,947
|
$
36,159
|
||||
|
Remaining
contractual maturities of time
deposits
|
422,935
|
406,945
|
15,199
|
736
|
55
|
||||
|
Subordinated
debt
|
11,341
|
-
|
-
|
-
|
11,341
|
||||
|
Employment
agreements
|
1,736
|
828
|
908
|
-
|
-
|
||||
|
Former
CEO SERP
|
143
|
95
|
48
|
-
|
-
|
||||
|
Director
and Officer retirement plan
obligations
|
1,467
|
117
|
177
|
252
|
921
|
||||
|
Loan
commitments
|
160,245
|
113,718
|
21,189
|
2,624
|
22,714
|
||||
|
Standby
letters of credit
|
4,613
|
4,451
|
54
|
108
|
-
|
||||
|
Total
|
$
647,406
|
$
527,548
|
$
41,001
|
$ 7,667
|
$
71,190
|
As
of December 31, 2007, the Company had entered into non-cancelable lease
agreements for its main office and operations center, ten current Republic
retail branch facilities, and a new branch facility scheduled to open in 2008,
expiring through August 31, 2037, including renewal options. The leases are
accounted for as operating leases. The minimum annual rental payments required
under these leases are $44.9 million through the year 2037. The
Company has entered into employment agreements with the CEO of the Company and
the President of Republic. The aggregate commitment for future salaries and
benefits under these employment agreements at December 31, 2007 is approximately
$1.7 million. The Company has retirement plan agreements with certain
Directors and Officers. The accrued benefits under the plan at
December 31, 2007 was approximately $1.5 million, with a minimum age of 65
established to qualify for the payments.
The
Company and Republic are from time to time a party (plaintiff or defendant) to
lawsuits that are in the normal course of business. While any litigation
involves an element of uncertainty, management, after reviewing pending actions
with its legal counsel, is of the opinion that the liability of the Company and
Republic, if any, resulting from such actions will not have a material effect on
the financial condition or results of operations of the Company and
Republic.
At
December 31, 2007, 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 $261.9 million, which
represented 31.9% of gross loans receivable at December 31, 2007. Various types
of real estate are included in this category, including industrial, retail
shopping centers, office space, residential multi-family and
others. In addition, credits extended for single family construction
amounted to $101.6 million, which represented 12.4% of gross loans receivable at
December 31, 2007. Loan concentrations are considered to exist when there is
amounts loaned to a multiple number of borrowers engaged in similar activities
that management believes would cause them to be similarly impacted by economic
or other conditions.
Interest
Rate Risk Management
Interest
rate risk management involves managing the extent to which interest-sensitive
assets and interest-sensitive liabilities are matched. The Company attempts to
optimize net interest income while managing period-to-period fluctuations
therein. The Company typically defines interest-sensitive assets and
interest-sensitive liabilities as those that reprice within one year or
less.
The
difference between interest-sensitive assets and interest-sensitive liabilities
is known as the “interest-sensitivity gap” (“GAP”). A positive GAP occurs when
interest-sensitive assets exceed interest-sensitive liabilities repricing in the
same time periods, and a negative GAP occurs when interest-sensitive liabilities
exceed interest-sensitive assets repricing in the same time periods.
A negative GAP ratio suggests that a financial institution may be better
positioned to take advantage of declining interest rates rather than increasing
interest rates, and a positive GAP ratio suggests the
converse. Static GAP analysis describes interest rate sensitivity at
a point in time. However, it alone does not accurately measure the magnitude of
changes in net interest income since changes in interest rates do not impact all
categories of assets and liabilities equally or
simultaneously. Interest rate sensitivity analysis also requires
assumptions about repricing certain categories of assets and
liabilities. For purposes of interest rate sensitivity analysis,
assets and liabilities are stated at either their contractual maturity,
estimated likely call date, or earliest repricing
opportunity. Mortgage backed securities and amortizing loans are
scheduled based on their anticipated cash flow, including prepayments based on
historical data and current market trends. Savings, money market and
interest-bearing demand accounts do not have a stated maturity or repricing term
and can be withdrawn or repriced at any time. Management estimates the repricing
characteristics of these accounts based on historical performance and other
deposit behavior assumptions. These deposits are not considered to reprice
simultaneously and, accordingly, a portion of the deposits are moved into time
brackets exceeding one year. However, management may choose not to reprice
liabilities proportionally to changes in market interest rates, for competitive
or other reasons.
Shortcomings,
inherent in a simplified and static GAP analysis, may result in an institution
with a negative GAP having interest rate behavior associated with an
asset-sensitive balance sheet. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Furthermore, repricing
characteristics of certain assets and liabilities may vary substantially within
a given time period. In the event of a change in interest rates, prepayments and
other cash flows could also deviate significantly from those assumed in
calculating GAP in the manner presented in the table below.
The
Company attempts to manage its assets and liabilities in a manner that optimizes
net interest income in a range of interest rate environments. Management uses
GAP analysis and simulation models to monitor behavior of its interest sensitive
assets and liabilities. Adjustments to the mix of assets and liabilities are
made periodically in an effort to provide steady growth in net interest
income.
Management
presently believes that the effect on Republic of any future fall in interest
rates, reflected in lower yielding assets, could be detrimental since Republic
may not have the immediate ability to commensurately decrease rates on its
interest bearing liabilities, primarily time deposits, other borrowings and
certain transaction accounts. An increase in interest rates could have a
negative effect on Republic, due to a possible lag in the repricing of core
deposits not assumed in the model.
The
following tables present a summary of the Company’s interest rate sensitivity
GAP at December 31, 2007. Amounts shown in the table include both
estimated maturities and instruments scheduled to reprice, including prime based
loans. For purposes of these tables, the Company has used assumptions
based on industry data and historical experience to calculate the expected
maturity of loans because, statistically, certain categories of loans are
prepaid before their maturity date, even without regard to interest rate
fluctuations. Additionally, certain prepayment assumptions were made with regard
to investment securities based upon the expected prepayment of the underlying
collateral of the mortgage-backed securities. The interest rate on the trust
preferred securities is variable and adjusts semi-annually.
Interest
Sensitivity Gap
At
December 31, 2007
(Dollars
in thousands)
|
0–90
Days
|
91–180
Days
|
181–365
Days
|
1–2
Years
|
2–3
Years
|
3–4
Years
|
4–5
Years
|
More
than
5
Years
|
Financial
Statement
Total
|
Fair
Value
|
|||||||||||||||||||||||||||||||
|
Interest
Sensitive Assets:
|
||||||||||||||||||||||||||||||||||||||||
|
Investment
securities and other interest-bearing
|
||||||||||||||||||||||||||||||||||||||||
|
balances
|
$ | 82,186 | $ | 298 | $ | 11,041 | $ | 9,966 | $ | 8,184 | $ | 6,714 | $ | 5,512 | $ | 28,627 | $ | 152,528 | $ | 152,531 | ||||||||||||||||||||
|
Average
interest rate
|
4.59 | % | 6.10 | % | 5.97 | % | 5.98 | % | 5.98 | % | 5.98 | % | 5.98 | % | 5.99 | % | ||||||||||||||||||||||||
|
Loans
receivable
|
384,017 | 20,252 | 107,350 | 83,649 | 73,975 | 57,305 | 48,307 | 46,694 | 821,549 | 822,545 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
7.55 | % | 6.81 | % | 6.86 | % | 6.77 | % | 6.77 | % | 6.77 | % | 6.77 | % | 6.69 | % | ||||||||||||||||||||||||
|
Total
|
466,203 | 20,550 | 118,391 | 93,615 | 82,159 | 64,019 | 53,819 | 75,321 | 974,077 | 975,076 | ||||||||||||||||||||||||||||||
|
Cumulative
Totals
|
$ | 466,203 | $ | 486,753 | $ | 605,144 | $ | 698,759 | $ | 780,918 | $ | 844,937 | $ | 898,756 | $ | 974,077 | ||||||||||||||||||||||||
|
Interest
Sensitive Liabilities:
|
||||||||||||||||||||||||||||||||||||||||
|
Demand
Interest Bearing(1)
|
$ | 17,618 | $ | - | $ | - | $ | 17,617 | $ | - | $ | - | $ | - | $ | - | $ | 35,235 | $ | 35,235 | ||||||||||||||||||||
|
Average
interest rate
|
1.00 | % | - | - | 1.00 | % | - | - | - | - | ||||||||||||||||||||||||||||||
|
Savings
Accounts (1)
|
9,146 | - | - | 9,145 | - | - | - | - | 18,291 | 18,291 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
4.15 | % | - | - | 4.15 | % | - | - | - | - | ||||||||||||||||||||||||||||||
|
Money
Market Accounts(1)
|
102,677 | - | - | 102,677 | - | - | - | - | 205,354 | 205,354 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
4.50 | % | - | - | 4.50 | % | - | - | - | - | ||||||||||||||||||||||||||||||
|
Time
Deposits
|
243,363 | 90,651 | 72,932 | 12,768 | 2,430 | 288 | 448 | 55 | 422,935 | 422,704 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
4.75 | % | 4.95 | % | 4.83 | % | 4.28 | % | 4.08 | % | 3.97 | % | 4.17 | % | 5.02 | % | ||||||||||||||||||||||||
|
FHLB
and Short Term
|
||||||||||||||||||||||||||||||||||||||||
|
Advances
|
133,433 | - | - | - | - | - | - | - | 133,433 | 133,433 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
4.50 | % | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
|
Subordinated
Debt
|
11,341 | - | - | - | - | - | - | - | 11,341 | 11,341 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
6.77 | % | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
|
Total
|
517,578 | 90,651 | 72,932 | 142,207 | 2,430 | 288 | 448 | 55 | 826,589 | 826,358 | ||||||||||||||||||||||||||||||
|
Cumulative
Totals
|
$ | 517,578 | $ | 608,229 | $ | 681,161 | $ | 823,368 | $ | 825,798 | $ | 826,086 | $ | 826,534 | $ | 826,589 | ||||||||||||||||||||||||
|
Interest
Rate
|
||||||||||||||||||||||||||||||||||||||||
|
Sensitivity
GAP
|
$ | (51,375 | ) | $ | (70,101 | ) | $ | 45,459 | $ | (48,592 | ) | $ | 79,729 | $ | 63,731 | $ | 53,371 | $ | 75,266 | |||||||||||||||||||||
|
Cumulative
GAP
|
$ | (51,375 | ) | $ | (121,476 | ) | $ | (76,017 | ) | $ | (124,609 | ) | $ | (44,880 | ) | $ | 18,851 | $ | 72,222 | $ | 147,488 | |||||||||||||||||||
|
Interest
Sensitive Assets/
|
||||||||||||||||||||||||||||||||||||||||
|
Interest
Sensitive
|
||||||||||||||||||||||||||||||||||||||||
|
Liabilities
|
90.07 | % | 80.03 | % | 88.84 | % | 84.87 | % | 94.57 | % | 102.28 | % | 108.74 | % | 117.84 | % | ||||||||||||||||||||||||
|
Cumulative
GAP/
|
||||||||||||||||||||||||||||||||||||||||
|
Total
Earning Assets
|
-5 | % | -12 | % | -8 | % | -13 | % | -5 | % | 2 | % | 7 | % | 15 | % | ||||||||||||||||||||||||
|
(1)
|
Demand,
savings and money market accounts are shown to reprice based upon
management’s estimate of when rates would have to be increased to retain
balances in response to competition. Such estimates are necessarily
arbitrary and wholly judgmental.
|
In
addition to the GAP analysis, the Company utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate sensitivity.
Income simulation considers not only the impact of changing market interest
rates on forecasted net interest income, but also other factors such a yield
curve relationships, the volume and mix of assets and liabilities and general
market conditions.
Net Portfolio Value and Net Interest
Income Analysis.
Our interest rate
sensitivity also is monitored by management through the use of models which
generate estimates of the change in its net portfolio value (“NPV”) and net
interest income (“NII”) over a range of interest rate scenarios. NPV
is the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts. The NPV ratio, under any interest rate
scenario, is defined as the NPV in that scenario divided by the market value of
assets in the same scenario. The following table sets forth our NPV
as of December 31, 2007 and reflects the changes to NPV as a result of immediate
and sustained changes in interest rates as indicated.
|
Change
in
Interest
Rates
|
Net
Portfolio Value
|
NPV
as % of Portfolio
Value
of Assets
|
|||
|
In
Basis Points
(Rate
Shock)
|
Amount
|
$
Change
|
%
Change
|
NPV
Ratio
|
Change
|
|
(Dollars
in Thousands)
|
|||||
|
200bp
|
$119,982
|
$(11,534)
|
(8.77)%
|
12.06%
|
(98)bp
|
|
100
|
126,123
|
(5,393)
|
(4.10)
|
12.58
|
(46)
|
|
Static
|
131,516
|
--
|
--
|
13.04
|
--
|
|
(100)
|
132,168
|
652
|
0.50
|
13.08
|
4
|
|
(200)
|
131,426
|
(90)
|
(0.07)
|
13.00
|
(4)
|
In
addition to modeling changes in NPV, we also analyze potential changes to NII
for a twelve-month period under rising and falling interest rate
scenarios. The following table shows our NII model as of December 31,
2007.
|
Change
in Interest Rates in Basis Points (Rate Shock)
|
Net
Interest Income
|
$
Change
|
%
Change
|
|
(Dollars
in Thousands)
|
|||
|
200bp
|
$28,862
|
$(1,361)
|
(4.50)%
|
|
100
|
29,628
|
(595)
|
(1.97)
|
|
Static
|
30,223
|
--
|
--
|
|
(100)
|
30,644
|
421
|
1.39
|
|
(200)
|
31,330
|
1,107
|
3.67
|
The above
table indicates that as of December 31, 2007, in the event of an immediate and
sustained 200 basis point increase in interest rates, the Company’s net interest
income for the 12 months ending December 31, 2007, subject to the significant
limitations specified in the following paragraph, might decrease by $1.4 million
over the static scenario.
As is the
case with the GAP Table, certain shortcomings are inherent in the methodology
used in the above interest rate risk measurements. Modeling changes
in NPV and NII require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the models presented assume that the
composition of our interest sensitive assets and liabilities existing at the
beginning of a period remains constant over the period being measured and also
assumes that a particular change in interest rates is reflected uniformly across
the yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities. Accordingly, although the NPV measurements
and net interest income models provide an indication of interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect
of
changes in market interest rates on net interest income and will differ from
actual results. It is unlikely that the increases in net interest
income shown in the table would occur, if deposit rates continue to lag prime
rate reductions.
The
Company’s management believes that the assumptions utilized in evaluating the
Company’s estimated net interest income are reasonable; however, the interest
rate sensitivity of the Company’s assets, liabilities and off-balance sheet
financial instruments as well as the estimated effect of changes in interest
rates on estimated net interest income could vary substantially if different
assumptions are used or actual experience differs from the experience on which
the assumptions were based. Periodically, the Company may and does make
significant changes to underlying assumptions, which are wholly
judgmental. Prepayments on residential mortgage loans and mortgage
backed securities have increased over historical levels due to the lower
interest rate environment, and may result in reductions in margins.
Capital
Resources
The
Company is required to comply with certain “risk-based” capital adequacy
guidelines issued by the FRB and the FDIC. The risk-based capital guidelines
assign varying risk weights to the individual assets held by a bank. The
guidelines also assign weights to the “credit-equivalent” amounts of certain
off-balance sheet items, such as letters of credit and interest rate and
currency swap contracts. Under these guidelines, banks are expected to meet a
minimum target ratio for “qualifying total capital” to weighted risk assets of
8%, at least one-half of which is to be in the form of “Tier 1 capital”.
Qualifying total capital is divided into two separate categories or “tiers”.
“Tier 1 capital” includes common stockholders’ equity, certain qualifying
perpetual preferred stock and minority interests in the equity accounts of
consolidated subsidiaries, less goodwill, “Tier 2 capital” components (limited
in the aggregate to one-half of total qualifying capital) includes allowances
for credit losses (within limits), certain excess levels of perpetual preferred
stock and certain types of “hybrid” capital instruments, subordinated debt and
other preferred stock. Applying the federal guidelines, the ratio of qualifying
total capital to weighted-risk assets, was 11.01% and 10.30% at December 31,
2007 and 2006, respectively, and as required by the guidelines, at least
one-half of the qualifying total capital consisted of Tier l capital elements.
Tier l risk-based capital ratios on December 31, 2007 and 2006 were 10.07% and
9.46%, respectively. At December 31, 2007 and 2006, the Company exceeded the
requirements for risk-based capital adequacy under both federal and Pennsylvania
state guidelines.
Under FRB
and FDIC regulations, a bank and a holding company are deemed to be “well
capitalized” when it has a “leverage ratio” (“Tier l capital to total assets”)
of at least 5%, a Tier l capital to weighted-risk assets ratio of at least 6%,
and a total capital to weighted-risk assets ratio of at least 10%. At December
31, 2007 and 2006, the Company’s leverage ratio was 9.44% and 8.75%,
respectively. Accordingly, at December 31, 2007 and 2006, the Company was
considered “well capitalized” under FRB and FDIC regulations.
On
November 28, 2001, Republic First Bancorp, Inc., through a pooled offering with
Sandler O'Neill & Partners, issued $6.2 million of corporation-obligated
mandatorily redeemable capital securities of the subsidiary trust holding solely
junior subordinated debentures of the corporation more commonly known as trust
preferred securities. The purpose of the issuance was to increase capital as a
result of the Company's continued loan and core deposit growth. The
trust preferred securities qualify as Tier 1 capital for regulatory purposes in
amounts up to 25% of total Tier 1 capital. The Company had the ability to call
the securities on any interest payment date after five years, without a
prepayment penalty, notwithstanding their final 30 year maturity. The interest
rate was variable and adjustable semi-annually at 3.75% over the 6 month London
Interbank Offered Rate (“Libor”). The Company did call the securities
in December 2006 and then issued $6.2 million in Trust Preferred Securities at a
variable interest rate, adjustable quarterly, at 1.73% over the 3 month
Libor. The Company may call the securities on any interest payment
date after five years.
On June
28, 2007, the Company, through a pooled offering, issued an additional $5.2
million of corporation-obligated mandatorily redeemable capital securities of
the subsidiary trust holding solely junior subordinated debentures of the
corporation more commonly known as Trust Preferred Securities for the same
purpose as the 2001 issuance. The Company has the ability to call the
securities or any interest payment date after five years, without a prepayment
penalty, notwithstanding their final 30 year maturity. The interest
rate is variable, adjustable quarterly, at 1.55% over the 3 month
Libor.
The
shareholders’ equity of the Company as of December 31, 2007, totaled
approximately $80.5 million compared to approximately $74.7 million as of
December 31, 2006. This increase of $5.7 million reflected 2007 net income of
$6.9 million, less $1.3 million for the purchase of treasury shares. That net
income increased the book value per share of the Company’s common stock from
$7.16 as of December 31, 2006, based upon 10,445,332 shares outstanding
(restated for a 10% stock dividend), to $7.80 as of December 31, 2007, based
upon 10,320,908 shares outstanding at December 31, 2007, as adjusted for
treasury stock.
Regulatory
Capital Requirements
Federal
banking agencies impose three minimum capital requirements on the Company’s
risk-based capital ratios based on total capital, Tier 1 capital, and a leverage
capital ratio. The risk-based capital ratios measure the adequacy of a bank’s
capital against the riskiness of its assets and off-balance sheet activities.
Failure to maintain adequate capital is a basis for “prompt corrective action”
or other regulatory enforcement action. In assessing a bank’s capital adequacy,
regulators also consider other factors such as interest rate risk exposure;
liquidity, funding and market risks; quality and level or earnings;
concentrations of credit, quality of loans and investments; risks of any
nontraditional activities; effectiveness of bank policies; and management’s
overall ability to monitor and control risks.
The
following table presents the Company’s regulatory capital ratios at December 31,
2007 and 2006:
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
be well
capitalized
under
regulatory
capital guidelines
|
|||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||
|
At
December 31, 2007
|
|||||||||||||
|
Total
risk based capital
|
|||||||||||||
|
Republic
|
$99,634
|
11.02%
|
$72,534
|
8.00%
|
$90,667
|
10.00%
|
|||||||
|
Company
|
99,704
|
11.01%
|
72,638
|
8.00%
|
-
|
-
|
|||||||
|
Tier
one risk based capital
|
|||||||||||||
|
Republic
|
91,126
|
10.08%
|
36,267
|
4.00%
|
54,400
|
6.00%
|
|||||||
|
Company
|
91,196
|
10.07%
|
36,319
|
4.00%
|
-
|
-
|
|||||||
|
Tier
one leverage capital
|
|||||||||||||
|
Republic
|
91,126
|
9.45%
|
48,225
|
5.00%
|
48,225
|
5.00%
|
|||||||
|
Company.
|
91,196
|
9.44%
|
48,294
|
5.00%
|
-
|
-
|
|||||||
|
At
December 31, 2006
|
|||||||||||||
|
Total
risk based capital
|
|||||||||||||
|
Republic
|
$88,256
|
10.28%
|
$61,009
|
8.00%
|
$76,261
|
10.00%
|
|||||||
|
Company
|
88,510
|
10.30%
|
61,098
|
8.00%
|
-
|
-
|
|||||||
|
Tier
one risk based capital
|
|||||||||||||
|
Republic
|
80,198
|
9.34%
|
30,505
|
4.00%
|
45,757
|
6.00%
|
|||||||
|
Company
|
80,452
|
9.46%
|
30,549
|
4.00%
|
-
|
-
|
|||||||
|
Tier
one leverage capital
|
|||||||||||||
|
Republic
|
80,198
|
8.72%
|
45,989
|
5.00%
|
45,989
|
5.00%
|
|||||||
|
Company
|
80,452
|
8.75%
|
45,990
|
5.00%
|
-
|
-
|
|||||||
Management
believes that the Company and Republic met, as of December 31, 2007 and 2006,
all capital adequacy requirements to which they are subject. As of December 31,
2007, the FDIC categorized Republic as well capitalized under the regulatory
framework for prompt corrective action provisions of the Federal Deposit
Insurance Act. There are no calculations or events since that notification,
which management believes would have changed Republic’s category.
The
Company and Republic’s ability to maintain the required levels of capital is
substantially dependent upon the success of their capital and business plans,
the impact of future economic events on Republic’s loan customers and Republic’s
ability to manage its interest rate risk, growth and other operating
expenses.
In
addition to the above minimum capital requirements, the Federal Reserve Bank
approved a rule that became effective on December 19, 1992, implementing a
statutory requirement that federal banking regulators take specified “prompt
corrective action” when an insured institution’s capital level falls below
certain levels. The rule defines five capital categories based on several of the
above capital ratios. Republic currently exceeds the levels required for a bank
to be classified as “well capitalized”. However, the Federal Reserve Bank may
consider other criteria when determining such classifications, which criteria
could result in a downgrading in such classifications.
The
Company’s equity to assets ratio increased to 7.92% as of December 31, 2007,
from 7.41% as of December 31, 2006. The increase at year-end 2007 was the
result of 2007 net income of $6.9 million. The Company’s average equity to
assets ratio for 2007, 2006 and 2005 was 8.01%, 8.17% and 7.99%, respectively.
The Company’s average return on equity for 2007, 2006 and 2005 was 8.86%, 14.59%
and 15.22%, respectively; and its average return on assets for 2007, 2006 and
2005, was 0.71%, 1.19% and 1.22%, respectively.
Liquidity
Financial
institutions must maintain liquidity to meet day-to-day requirements of
depositors and borrowers, time investment purchases to market conditions and
provide a cushion against unforeseen needs. Liquidity needs can be met by either
reducing assets or increasing liabilities. The most liquid assets consist of
cash, amounts due from banks and federal funds sold.
Regulatory
authorities require the Company to maintain certain liquidity ratios such that
Republic maintains available funds, or can obtain available funds at reasonable
rates, in order to satisfy commitments to borrowers and the demands of
depositors. In response to these requirements, the Company has formed
an Asset/Liability Committee (ALCO), comprised of certain members of Republic’s
board of directors and senior management, which monitors such
ratios. The purpose of the committee is, in part, to monitor
Republic’s liquidity and adherence to the ratios in addition to managing
relative interest rate risk. The ALCO meets at least
quarterly.
The
Company’s most liquid assets, comprised of cash and cash equivalents on the
balance sheet, totaled $73.2 million at December 31, 2007, compared to $83.1
million at December 31, 2006. Loan maturities and repayments are another
source of asset liquidity. At December 31, 2007, Republic estimated that in
excess of $50.0 million of loans would mature or repay in the six-month period
ended June 30, 2008. Additionally, the majority of its securities are available
to satisfy liquidity requirements through pledges to the FHLB to access
Republic’s line of credit.
Funding
requirements have historically been satisfied by generating core deposits and
certificates of deposit with competitive rates, buying federal funds or
utilizing the facilities of the Federal Home Loan Bank System (“FHLB”). At
December 31, 2007, Republic had $113.1 million in unused lines of credit
available under arrangements with the FHLB and with correspondent banks,
compared to $82.7 million at December 31, 2006. The increase in available
lines resulted from Republic’s decreased level of overnight borrowings against
these lines. Management believes it satisfactorily exceeds regulatory
liquidity guidelines. These lines of credit enable Republic to purchase funds
for short to long-term needs at rates often lower than other sources and require
pledging of securities or loan collateral.
At
December 31, 2007, the Company had outstanding commitments (including unused
lines of credit and letters of credit) of $164.9 million. Certificates of
deposit scheduled to mature in one year totaled $406.9 million at December 31,
2007. The Company anticipates that it will have sufficient funds available to
meet its current commitments. In addition, the Company can use term borrowings
to replace these borrowed funds.
Republic’s
target and actual liquidity levels are determined by comparisons of the
estimated repayment and marketability of Republic’s interest-earning assets with
projected future outflows of deposits and other liabilities. Republic has
established a contingency line of credit with a correspondent bank to assist in
managing Republic’s liquidity position. That line of credit totaled
$15.0 million at December 31, 2007. Republic had drawn down $0 on
this line at December 31, 2007. Republic has also established a line of credit
with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity
of approximately $211.5 million. That $211.5 million capacity is
reduced by advances outstanding to arrive at the unused line of credit
available. As of December 31, 2007 and 2006, Republic had borrowed
$113.4 million and $139.7 million, respectively from the FHLB. Investment
securities represent a primary source of liquidity for Republic. Accordingly,
investment decisions generally reflect liquidity over other
considerations. Additionally, Republic has uncollateralized overnight
advances with PNC. As of December 31, 2007 and 2006, there were $20.0
million and $20.0 million of such overnight advances outstanding.
Operating
cash flows are primarily derived from cash provided from net income during the
year and are another source of liquidity.
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. Republic has historically been able to generate
certificates of deposit by matching Philadelphia market rates or paying a
premium rate of 25 to 50 basis points over those market rates. It is anticipated
that this source of liquidity will continue to be available; however, the
incremental cost may vary
depending
on market conditions. The Company’s securities portfolio is also available for
liquidity, most likely as collateral for FHLB advances. Because of the FHLB’s
AAA rating, it is unlikely those advances would not be available. But even if
they are not, numerous investment companies would likely provide repurchase
agreements up to the amount of the market value of the securities.
The ALCO
committee is responsible for managing the liquidity position and interest
sensitivity of Republic. That committee’s primary objective is to maximize net
interest income while configuring Republic’s interest-sensitive assets and
liabilities to manage interest rate risk and provide adequate liquidity for
projected needs.
Investment
Securities Portfolio
Republic’s
investment securities portfolio is intended to provide liquidity and contribute
to earnings while diversifying credit risk. The Company attempts to maximize
earnings while minimizing its exposure to interest rate risk. The securities
portfolio consists primarily of U.S. Government agency securities, mortgage
backed securities, municipal securities, corporate bonds and trust preferred
securities. The Company’s ALCO monitors and approves all security
purchases. The increase in securities in 2006 was a result of the
Company’s desire to reduce its exposure to lower rate environments, by
purchasing long term bonds. The decline in securities in 2007
primarily reflected the maturity of an eighteen month security.
A summary
of investment securities available-for-sale and investment securities
held-to-maturity at December 31, 2007, 2006 and 2005 follows.
|
Investment
Securities Available for Sale at December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
U.S.
Government Agencies
|
$ | - | $ | 18,570 | $ | 18,717 | ||||||
|
Mortgage
backed Securities/CMOs (1)
|
55,579 | 58,642 | 8,691 | |||||||||
|
Other
securities (2)
|
27,671 | 24,400 | 9,752 | |||||||||
|
Total
amortized cost of securities
|
$ | 83,250 | $ | 101,612 | $ | 37,160 | ||||||
|
Total
fair value of investment securities
|
$ | 83,659 | $ | 102,039 | $ | 37,283 | ||||||
|
Investment
Securities Held to Maturity at December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
U.S.
Government Agencies
|
$ | 3 | $ | 3 | $ | 3 | ||||||
|
Mortgage
backed Securities/CMOs (1)
|
15 | 58 | 59 | |||||||||
|
Other
securities
|
264 | 272 | 354 | |||||||||
|
Total
amortized cost of investment securities
|
$ | 282 | $ | 333 | $ | 416 | ||||||
|
Total
fair value of investment securities
|
$ | 285 | $ | 338 | $ | 427 | ||||||
(1)
Substantially all of these obligations consist of U.S. Government Agency issued
securities.
(2)
Comprised
primarily of municipal securities, corporate bonds and trust preferred
securities.
The
following table presents the contractual maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 2007.
Mortgage backed securities are presented without consideration of amortization
or prepayments.
|
Investment
Securities Available for Sale at December 31, 2007
|
||||||||||||||||||||||||||||||||||||||||||||
|
Within
One Year
|
One
to Five Years
|
Five
to Ten Years
|
Past
10 Years
|
Total
|
||||||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Fair
value
|
Cost
|
Yield
|
||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||||||
|
U.S.
Government Agencies
|
$ | - | - | $ | - | - | $ | - | - | $ | - | - | $ | - | $ | - | - | |||||||||||||||||||||||||||
|
Mortgage
backed securities
|
- | - | - | - | 253 | 6.21 | % | 56,206 | 6.04 | % | 56,459 | 55,579 | 6.04 | % | ||||||||||||||||||||||||||||||
|
Other securities
|
- | - | 148 | 4.40 | % | 2,104 | 6.02 | % | 24,948 | 5.56 | % | 27,200 | 27,671 | 5.59 | % | |||||||||||||||||||||||||||||
|
Total
AFS
securities
|
$ | - | - | 148 | 4.40 | % | $ | 2,357 | 6.04 | % | $ | 81,154 | 5.89 | % | $ | 83,659 | $ | 83,250 | 5.89 | % | ||||||||||||||||||||||||
|
Investment
Securities Held to Maturity at December 31, 2007
|
||||||||||||||||||||||||||||||||||||||||
|
Within
One Year
|
One
to Five Years
|
Five
to Ten Years
|
Past
10 Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
U.S.
Government Agencies
|
$ | - | - | $ | - | - | $ | 3 | 6.04 | % | $ | - | - | $ | 3 | 6.04 | % | |||||||||||||||||||||||
|
Mortgage
backed securities
|
- | - | - | - | - | - | 15 | 7.48 | % | 15 | 7.48 | % | ||||||||||||||||||||||||||||
|
Other
securities
|
80 | 6.10 | % | 75 | 6.45 | % | 34 | 6.01 | % | 75 | 3.50 | % | 264 | 5.45 | % | |||||||||||||||||||||||||
|
Total
HTM securities
|
$ | 80 | 6.10 | % | $ | 75 | 6.45 | % | $ | 37 | 6.01 | % | $ | 90 | 4.16 | % | $ | 282 | 5.56 | % | ||||||||||||||||||||
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 and other consumer loans.
Commercial loans are primarily secured term loans made to small to medium-sized
businesses and professionals for working capital, asset acquisition and other
purposes. Commercial loans are originated as either fixed or variable rate loans
with typical terms of 1 to 5 years. Republic’s commercial loans typically range
between $250,000 and $5.0 million but customers may borrow significantly larger
amounts up to Republic’s legal lending limit of approximately $15.0 million at
December 31, 2007. Individual customers may have several loans often secured by
different collateral. Such relationships in excess of $8.8 million (an internal
monitoring guideline which approximates 10% of capital and reserves) at December
31, 2007, amounted to $372.9 million. There were no loans in excess of the legal
lending limit at December 31, 2007.
The
Company’s total loans increased $29.5 million, or 3.7%, to $821.5 million at
December 31, 2007, from $792.1 million at December 31, 2006. That increase
reflected a $11.0 million, or 2.4%, increase in real estate secured loans, which
represents the Company’s largest loan portfolio. The increase also
reflected a $9.9 million, or 4.5%, increase in construction loans.
The
following table sets forth the Company’s gross loans by major categories for the
periods indicated:
|
At
December 31,
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Real estate
secured
|
$ | 477,678 | $ | 466,636 | $ | 447,673 | $ | 351,314 | $ | 281,253 | ||||||||||
|
Construction and land
development
|
228,616 | 218,671 | 141,461 | 107,462 | 86,547 | |||||||||||||||
|
Non real estate
secured
|
77,347 | 71,816 | 49,515 | 57,361 | 49,850 | |||||||||||||||
|
Non real estate
unsecured
|
8,451 | 8,598 | 10,620 | 8,917 | 13,398 | |||||||||||||||
|
Total
commercial
|
792,092 | 765,721 | 649,269 | 525,054 | 431,048 | |||||||||||||||
|
Residential
real estate
(1)
|
5,960 | 6,517 | 7,057 | 8,219 | 14,875 | |||||||||||||||
|
Consumer
and
other
|
24,302 | 20,952 | 23,050 | 17,048 | 14,636 | |||||||||||||||
|
Total
loans
|
822,354 | 793,190 | 679,376 | 550,321 | 460,559 | |||||||||||||||
|
Deferred
loan
fees
|
805 | 1,130 | 1,290 | 632 | 735 | |||||||||||||||
|
Total loans, net of deferred
loan fees
|
$ | 821,549 | $ | 792,060 | $ | 678,086 | $ | 549,689 | $ | 459,824 | ||||||||||
__________
(1) Residential
real estate secured is comprised of jumbo residential first mortgage loans for
all years presented.
Loan
Maturity and Interest Rate Sensitivity
The
amount of loans outstanding by category as of the dates indicated, which are due
in (i) one year or less, (ii) more than one year through five years
and (iii) over five years, is shown in the following table. Loan balances
are also categorized according to their sensitivity to changes in interest
rates:
|
At
December 31, 2007
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Commercial
and Commercial Real Estate
|
Construction
and Land Development
|
Residential
Real Estate
|
Consumer
and Other
|
Total
|
||||||||||||||||
|
Fixed
Rate
|
||||||||||||||||||||
|
1
year or less
|
$ | 77,004 | $ | 9,254 | $ | - | $ | 381 | $ | 86,639 | ||||||||||
|
1-5
years
|
255,289 | 6,840 | - | 1,143 | 263,272 | |||||||||||||||
|
After
5 years
|
90,371 | 17,224 | 5,960 | 5,054 | 118,609 | |||||||||||||||
|
Total fixed
rate
|
422,664 | 33,318 | 5,960 | 6,578 | 468,520 | |||||||||||||||
|
Adjustable
Rate
|
||||||||||||||||||||
|
1
year or less
|
63,787 | 152,270 | - | 986 | 217,043 | |||||||||||||||
|
1-5
years
|
22,900 | 18,983 | - | 187 | 42,070 | |||||||||||||||
|
After
5 years
|
53,320 | 24,045 | - | 16,551 | 93,916 | |||||||||||||||
|
Total
adjustable rate
|
140,007 | 195,298 | - | 17,724 | 353,029 | |||||||||||||||
|
Total
|
$ | 562,671 | $ | 228,616 | $ | 5,960 | $ | 24,302 | $ | 821,549 | ||||||||||
In the
ordinary course of business, loans maturing within one year may be renewed, in
whole or in part, as to principal amount, at interest rates prevailing at the
date of renewal.
At
December 31, 2007, 57.0% of total loans were fixed rate compared to 51.3% at
December 31, 2006.
Credit
Quality
Republic’s
written lending policies require specified underwriting, loan documentation and
credit analysis standards to be met prior to funding, with independent credit
department approval for the majority of new loan balances. A committee of the
Board of Directors oversees the loan approval process to monitor that proper
standards are maintained, while approving the majority of commercial
loans.
Loans,
including impaired loans, are generally classified as non-accrual if they are
past due as to maturity or payment of interest or principal for a period of more
than 90 days, unless such loans are well-secured and in the process of
collection. Loans that are on a current payment status or past due less than 90
days may also be classified as non-accrual if repayment in full of principal
and/or interest is in doubt.
Loans may
be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms.
While a
loan is classified as non-accrual or as an impaired loan and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When the future collectibility of the recorded loan balance is expected,
interest income may be recognized on a cash basis. For non-accrual loans which
have been partially charged off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan balance at
the contractual interest rate. Cash interest receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
The
following summary shows information concerning loan delinquency and
non-performing assets at the dates indicated.
|
At
December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Loans
accruing, but past due 90 days or more
|
$ | - | $ | - | $ | - | $ | - | $ | 2,928 | ||||||||||
|
Restructured
loans
|
- | - | - | - | - | |||||||||||||||
|
Non-accrual
loans
|
||||||||||||||||||||
|
Commercial
|
14,757 | 6,448 | 2,725 | 3,914 | 3,269 | |||||||||||||||
|
Construction
|
6,747 | 173 | 492 | 656 | 1,795 | |||||||||||||||
|
Residential
real estate
|
- | - | - | - | - | |||||||||||||||
|
Consumer
and other
|
776 | 295 | 206 | 284 | 74 | |||||||||||||||
|
Total
non-accrual loans
|
22,280 | 6,916 | 3,423 | 4,854 | 5,138 | |||||||||||||||
|
Total
non-performing loans (1)
|
22,280 | 6,916 | 3,423 | 4,854 | 8,066 | |||||||||||||||
|
Other
real estate owned
|
3,681 | 572 | 137 | 137 | 207 | |||||||||||||||
|
Total
non-performing assets (1)
|
$ | 25,961 | $ | 7,488 | $ | 3,560 | $ | 4,991 | $ | 8,273 | ||||||||||
|
Non-performing
loans as a percentage of total
|
||||||||||||||||||||
|
loans, net of unearned income
(1) (2)
|
2.71 | % | 0.87 | % | 0.50 | % | 0.88 | % | 1.75 | % | ||||||||||
|
Non-performing
assets as a percentage of total assets
|
2.55 | % | 0.74 | % | 0.42 | % | 0.75 | % | 1.33 | % | ||||||||||
|
(1)
|
Non-performing
loans are comprised of (i) loans that are on a non-accrual basis,
(ii) accruing loans that are 90 days or more past due and
(iii) restructured loans. Non-performing assets are composed of
non-performing loans and other real estate
owned.
|
|
(2)
|
Includes
loans held for sale.
|
Total
non-performing loans increased $15.4 million to $22.3 million at December 31,
2007, from $6.9 million at the prior year-end. The $15.4 million
increase in 2007 non-performing loans compared to 2006 reflected the transfer of
loans to two borrowers totaling $20.0 million to non-accrual status, partially
offset by the payoff of one loan totaling $1.9 million, the charge off and
paydown of loans to one borrower totaling $1.0 million, and the paydown and
transfer to substandard of one loan totaling $2.0 million. 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 December 31, 2007, all identified problem loans are
included in the preceding table, or are classified as substandard or doubtful,
with a reserve allocation in the allowance for loan losses (see “Allowance For
Loan Losses”).
The
following summary shows the impact on interest income of non-accrual loans for
the periods indicated:
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Interest
income that would have been recorded
|
||||||||||||||||||||
|
had
the loans been in accordance with their
|
||||||||||||||||||||
|
original
terms
|
$ | 1,447,000 | $ | 479,000 | $ | 165,000 | $ | 391,000 | $ | 253,000 | ||||||||||
|
Interest
income included in net income
|
$ | - | $ | - | $ | - | $ | 170,000 | $ | - | ||||||||||
At
December 31, 2007, the Company had no foreign loans and no loan concentrations
exceeding 10% of total loans except for credits extended to non-residential
building operators and real estate agents and managers in the aggregate amount
of $261.9 million, which represented 31.9% of gross loans receivable at December
31, 2007. Various types of real estate are included in this category, including
industrial, retail shopping centers, office space, residential multi-family and
others. In addition, credits were extended for single family
construction in the amount of $101.6 million, which represented 12.4% of gross
loans receivable at December 31, 2007. 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. Republic had no credit exposure to “highly leveraged
transactions” at December 31, 2007 as defined by the FRB.
Allowance
for Loan Losses
A
detailed analysis of the Company’s allowance for loan losses for the years ended
December 31, 2007, 2006, 2005, 2004 and 2003 is as follows: (Dollars in
thousands)
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Balance
at beginning of period
|
$ | 8,058 | $ | 7,617 | $ | 6,684 | $ | 7,333 | $ | 6,076 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial
|
1,503 | 601 | 29 | 1,036 | 365 | |||||||||||||||
|
Tax
refund loans
|
- | 1,286 | 1,113 | 700 | 1,393 | |||||||||||||||
|
Consumer
|
3 | - | 21 | 186 | 53 | |||||||||||||||
|
Short-term
loans
|
- | - | - | - | 4,159 | |||||||||||||||
|
Total
charge-offs
|
1,506 | 1,887 | 1,163 | 1,922 | 5,970 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
81 | 37 | 287 | 1,383 | 1,066 | |||||||||||||||
|
Tax
refund loans
|
283 | 927 | 617 | 200 | 334 | |||||||||||||||
|
Consumer
|
2 | - | 6 | 4 | - | |||||||||||||||
|
Total
recoveries
|
366 | 964 | 910 | 1,587 | 1,400 | |||||||||||||||
|
Net
charge-offs
|
1,140 | 923 | 253 | 335 | 4,570 | |||||||||||||||
|
Provision
for loan losses
|
1,590 | 1,364 | 1,186 | (314 | ) | 5,827 | ||||||||||||||
|
Balance
at end of period
|
$ | 8,508 | $ | 8,058 | $ | 7,617 | $ | 6,684 | $ | 7,333 | ||||||||||
|
Average
loans outstanding (1)
|
$ | 820,380 | $ | 728,754 | $ | 602,031 | $ | 493,635 | $ | 439,127 | ||||||||||
|
As
a percent of average loans (1):
|
||||||||||||||||||||
|
Net
charge-offs (2)
|
0.14 | % | 0.13 | % | 0.04 | % | 0.07 | % | 1.04 | % | ||||||||||
|
Provision
for loan losses
|
0.19 | % | 0.19 | % | 0.20 | % | (0.06 | )% | 1.33 | % | ||||||||||
|
Allowance
for loan losses
|
1.04 | % | 1.11 | % | 1.27 | % | 1.35 | % | 1.67 | % | ||||||||||
|
Allowance
for loan losses to:
|
||||||||||||||||||||
|
Total
loans, net of unearned income
|
1.04 | % | 1.02 | % | 1.12 | % | 1.22 | % | 1.59 | % | ||||||||||
|
Total
non-performing loans
|
38.19 | % | 116.51 | % | 222.52 | % | 137.70 | % | 90.91 | % | ||||||||||
__________
(1) Includes
non-accruing loans.
(2)
Excluding
tax refund loan net charge-offs, ratios were 0.17%, 0.08% and (0.04)% in 2007,
2006 and 2005, respectively.
In 2007,
the Company charged-off commercial loans to three borrowers totaling $1.4
million. In 2006, the Company charged-off commercial loans to three
borrowers totaling $523,000. There were no charge-offs on tax refund
loans in 2007 as the Company did not purchase tax refund loans in that
year. Charge-offs on tax refund loans amounted to $1.3 million
in 2006. Recoveries on tax refund loans decreased to $283,000 in 2007, from
$927,000 in 2006 as a result of the discontinuation of the tax refund loan
program in 2007. 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 Republic’s regulators or internal
loan review officer, who reviews both the loan portfolio and overall adequacy of
the allowance for loan losses. The Board of Directors also considers specific
loans, pools of similar loans, historical charge-off activity, economic
conditions and other relevant factors in reviewing the adequacy of the loan loss
reserve. Any additions deemed necessary to the allowance for loan losses are
charged to operating expenses.
The
Company has an existing loan review program, which monitors the loan portfolio
on an ongoing basis. Loan review is conducted by a loan review officer who
reports quarterly, directly to the Board of Directors.
Estimating
the appropriate level of the allowance for loan losses at any given date is
difficult, particularly in a continually changing economy. In Management’s
opinion, the allowance for loan losses was appropriate at December 31, 2007.
However, there can be no assurance that, if asset quality deteriorates in future
periods, additions to the allowance for loan losses will not be
required.
Republic’s
management is unable to determine in which loan category future charge-offs and
recoveries may occur. The following schedule sets forth the allocation of the
allowance for loan losses among various categories. The allocation is
accordingly based upon historical experience. The entire allowance for loan
losses is available to absorb loan losses in any loan category:
|
At
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||||||||||||
|
Allocation
of the allowance for loan losses (1) (2):
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
||||||||||||||||||||||||||||||
|
Commercial
|
$ | 5,303 | 68.5 | % | $ | 5,852 | 69.0 | % | $ | 5,074 | 74.8 | % | $ | 5,016 | 75.9 | % | $ | 5,247 | 74.8 | % | ||||||||||||||||||||
|
Construction
|
2,739 | 27.8 | % | 1,714 | 27.6 | % | 1,417 | 20.8 | % | 783 | 19.5 | % | 1,058 | 18.8 | % | |||||||||||||||||||||||||
|
Residential
real estate
|
43 | 0.7 | % | 48 | 0.8 | % | 71 | 1.0 | % | 33 | 1.5 | % | 60 | 3.2 | % | |||||||||||||||||||||||||
|
Consumer
and other
|
174 | 3.0 | % | 156 | 2.6 | % | 231 | 3.4 | % | 115 | 3.1 | % | 96 | 3.2 | % | |||||||||||||||||||||||||
|
Unallocated
|
249 | - | 288 | - | 824 | - | 737 | - | 872 | - | ||||||||||||||||||||||||||||||
|
Total
|
$ | 8,508 | 100 | % | $ | 8,058 | 100 | % | $ | 7,617 | 100 | % | $ | 6,684 | 100 | % | $ | 7,333 | 100 | % | ||||||||||||||||||||
__________
(1) Gross
loans net of unearned income.
(2) Includes
loans held for sale.
The
methodology utilized to estimate the amount of the allowance for loan losses is
as follows: The Company first applies an estimated loss percentage against all
loans which are not specifically reserved. In 2007, excluding tax refund loans,
the Company experienced net charge-offs to average loans of approximately
0.17%. Net recoveries and net charge-offs, respectively, excluding
short-term and tax refund loans, to average loans were 0.08%, (0.04)%, (0.03)%
and (0.15)% in 2006, 2005, 2004 and 2003. In the absence of sustained
charge-off history, management estimates loss percentages based upon the purpose
and/or collateral of various commercial loan categories. While such loss
percentages exceed the percentages suggested by historical experience, the
Company maintained those percentages in 2007. The Company will continue to
evaluate these percentages and may adjust these estimates on the basis of
charge-off history, economic conditions, industry experience or other relevant
factors. The Company also provides specific reserves for impaired
loans to the extent the estimated realizable value of the underlying collateral
is less than the loan balance, when the collateral is the only source of
repayment. Also, the Company estimates and recognizes reserve allocations on
loans classified as “doubtful”, “substandard” or “special mention” based upon
any factor that might impact loss estimates. Those factors include but are not
limited to the impact of economic conditions on the borrower and management’s
potential alternative strategies for loan or collateral
disposition. At December 31, 2005, the unallocated component
increased $87,000 to $824,000 from $737,000 at December 31, 2004. The
unallocated component decreased $536,000 from $824,000 at December 31, 2005 to
$288,000 at December 31, 2006 as the Company integrated the revised Interagency
Policy Statement on the allowance for loan losses issued by the FDIC in December
2006. As of December 31, 2007, the unallocated component decreased
$39,000 to $249,000 from $288,000 at December 31, 2006. Total loans
at December 31, 2007, increased to $821.5 million from $792.1 million at the
prior year-end. The unallocated allowance is established for losses
that have not been identified through the formulaic and other specific
components of the allowance as described above. The unallocated portion is more
subjective and requires a high degree of management judgment and experience.
Management has identified several factors that impact credit losses that are not
considered in either the formula or the specific allowance segments. These
factors consist of macro and micro economic conditions, industry and geographic
loan concentrations, changes in the composition of the loan portfolio, changes
in underwriting processes and trends in problem loan and loss recovery rates.
The impact of the above is considered in light of management’s conclusions as to
the overall adequacy of underlying collateral and other factors.
The
majority of the Company's loan portfolio represents loans made for commercial
purposes, while significant amounts of residential property may serve as
collateral for such loans. The Company attempts to evaluate larger loans
individually, on the basis of its loan review process, which scrutinizes loans
on a selective basis; and other available information. Even if all commercial
purpose
loans
could be reviewed, there is no assurance that information on potential problems
would be available. The Company's portfolios of loans made for purposes of
financing residential mortgages and consumer loans are evaluated in groups. At
December 31, 2007, loans made for commercial and construction, residential
mortgage and consumer purposes, respectively, amounted to $791.3 million, $6.0
million and $24.3 million.
The
recorded investment in loans that are impaired in accordance with SFAS No. 114
totaled $22.3 million, $6.9 million and $3.4 million at December 31, 2007, 2006
and 2005 respectively. The amounts of related valuation allowances were $1.6
million, $1.8 million and $1.6 respectively at those dates. For the
years ended December 31, 2007, 2006 and 2005 the average
recorded
investment in impaired loans was approximately $16.1 million, $5.3 million, and
$3.5 million, respectively. The Company did not recognize any interest income on
impaired loans during 2007, 2006 or 2005. There were no commitments
to extend credit to any borrowers with impaired loans as of the end of the
periods presented herein.
At
December 31, 2007 and 2006, accruing special mention loans totaled approximately
$10.6 million and $2.9 million, respectively. The amounts of related
valuation allowances were $688,000 and $61,000 respectively at those
dates. At December 31, 2007 and 2006, accruing substandard loans
totaled approximately $702,000 and $162,000 respectively. The amounts
of related valuation were $56,000 and $28,000 respectively at those
dates. There were no accruing doubtful loans at December 31, 2007 and
2006. Republic had delinquent loans as follows: (i) 30 to 59 days
past due, at December 31, 2007 and 2006, in the aggregate principal amount of
$3.6 million and $40,000 respectively; and (ii) 60 to 89 days past due, at
December 31, 2007 and 2006 in the aggregate principal amount of $1.6 million and
$2.5 million respectively.
The
following table is an analysis of the change in Other Real Estate Owned for the
years ended December 31, 2007 and 2006.
Dollars
in thousands
|
2007
|
2006
|
|||||||
|
Balance
at January
1,
|
$ | 572 | $ | 137 | ||||
|
Additions,
net
|
3,639 | 572 | ||||||
|
Sales
|
530 | 137 | ||||||
|
Balance
at December
31,
|
$ | 3,681 | $ | 572 | ||||
Deposit
Structure
Of the
total daily average deposits of approximately $745.3 million held by Republic
during the year ended December 31, 2007, approximately $78.6 million, or 10.6%,
represented non-interest bearing demand deposits, compared to approximately
$82.2 million, or 12.1%, of total daily average deposits during 2006. Total
deposits at December 31, 2007, consisted of $99.0 million in
non-interest-bearing demand deposits, $35.2 million in interest-bearing demand
deposits, $223.6 million in savings and money market accounts, $179.0 million in
time deposits under $100,000 and $243.9 million in time deposits greater than
$100,000.
The
following table is a distribution of Republic’s deposits for the periods
indicated:
|
At
December 31,
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
Demand
deposits, non-interest bearing
|
$ | 99,040 | $ | 78,131 | $ | 88,862 | $ | 97,790 | $ | 74,572 | ||||||||||
|
Demand
deposits, interest bearing
|
35,235 | 47,573 | 69,940 | 54,762 | 70,536 | |||||||||||||||
|
Money
market & savings deposits
|
223,645 | 260,246 | 223,129 | 170,980 | 98,196 | |||||||||||||||
|
Time
deposits
|
422,935 | 368,823 | 265,912 | 187,152 | 182,193 | |||||||||||||||
|
Total
deposits
|
$ | 780,855 | $ | 754,773 | $ | 647,843 | $ | 510,684 | $ | 425,497 | ||||||||||
In
general, Republic pays higher interest rates on time deposits compared to other
deposit categories. Republic’s various deposit liabilities may fluctuate from
period-to-period, reflecting customer behavior and strategies to optimize net
interest income.
The
following table is a distribution of the average balances of Republic’s deposits
and the average rates paid thereon, for the years ended December 31, 2007, 2006
and 2005.
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Average
Balance
|
Rate
|
Average
Balance
|
Rate
|
Average
Balance
|
Rate
|
|||||||||||||||||||
|
Demand
deposits, non-interest-bearing
|
$ | 78,641 | - | % | $ | 82,233 | - | % | $ | 88,702 | - | % | ||||||||||||
|
Demand
deposits, interest-bearing
|
38,850 | 1.10 | % | 53,073 | 1.06 | % | 49,118 | 0.68 | % | |||||||||||||||
|
Money
market & savings deposits
|
266,706 | 4.48 | % | 240,189 | 3.79 | % | 238,786 | 2.52 | % | |||||||||||||||
|
Time
deposits
|
361,120 | 5.21 | % | 304,375 | 4.64 | % | 211,972 | 3.20 | % | |||||||||||||||
|
Total
deposits
|
$ | 745,317 | 4.18 | % | $ | 679,870 | 3.50 | % | $ | 588,578 | 2.23 | % | ||||||||||||
The
following is a breakdown by contractual maturity, of the Company’s time
certificates of deposit issued in denominations of $100,000 or more as of
December 31, 2007.
|
Certificates
of Deposit
|
||||
|
(Dollars
in thousands)
|
||||
|
2007
|
||||
|
Maturing
in:
|
||||
|
Three
months or
less
|
$ |
196,422
|
||
|
Over
three months through six months
|
30,149
|
|||
|
Over
six months through twelve months
|
7,748
|
|||
|
Over
twelve
months
|
9,573
|
|||
|
Total
|
$ |
243,892
|
||
The
following is a breakdown, by contractual maturities of the Company’s time
certificates of deposit for the years 2007 through 2012.
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||
| $ | 406,945 | $ | 12,769 | $ | 2,430 | $ | 288 | $ | 448 | $ | 55 | $ | 422,935 | |||||||||||||
Variable
Interest Entities
In
January 2003, the FASB issued FASB Interpretation 46 (FIN 46),
Consolidation of Variable Interest
Entities
. FIN 46 clarifies the application of Accounting Research
Bulletin 51,
Consolidated
Financial Statements
, to certain entities in which voting rights are not
effective in identifying the investor with the controlling financial interest.
An entity is subject to consolidation under FIN 46 if the investors either do
not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support, are unable to direct the
entity’s activities, or are not exposed to the entity’s losses or entitled to
its residual returns ("variable interest entities"). Variable interest entities
within the scope of FIN 46 will be required to be consolidated by their primary
beneficiary. The primary beneficiary of a variable interest entity is determined
to be the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected returns, or both.
Management
previously determined that Republic First Capital Trust I, utilized for the
Company’s $6,000,000 of pooled trust preferred securities issuance, qualifies as
a variable interest entity under FIN 46. Republic First Capital Trust I (“RFCT”)
originally issued mandatorily redeemable preferred stock to investors and loaned
the proceeds to the Company. The securities were subsequently
reissued via a call during 2006 by Republic First Capital Trust
II. Republic First Capital Trust II holds, as its sole asset,
subordinated debentures issued by the Company in 2006. The
Company issued an additional $5,000,000 of pooled trust preferred securities in
June 2007. Republic First Capital Trust III holds, as its sole asset,
subordinated debentures issued by the Company in 2007.
The
Company does not consolidate RFCT. 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 non-consolidation
results
in the investment in the common stock of RFCT to be included in other assets
with a corresponding increase in outstanding debt of $341,000. In addition, the
income received on the Company’s common stock investment is included in other
income. The adoption of FIN 46R did not have a material impact on the financial
position or results of operations. The Federal Reserve has issued final guidance
on the regulatory capital treatment for the trust-preferred securities issued by
RFCT as a result of the adoption of FIN 46(R). The final rule would retain the
current maximum percentage of total capital permitted for trust preferred
securities at 25%, but would enact other changes to the rules governing trust
preferred securities that affect their use as part of the collection of entities
known as “restricted core capital elements”. The rule would take
effect March 31, 2009; however, a five-year transition period starting March 31,
2004 and leading up to that date would allow bank holding companies to continue
to count trust preferred securities as Tier 1 Capital after applying FIN-46(R).
Management has evaluated the effects of the final rule and does not anticipate a
material impact on its capital ratios.
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
7A: Quantitative and Qualitative Disclosure
about Market Risk (Item 305 of Reg S-K)
See
“Management Discussion and Analysis of Results of Operations and Financial
Condition – Interest Rate Risk Management”.
Item
8: Financial Statements and
Supplementary Data
The
consolidated financial statements of the Company begin on Page 53.
Item
9: Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item
9A: Controls and
Procedures
Evaluation of Disclosure Controls
and Procedures.
As of December 31, 2007, the end of the period
covered by this Annual Report on From 10-K, the Company’s management, including
the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon
that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer each concluded that as of December 31, 2007, the end of the period
covered by this Annual Report on Form 10-K, the Company maintained effective
disclosure controls and procedures.
Management’s Report on Internal
Control over Financial Reporting.
The Company’s management is
responsible for establishing and maintaining effective internal control over
financial reporting (as defined in Rule 13a-15(f) under the Securities and
Exchange Act of 1934). The Company’s internal control over financial
reporting is under the general oversight of the Board of Directors acting
through the Audit Committee, which is composed entirely of independent
directors. Beard Miller Company LLP, the Company’s independent
auditors, has direct and unrestricted access to the Audit Committee at all
times, with no members of management present, to discuss its audit and any other
matters that have come to its attention that may affect the Company’s
accounting, financial reporting or internal controls. The Audit
Committee meets periodically with management, internal auditors and Beard Miller
Company LLP to determine that each is fulfilling its responsibilities and to
support actions to identify, measure and control risk and augment internal
control over financial reporting. Internal control over financial
reporting, however, cannot provide absolute assurance of achieving financial
reporting objectives because of its inherent limitations.
Under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, the Company conducted an
evaluation of the effectiveness of its internal control over financial reporting
as of December 31, 2007 based on the framework in “Internal Control- Integrated
Framework” issued by the Committee of
Sponsoring
Organizations of the Treadway Commission. Based upon that evaluation,
management concluded that its internal control over financial reporting was
effective as of December 31, 2007. Management’s report on internal
control over financial reporting is set forth in the Company’s 2007 Annual
Report, and is incorporated herein by reference. The Company’s
internal control over financial reporting has been audited by Beard Miller
Company LLP, an independent, registered public accounting firm, as stated in its
report, which is set forth in the Company’s 2007 Annual Report and is
incorporated herein by reference.
Changes in Internal Control Over
Financial Reporting.
No change in the Company’s internal
control over financial reporting occurred during the fourth quarter of the
fiscal year ended December 31, 2007, that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item
9B: Other
Information
Not
applicable
PART
III
Item
10:
Directors,
Executive Officers and Corporate Governance
The
information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and
Exchange Commission in connection with the Company’s 2008 annual meeting of
shareholders scheduled for April 22, 2008.
Item
11: Executive
Compensation
The
information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and
Exchange Commission in connection with the Company’s 2008 annual meeting of
shareholders scheduled for April 22, 2008.
Item
12: Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Equity
Compensation Plan Information
The following table sets forth
information as of December 31, 2007, with respect to the shares of common stock
that may be issued under the Company’s existing equity compensation
plans.
|
(a)
|
(b)
|
(c)
|
||||
|
Plan
category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|||
|
Equity
compensation plans approved by security holders
|
737,841
|
$
6.39
|
(1)
|
|||
|
Equity
compensation plans not approved by security holders: Incentives to acquire
new employees
|
-
|
-
|
-
|
|||
|
Total
|
737,841
|
$6.39
|
(1)
|
|
(1)
|
The
amended plan includes an “evergreen formula” which provides that the
maximum number of shares which may be issued is 1,540,000 shares plus an
annual increase equal to the number of shares required to restore the
maximum number of shares available for grant to 1,540,000
shares.
|
Item
13: Certain
Relationships and Related Transactions, and Director Independence
Certain
of the directors of the Company and/or their affiliates have loans outstanding
from Republic. All such loans were made in the ordinary course of Republic’s
business; were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
unrelated persons; and, in the opinion of management, do not involve more than
the normal risk of collectibility or present other unfavorable
features. The information required by this Item is incorporated by
reference from the definitive proxy materials of the Company to be filed with
the Securities and Exchange Commission in connection with the Company’s 2008
annual meeting of shareholders scheduled for April 22, 2008.
Item
14.
Principal
Accountant Fees and Services
The
information required by this Item is incorporated by reference from the
definitive proxy materials of the Company to be filed with the Securities and
Exchange Commission in connection with the Company’s 2008 annual meeting of
shareholders scheduled for April 22, 2008.
|
|
PART
IV
Item
15:
Exhibits
and Financial Statement Schedules
A.
Financial
Statements
|
(1)
|
Management’s
Report on Internal Control Over Financial
Reporting
|
|
(2)
|
Reports
of Independent Registered Public Accounting
Firms
|
|
(3)
|
Consolidated
Balance Sheets as of December 31, 2007 and
2006
|
|
(4)
|
Consolidated
Statements of Income for the years ended December 31, 2007, 2006 and
2005
|
|
(5)
|
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December
31, 2007, 2006 and 2005
|
|
(6)
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2006 and
2005
|
|
(7)
|
Notes
to Consolidated Financial
Statements
|
B. Exhibits
The
following Exhibits are filed as part of this report. (Exhibit numbers correspond
to the exhibits required by Item 601 of Regulation S-K for an annual report on
Form 10-K)
All other
schedules and exhibits are omitted because they are not applicable or because
the required information is set out in the financial statements or the notes
thereto.
|
Exhibit
Number
|
Description
|
Manner of
Filing
|
|
3.1
|
Amended
and Restated Articles of Incorporation of Republic First Bancorp,
Inc.
|
Incorporated
by reference to Form 10-K Filed March 30, 2005
|
|
3.2
|
Amended
and Restated By-Laws of Republic First Bancorp, Inc.
|
Incorporated
by reference to Form 10-K Filed March 30, 2005
|
|
10.1
|
Employment
Contract Between the Company and Harry D. Madonna*
|
Incorporated
by reference to Form 8-K Filed March 2, 2007
|
|
10.2
|
Amended
and Restated Stock Option Plan and Restricted Stock Plan*
|
|
|
10.3
|
Deferred
Compensation Plan*
|
Incorporated
by reference to Form 10-Q Filed November 15, 2004
|
|
10.4
|
Human
Resources and Payroll Services Agreement between Republic First Bank and
BSC Services Corp. dated January 1, 2005
|
Incorporated
by reference to Form 10-K Filed March 30, 2005
|
|
10.5
|
Operation
and Data Processing Services Agreement between Republic First
Bank and BSC Services Corp. dated January 1, 2005
|
Incorporated
by reference to Form 10-K Filed March 30, 2005
|
|
10.6
|
Compliance
Services Agreement between Republic First Bank and BSC Services Corp.
dated January 1, 2005
|
Incorporated
by reference to Form 10-K Filed March 30, 2005
|
|
10.7
|
Financial
Accounting and Reporting Services Agreement between Republic First Bank
and BSC Services Corp. dated January 1, 2005
|
Incorporated
by reference to Form 10-K Filed March 30, 2005
|
|
10.8
|
Employment
Contract Between Republic and Louis J. DeCesare, Jr.*
|
Incorporated
by reference to Form 8-K Filed March 2, 2007
|
|
10.9
|
Change
in Control Policy for Certain Executive Officers*
|
Incorporated
by reference to Form 10-K filed March 9, 2007
|
|
21.1
|
Subsidiaries
of the Company
|
|
|
23.1
|
Consent
of Beard Miller Company LLP
|
|
|
31.1
|
Certification
of Chairman and Chief Executive Officer of Republic First Bancorp, Inc.
pursuant to Commission Rule 13a-14(a) and Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
Certification
of Vice President and Chief Financial Officer of Republic First Bancorp,
Inc. pursuant to Commission Rule 13a-14(a) and Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
Certification
under Section 906 of the Sarbanes Oxley Act of Harry D.
Madonna.
|
|
|
32.2
|
Certification
under Section 906 of the Sarbanes Oxley Act of Paul
Frenkiel.
|
|
* Constitutes
a compensation agreement or arrangement.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania.
|
REPUBLIC
FIRST BANCORP, INC. [registrant]
|
|||
|
Date: March
5, 2008
|
By:
|
/s/
Harry D. Madonna
|
|
|
Harry
D. Madonna
|
|||
|
Chairman,
President and
|
|||
|
Chief
Executive Officer
|
|||
|
Date:
March 5, 2008
|
By:
|
/s/
Paul Frenkiel
|
|
|
Paul
Frenkiel,
|
|||
|
Executive
Vice President and
|
|||
|
Chief
Financial Officer
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
|
Date: March
5, 2008
|
/s/
Harris Wildstein, Esq.
|
||
|
Harris
Wildstein, Esq., Director
|
|||
|
/s/
Neal I. Rodin
|
|||
|
Neal
I. Rodin, Director
|
|||
|
/s/
Harry D. Madonna
|
|||
|
Harry
D. Madonna, Director and Chairman of the Board
|
|||
|
/s/
Louis J. DeCesare, Jr.
|
|||
|
Louis
J. DeCesare, Jr., Director
|
|||
|
/s/
William Batoff
|
|||
|
William
Batoff, Director
|
|||
|
/s/
Robert Coleman
|
|||
|
Robert
Coleman, Director
|
|||
|
/s/
Barry L. Spevak
|
|||
|
Barry
L. Spevak, Director
|
|||
|
/s/
Lyle W. Hall
|
|||
|
Lyle
W. Hall, Director
|
INDEX
TO CONSOLIDATED FINANCIAL
STATEMENTS
OF
REPUBLIC
FIRST BANCORP, INC.
|
Page
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
|
|
Reports
of Independent Registered Public Accounting Firms
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and 2006
|
|
|
Consolidated
Statements of Income
|
|
|
for
the years ended December 31, 2007, 2006 and 2005
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity
|
|
|
for
the years ended December 31, 2007, 2006 and 2005
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
for
the years ended December 31, 2007, 2006 and 2005
|
|
|
Notes
to Consolidated Financial Statements
|
|
Management's
Report on Internal Control Over Financial Reporting
Management
of Republic First Bancorp, Inc. (the “Company”) is responsible for
establishing and maintaining effective internal control over financial
reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.
Under the
supervision and with the participation of management, including the principal
executive officer and principal financial officer, the Company conducted an
evaluation of the effectiveness of internal control over financial reporting
based on the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the framework in Internal
Control – Integrated Framework, management of the Company has concluded the
Company maintained effective internal control over financial reporting, as such
term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of
December 31, 2007.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal
control over financial reporting can also be circumvented by collusion or
improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
Management
is also responsible for the preparation and fair presentation of the
consolidated financial statements and other financial information contained in
this report. The accompanying consolidated financial statements were
prepared in conformity with U.S. generally accepted accounting principles and
include, as necessary, best estimates and judgments by management.
Beard
Miller Company LLP, an independent registered public accounting firm, has
audited the Company’s consolidated financial statements as of and for the year
ended December 31, 2007, and the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2007, as stated in their reports,
which are included herein.
|
Date: March
5, 2008
|
By:
|
/s/
Harry D. Madonna
|
|
Harry
D. Madonna
|
||
|
Chairman,
President and
|
||
|
Chief
Executive Officer
|
||
|
Date:
March 5, 2008
|
By:
|
/s/
Paul Frenkiel
|
|
Paul
Frenkiel,
|
||
|
Executive
Vice President and
|
||
|
Chief
Financial Officer
|
Report
of Independent Registered Public Accounting
Firm
To the
Board of Directors and Shareholders
Republic
First Bancorp, Inc.
We have
audited Republic First Bancorp, Inc.’s (the “Company”) internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Republic First Bancorp, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Republic First Bancorp, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2007,
based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance and the related
consolidated statements of income, changes in shareholders’ equity and cash
flows of Republic First Bancorp, Inc. and our report dated March 10, 2008
expressed an unqualified opinion.
Beard
Miller Company LLP
Malvern,
Pennsylvania
March 10,
2008
Report
of Independent Registered Public Accounting
Firm
To the
Board of Directors and Shareholders
Republic
First Bancorp, Inc.
We have
audited the accompanying consolidated balance sheets of Republic First Bancorp,
Inc. and subsidiary as of December 31, 2007 and 2006, and the related
consolidated related statements of income, changes in shareholders’ equity, and
cash flows for each of the years in the three-year period ended December 31,
2007. Republic First Bancorp, Inc.’s management is responsible for these
financial statements. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Republic First Bancorp, Inc.
and subsidiary as of December 31, 2007 and 2006, and the results of their
operations and its cash flows for each of the years in the three-year period
ended December 31, 2007 in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 2 to the consolidated financial statements, Republic First
Bancorp, Inc. changed its method of Accounting for share-based compensation in
2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Republic First Bancorp’s internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 10, 2008 expressed an
unqualified opinion.
|
Beard
Miller Company LLP
|
|
|
Malvern,
Pennsylvania
|
|
|
March
10, 2008
|
|
REPUBLIC
FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
December
31, 2007 and 2006
(Dollars
in thousands, except share data)
|
2007
|
2006
|
|||||||
|
ASSETS:
|
||||||||
|
Cash
and due from
banks
|
$ | 10,996 | $ | 19,454 | ||||
|
Interest
bearing deposits with
banks
|
320 | 426 | ||||||
|
Federal
funds
sold
|
61,909 | 63,247 | ||||||
|
Total cash and cash
equivalents
|
73,225 | 83,127 | ||||||
|
Investment
securities available for sale, at fair
value
|
83,659 | 102,039 | ||||||
|
Investment
securities held to maturity, at amortized cost
|
||||||||
|
(fair value of $285 and
$338 respectively)
|
282 | 333 | ||||||
|
Restricted
stock, at
cost
|
6,358 | 6,804 | ||||||
|
Loans
receivable, (net of allowance for loan losses of $8,508 and
$8,058
|
||||||||
|
respectively)
|
813,041 | 784,002 | ||||||
|
Premises
and equipment,
net
|
11,288 | 5,648 | ||||||
|
Other
real estate owned,
net
|
3,681 | 572 | ||||||
|
Accrued
interest
receivable
|
5,058 | 5,370 | ||||||
|
Bank
owned life
insurance
|
11,718 | 11,294 | ||||||
|
Other
assets
|
7,998 | 9,635 | ||||||
|
Total
Assets
|
$ | 1,016,308 | $ | 1,008,824 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY:
|
||||||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Demand
—
non-interest-bearing
|
$ | 99,040 | $ | 78,131 | ||||
|
Demand
—
interest-bearing
|
35,235 | 47,573 | ||||||
|
Money
market and
savings
|
223,645 | 260,246 | ||||||
|
Time
less than
$100,000
|
179,043 | 138,566 | ||||||
|
Time
over
$100,000
|
243,892 | 230,257 | ||||||
|
Total
Deposits
|
780,855 | 754,773 | ||||||
|
Short-term
borrowings
|
133,433 | 159,723 | ||||||
|
Accrued
interest
payable
|
3,719 | 5,224 | ||||||
|
Other
liabilities
|
6,493 | 8,184 | ||||||
|
Subordinated
debt
|
11,341 | 6,186 | ||||||
|
Total
Liabilities
|
935,841 | 934,090 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Shareholders’
Equity:
|
||||||||
|
Preferred
stock, par value $0.01 per share; 10,000,000 shares
authorized;
|
||||||||
|
no
shares issued as of December 31, 2007 and 2006
|
- | - | ||||||
|
Common
stock, par value $0.01 per share; 20,000,000 shares
authorized;
|
||||||||
|
shares issued 10,737,211 as of
December 31, 2007 and
|
||||||||
|
9,746,312 as of December 31,
2006
|
107 | 97 | ||||||
|
Additional
paid in
capital
|
75,321 | 63,342 | ||||||
|
Retained
earnings
|
8,927 | 13,511 | ||||||
|
Treasury
stock at cost (416,303 shares and 250,555
respectively)
|
(2,993 | ) | (1,688 | ) | ||||
|
Stock
held by deferred compensation
plan
|
(1,165 | ) | (810 | ) | ||||
|
Accumulated
other comprehensive
income
|
270 | 282 | ||||||
|
Total Shareholders’
Equity
|
80,467 | 74,734 | ||||||
|
Total Liabilities and
Shareholders’
Equity
|
$ | 1,016,308 | $ | 1,008,824 | ||||
(See
notes to consolidated financial statements)
REPUBLIC
FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF INCOME
For
the years ended December 31, 2007, 2006 and 2005
(Dollars
in thousands, except per share data)
|
2007
|
2006
|
2005
|
||||||||||
|
Interest
income:
|
||||||||||||
|
Interest
and fees on loans
|
$ | 62,184 | $ | 58,254 | $ | 42,331 | ||||||
|
Interest
and dividends on taxable investment securities
|
4,963 | 3,049 | 1,972 | |||||||||
|
Interest
and dividends on tax- exempt investment securities
|
513 | 151 | - | |||||||||
|
Interest
on federal funds sold and other interest-earning
assets
|
686 | 1,291 | 1,078 | |||||||||
| 68,346 | 62,745 | 45,381 | ||||||||||
|
Interest
expense:
|
||||||||||||
|
Demand – interest
bearing
|
428 | 565 | 332 | |||||||||
|
Money market and
savings
|
11,936 | 9,109 | 6,026 | |||||||||
|
Time less than
$100,000
|
7,200 | 6,031 | 3,181 | |||||||||
|
Time over
$100,000
|
11,622 | 8,078 | 3,608 | |||||||||
|
Other
borrowings
|
7,121 | 4,896 | 3,076 | |||||||||
| 38,307 | 28,679 | 16,223 | ||||||||||
|
Net
interest income
|
30,039 | 34,066 | 29,158 | |||||||||
|
Provision
for loan losses
|
1,590 | 1,364 | 1,186 | |||||||||
|
Net
interest income after provision for loan losses
|
28,449 | 32,702 | 27,972 | |||||||||
|
Non-interest
income:
|
||||||||||||
|
Loan advisory and servicing
fees
|
1,177 | 1,234 | 573 | |||||||||
|
Service fees on deposit
accounts
|
1,187 | 1,479 | 2,000 | |||||||||
|
Gains on sales and calls of
investment securities
|
- | - | 97 | |||||||||
|
Gain on sale of other real
estate owned
|
185 | 130 | - | |||||||||
|
Lawsuit damage
award
|
- | - | 251 | |||||||||
|
Bank owned life insurance
income
|
424 | 368 | 331 | |||||||||
|
Other
income
|
100 | 429 | 362 | |||||||||
| 3,073 | 3,640 | 3,614 | ||||||||||
|
Non-interest
expenses:
|
||||||||||||
|
Salaries and employee
benefits
|
10,612 | 11,629 | 9,569 | |||||||||
|
Occupancy
|
2,420 | 1,887 | 1,566 | |||||||||
|
Depreciation and
amortization
|
1,360 | 1,008 | 991 | |||||||||
|
Legal
|
750 | 654 | 673 | |||||||||
|
Other real
estate
|
23 | 10 | 44 | |||||||||
|
Advertising
|
503 | 494 | 192 | |||||||||
|
Data
processing
|
693 | 496 | 504 | |||||||||
|
Insurance
|
398 | 353 | 296 | |||||||||
|
Professional
fees
|
542 | 562 | 769 | |||||||||
|
Taxes,
other
|
820 | 741 | 688 | |||||||||
|
Other operating
expenses
|
3,243 | 3,183 | 2,915 | |||||||||
| 21,364 | 21,017 | 18,207 | ||||||||||
|
Income
before income taxes
|
10,158 | 15,325 | 13,379 | |||||||||
|
Provision
for income taxes
|
3,273 | 5,207 | 4,486 | |||||||||
|
Net
Income
|
$ | 6,885 | $ | 10,118 | $ | 8,893 | ||||||
|
Net
income per share: (1)
|
||||||||||||
|
Basic
|
$ | 0.66 | $ | 0.97 | $ | 0.88 | ||||||
|
Diluted
|
$ | 0.65 | $ | 0.95 | $ | 0.84 | ||||||
(1) Prior year amounts have been
restated for a 10% stock dividend paid on April 17, 2007
(See
notes to consolidated financial statements)
REPUBLIC
FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
For the years ended December 31, 2007,
2006 and 2005
(Dollars in thousands, except share
data)
|
Comprehensive
Income
|
Common
Stock
|
Additional
Paid
in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Stock
Held by Deferred Compensation Plan
|
Accumulated
Other
Comprehensive
Income
|
Total
Shareholders’
Equity
|
|||||||||||||||||||||||||
|
Balance
January 1, 2005
|
$ | 74 | $ | 42,494 | $ | 23,867 | $ | (1,541 | ) | $ | - | $ | 330 | $ | 65,224 | |||||||||||||||||
|
Total
other comprehensive loss, net of reclassification adjustments and taxes of
($119):
|
(227 | ) | - | - | - | (227 | ) | (227 | ) | |||||||||||||||||||||||
|
Net
income for the year
|
8,893 | - | - | 8,893 | - | - | 8,893 | |||||||||||||||||||||||||
|
Total
comprehensive income
|
$ | 8,666 | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Stock
dividend (924,022 shares)
|
10 | 10,968 | (10,978 | ) | ||||||||||||||||||||||||||||
|
First
Bank of Delaware spin-off
|
- | (5,158 | ) | (6,216 | ) | (22 | ) | (11,396 | ) | |||||||||||||||||||||||
|
Options
exercised (476,859)
|
4 | 1,271 | - | - | - | 1,275 | ||||||||||||||||||||||||||
|
Purchase
of treasury shares
(11,961
shares)
|
4 | (147 | ) | (143 | ) | |||||||||||||||||||||||||||
|
Tax
benefit of stock option
exercises
|
624 | 624 | ||||||||||||||||||||||||||||||
|
Stock
purchases for deferred
compensation
plan (44,893 shares)
|
(573 | ) | (573 | ) | ||||||||||||||||||||||||||||
|
Balance
December 31, 2005
|
88 | 50,203 | 15,566 | (1,688 | ) | (573 | ) | 81 | 63,677 | |||||||||||||||||||||||
|
Total
other comprehensive income, net of taxes of
$103:
|
201 | - | - | - | - | 201 | 201 | |||||||||||||||||||||||||
|
Net
income for the year
|
10,118 | - | - | 10,118 | - | - | 10,118 | |||||||||||||||||||||||||
|
Total
comprehensive income
|
$ | 10,319 | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Stock
based compensation
|
15 | 15 | ||||||||||||||||||||||||||||||
|
Stock
dividend (885,279 shares)
|
8 | 12,165 | (12,173 | ) | - | - | - | |||||||||||||||||||||||||
|
Options
exercised (117,248 shares)
|
1 | 699 | - | - | - | 700 | ||||||||||||||||||||||||||
|
Tax
benefit of stock option
exercises
|
260 | 260 | ||||||||||||||||||||||||||||||
|
Stock
purchases for deferred
compensation
plan (21,062 shares)
|
(237 | ) | (237 | ) | ||||||||||||||||||||||||||||
|
Balance
December 31, 2006
|
97 | 63,342 | 13,511 | (1,688 | ) | (810 | ) | 282 | 74,734 | |||||||||||||||||||||||
|
Total
other comprehensive loss, net of taxesof ($6):
|
(12 | ) | - | - | - | - | (12 | ) | (12 | ) | ||||||||||||||||||||||
|
Net
income for the year
|
6,885 | - | - | 6,885 | - | - | 6,885 | |||||||||||||||||||||||||
|
Total
comprehensive income
|
$ | 6,873 | - | - | - | - | - | - | ||||||||||||||||||||||||
|
Stock
based compensation
|
125 | 125 | ||||||||||||||||||||||||||||||
|
Stock
dividend (974,441 shares)
|
10 | 11,459 | (11,469 | ) | - | - | - | |||||||||||||||||||||||||
|
Options
exercised (16,558 shares)
|
- | 47 | - | - | - | 47 | ||||||||||||||||||||||||||
|
Purchase
of treasury shares (140,700 shares)
|
(1,305 | ) | (1,305 | ) | ||||||||||||||||||||||||||||
|
Tax
benefit of stock option
exercises
|
348 | 348 | ||||||||||||||||||||||||||||||
|
Stock
purchases for deferred
compensation
plan (38,000 shares)
|
(355 | ) | (355 | ) | ||||||||||||||||||||||||||||
|
Balance
December 31, 2007
|
$ | 107 | $ | 75,321 | $ | 8,927 | $ | (2,993 | ) | $ | (1,165 | ) | $ | 270 | $ | 80,467 | ||||||||||||||||
(See
notes to consolidated financial statements)
REPUBLIC
FIRST BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 6,885 | $ | 10,118 | $ | 8,893 | ||||||
|
Adjustments to reconcile net
income to net cash
|
||||||||||||
|
provided by operating
activities:
|
||||||||||||
|
Provision for loan
losses
|
1,590 | 1,364 | 1,186 | |||||||||
|
Gain on sale of other real
estate owned
|
(185 | ) | (130 | ) | - | |||||||
|
Depreciation and
amortization
|
1,360 | 1,008 | 991 | |||||||||
|
Deferred
income taxes
|
(156 | ) | (222 | ) | (322 | ) | ||||||
|
Tax benefit of stock option
exercises
|
- | - | 624 | |||||||||
|
Stock
purchases for deferred compensation plan
|
(355 | ) | (237 | ) | (573 | ) | ||||||
|
Stock
based compensation
|
125 | 15 | - | |||||||||
|
Gains
on sales and calls of investment securities
|
- | - | (97 | ) | ||||||||
|
Amortization of (discounts)
premiums on investment securities
|
(194 | ) | 93 | 189 | ||||||||
|
Increase in value of bank owned
life insurance
|
(424 | ) | (368 | ) | (331 | ) | ||||||
|
(Increase) decrease in accrued
interest receivable and other assets
|
2,111 | (193 | ) | 4,388 | ||||||||
|
Increase (decrease) in accrued
expenses and other liabilities
|
(3,196 | ) | 4,126 | 1,266 | ||||||||
|
Net cash provided by operating
activities
|
7,561 | 15,574 | 16,214 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase of investment
securities:
|
||||||||||||
|
Available for
sale
|
(9,639 | ) | (67,118 | ) | (18,665 | ) | ||||||
|
Proceeds from maturities and
calls of securities:
|
||||||||||||
|
Available for
sale
|
28,195 | 2,470 | 20,671 | |||||||||
|
Held to
maturity
|
51 | 83 | 183 | |||||||||
|
Principal collected on
investment securities:
|
||||||||||||
|
Available for
sale
|
- | - | 4,126 | |||||||||
|
Held to
maturity
|
- | - | 49 | |||||||||
|
Purchase
of FHLB stock
|
- | (342 | ) | (1,684 | ) | |||||||
|
Proceeds
from sale of FHLB stock
|
446 | - | - | |||||||||
|
Net increase in
loans
|
(34,268 | ) | (115,469 | ) | (128,650 | ) | ||||||
|
Net proceeds from sale of other
real estate owned
|
715 | 267 | - | |||||||||
|
Decrease in other
interest-earning restricted cash
|
- | - | 2,923 | |||||||||
|
Premises and equipment
expenditures
|
(7,000 | ) | (3,058 | ) | (964 | ) | ||||||
|
Net cash used in investing
activities
|
(21,500 | ) | (183,167 | ) | (122,011 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net proceeds from exercise of
stock options
|
47 | 700 | 1,275 | |||||||||
|
Purchase
of treasury shares
|
(1,305 | ) | - | (143 | ) | |||||||
|
Tax benefit of stock option
exercises
|
348 | 260 | - | |||||||||
|
Net increase (decrease) in
demand, money market and savings deposits
|
(28,030 | ) | 4,019 | 58,399 | ||||||||
|
Net increase in time
deposits
|
54,112 | 102,911 | 78,760 | |||||||||
|
Net increase (decrease) in
short term borrowings
|
(26,290 | ) | 35,856 | 62,777 | ||||||||
|
Call of subordinated
debt
|
- | (6,186 | ) | - | ||||||||
|
Re-issuance of subordinated
debt
|
- | 6,186 | - | |||||||||
|
Issuance
of subordinated debt
|
5,155 | - | - | |||||||||
|
Repayment of FHLB
advances
|
- | - | (25,000 | ) | ||||||||
|
Net cash provided by financing
activities
|
4,037 | 143,746 | 176,068 | |||||||||
|
(Decrease)
increase in cash and cash equivalents
|
(9,902 | ) | (23,847 | ) | 70,271 | |||||||
|
Cash
and cash equivalents, beginning of year
|
83,127 | 106,974 | 36,703 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 73,225 | $ | 83,127 | $ | 106,974 | ||||||
|
Supplemental
disclosures:
|
||||||||||||
|
Interest paid
|
$ | 39,812 | $ | 25,268 | $ | 16,535 | ||||||
|
Income taxes
paid
|
3,425 | 4,700 | 3,885 | |||||||||
|
Non-monetary transfers from
loans to other real estate owned
|
3,639 | 572 | - | |||||||||
(See
notes to consolidated financial statements)
REPUBLIC
FIRST BANCORP, INC. AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of Operations:
Republic
First Bancorp, Inc. (“the Company”) is a one-bank holding company organized and
incorporated under the laws of the Commonwealth of Pennsylvania. It is comprised
of one wholly owned subsidiary, Republic First Bank (“Republic”), a Pennsylvania
state chartered bank. Republic offers a variety of banking services to
individuals and businesses throughout the Greater Philadelphia and South Jersey
area through its offices and branches in Philadelphia, Montgomery, Delaware and
Camden Counties. The Company also has two unconsolidated subsidiaries
for two trust preferred issuances.
Republic
shares data processing, accounting, human resources and compliance services
through BSC Services Corp. (“BSC”), which is a subsidiary of an unaffiliated
company. BSC allocates its costs, on the basis of usage to Republic
which classifies such costs to the appropriate non-interest expense
categories.
The
Company and Republic encounter vigorous competition for market share in the
geographic areas they serve from bank holding companies, other community banks,
thrift institutions and other non-bank financial organizations, such as mutual
fund companies, insurance companies and brokerage companies.
The
Company and Republic are subject to regulations of certain state and federal
agencies. These regulatory agencies periodically examine the Company and its
subsidiary for adherence to laws and regulations. As a consequence, the cost of
doing business may be affected.
2. Summary
of Significant Accounting Policies:
Basis
of Presentation:
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, Republic. 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 primarily on the earnings of Republic. Earnings
are dependent primarily upon the level of net interest income, which is the
difference between interest earned on its interest-earning assets, such as loans
and investments, and the interest paid on its interest-bearing liabilities, such
as deposits and borrowings. Accordingly, the results of
operations are subject to risks and uncertainties surrounding their
exposure to change in the interest rate environment.
Prepayments
on residential real estate mortgage and other fixed rate loans and mortgage
backed securities vary significantly and may cause significant fluctuations in
interest margins.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
significant estimates and assumptions that 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, assessment of other-than-temporary
impairment, 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 Republic’s control, it is at
least reasonably possible that the estimates of the allowance for loan losses
and the carrying values of other real estate owned could differ materially in
the near term.
The
Company and Republic 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.
Cash
and Cash Equivalents:
For
purposes of the statements of cash flows, the Company considers all cash and due
from banks, interest-bearing deposits with an original maturity of ninety days
or less and federal funds sold, maturing in ninety days or less, to be cash and
cash equivalents.
Restrictions
on Cash and Due From Banks:
Republic
is required to maintain certain average reserve balances as established by the
Federal Reserve Board. The amounts of those balances for the reserve computation
periods that include December 31, 2007 and 2006 were approximately $700,000 and
$400,000, respectively. These requirements were satisfied through the
restriction of vault cash and a balance at the Federal Reserve Bank of
Philadelphia.
Investment
Securities:
Debt and
equity investment securities are classified and accounted for as
follows:
Held to Maturity
– Debt
securities that management has the positive intent and ability to hold until
maturity are classified as held to maturity and are carried at their remaining
unpaid principal balances, net of unamortized premiums or unaccreted
discounts. Premiums are amortized and discounts are accreted using
the interest method over the estimated remaining term of the underlying
security.
Available for Sale –
Debt and
equity securities that will be held for indefinite periods of time, including
securities that may be sold in response to changes in market interest or
prepayment rates, needs for liquidity, and changes in the availability of and in
the yield of alternative investments, are classified as available for
sale. These assets are carried at fair value. Fair value
is determined using published quotes as of the close of
business. Unrealized gains and losses are excluded from earnings and
are reported net of tax as a separate component of stockholders’ equity until
realized. Realized gains and losses on the sale of investment and
mortgage-backed securities are reported in the consolidated statements of income
and determined using the adjusted cost of the specific security
sold.
Other-Than-Temporary
Impairment of Securities:
Securities
are evaluated on at least a quarterly basis, and more frequently when market
conditions warrant such an evaluation, to determine whether a decline in their
value is other-than-temporary. To determine whether a loss in value is
other-than-temporary, management utilizes criteria such as the reasons
underlying the decline, the magnitude and duration of the decline and the intent
and ability of the Company to retain its investment in the security for a period
of time sufficient to allow for an anticipated recovery in the fair value. The
term “other-than-temporary” is not intended to indicate that the decline is
permanent, but indicates that the prospects for a near-term recovery of value is
not necessarily favorable, or that there is a lack of evidence to support a
realizable value equal to or greater than the carrying value of the investment.
Once a decline in value is determined to be other-than-temporary, the value of
the security is reduced and a corresponding charge to earnings is recognized. No
impairment charge was recognized during the years ended December 31, 2007, 2006
and 2005.
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value.
Loans
and Allowance for Loan Losses:
Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or payoff are stated at the amount of unpaid principal, reduced
by unearned income and an allowance for loan losses. Interest on loans is
calculated based upon the principal amounts outstanding. The Company defers and
amortizes certain origination and commitment fees,
and
certain direct loan origination costs over the contractual life of the related
loan. This results in an adjustment of the related loans yield.
The
Company accounts for amortization of premiums and accretion of discounts related
to loans purchased and investment securities based upon the effective interest
method. If a loan prepays in full before the contractual maturity date, any
unamortized premiums, discounts or fees are recognized immediately as an
adjustment to interest income.
Loans are
generally classified as non-accrual if they are past due as to maturity or
payment of principal or interest for a period of more than 90 days, unless such
loans are well-secured and in the process of collection. Loans that are on a
current payment status or past due less than 90 days may also be classified as
non-accrual if repayment in full of principal and/or interest is in doubt. Loans
may be returned to accrual status when all principal and interest amounts
contractually due are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance of
interest and principal by the borrower, in accordance with the contractual
terms. Generally, in the case of non-accrual loans, cash received is applied to
reduce the principal outstanding.
The
allowance for loan losses is established through a provision for loan losses
charged to operations. Loans are charged against the allowance when management
believes that the collectibility of the loan principal is unlikely. Recoveries
on loans previously charged off are credited to the allowance.
The
allowance is an amount that represents management’s best estimate of known and
inherent loan losses. Management’s evaluations of the allowance for loan losses
consider such factors as an examination of the portfolio, past loss experience,
the results of the most recent regulatory examination, current economic
conditions and other relevant factors.
The
allowance consists of specific, general and unallocated
components. The specific component relates to loans that are
classified as either doubtful, substandard or special mention. For
such loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price)
of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable losses. The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.
A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining
impairment, include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans
that experience insignificant payment delays and payment shortfalls generally
are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis,
taking into consideration of all the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to
the principal and interest owed. Impairment is measured on a loan by
loan basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify
individual consumer and residential loans for impairment disclosures, unless
such loans are the subject of a restructuring agreement.
The
Company accounts for the transfers and servicing financial assets in accordance
with SFAS No. 140
, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
. SFAS No. 140 revises the standards for accounting for the
securitizations and other transfers of financial assets and
collateral.
Transfers
of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
The
Company accounts for guarantees in accordance with FIN 45
Guarantor’s Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others
. FIN 45 requires a guarantor entity, at
the inception
of a
guarantee covered by the measurement provisions of the interpretation, to record
a liability for the fair value of the obligation undertaken in issuing the
guarantee. The Company has financial and performance letters of
credit. Financial letters of credit require the Company to make
payment if the customer’s financial condition deteriorates, as defined in the
agreements. Performance letters of credit require the Company
to make payments if the customer fails to perform certain non-financial
contractual obligation. The maximum potential undiscounted amount of
future payments of these letters of credit as of December 31, 2007 is $4.6
million and they expire as follows: $4.5 million in 2008, $54,000 in 2009,
$6,000 in 2011 and $103,000 in 2012. Amounts due under these letters
of credit would be reduced by any proceeds that the Company would be able to
obtain in liquidating the collateral for the loans, which varies depending on
the customer.
The
Company accounts for loan commitments in accordance with SFAS No. 149,
Amendment of Statement 133 on
Derivative Instruments and Hedging Activities
. SFAS No. 149
clarifies and amends SFAS No. 133 for implementation issues raised by
constituents or includes the conclusions reached by the FASB on certain FASB
Staff Implementation Issues. SFAS No. 149 also amends SFAS No. 133 to
require a lender to account for loan commitments related to mortgage loans that
will be held for sale as derivatives. The Company periodically enters
into commitments with its customers, which it intends to sell in the
future.
Premises
and Equipment:
Premises
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation of furniture and equipment is calculated over the estimated useful
life of the asset using the straight-line method. Leasehold improvements are
amortized over the shorter of their estimated useful lives or terms of their
respective leases, using the straight-line method. Repairs and maintenance are
charged to current operations as incurred, and renewals and betterments are
capitalized.
Other
Real Estate Owned:
Other
real estate owned consists of assets acquired through, or in lieu of, loan
foreclosure. They are held for sale and are initially recorded at
fair value at the date of foreclosure, establishing a new cost
basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying
amount or fair value, less the cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in net
expenses from foreclosed assets. At December 31, 2007, the Company
had assets classified as other real estate owned with a value of $3.7 million
comprised of a tract development project for single family homes with a value of
$3.5 million, a commercial building with a value of $109,000 and a parcel of
land with a value of $42,000. At December 31, 2006, the Company had
parcels of land classified as other real estate owned with a value of $572,000,
of which assets valued at $530,000 were sold in 2007.
Bank
Owned Life Insurance:
The
Company invests in bank owned life insurance (“BOLI”) as a source of funding to
purchase life insurance on certain employees. The Company is the owner and
beneficiary of the policies. This life insurance investment is
carried at the cash surrender value of the underlying
policies. Income from the increase in cash surrender value of the
policies is included in other income on the income statement. At
December 31, 2007 and 2006, the Company owned $11.7 million and $11.3 million,
respectively, in BOLI. In 2007, 2006, and 2005 the Company recognized
$424,000, $368,000, and $331,000, respectively in related income.
Advertising
Costs:
It is the
Company’s policy to expense advertising costs in the period in which they are
incurred.
Income
Taxes:
The
Company accounts for income taxes under the liability method of accounting.
Deferred tax assets and liabilities are established for the temporary
differences between the financial reporting basis and the tax basis of the
Company’s assets and liabilities at the tax rates expected to be in effect when
the temporary differences are realized or settled. In addition, a deferred tax
asset is recorded to reflect the future benefit of net operating loss
carryforwards. The deferred tax assets may be reduced by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax
assets will not be realized.
Shareholders’
Equity:
On March
19, 2007, the Company’s Board of Directors declared a 10% stock dividend to
shareholders of record on April 5, 2007, which was paid on April 17,
2007. On April 24, 2006, the Company’s Board of Directors declared a
10% stock dividend to shareholders of record on May 5, 2006, which was paid on
May 17, 2006. On May 17, 2005, the Company’s Board of Directors
declared a 12% stock dividend to shareholders of record on May 23, 2005, which
was paid on June 7, 2005. All weighted average share and per share
information has been retroactively restated.
On June
13, 2007, the Company implemented a stock repurchase program. The
repurchase program will be in effect from time to time for carrying periods from
and after June 14, 2007, through and including June 30, 2008. The
aggregate amount of the Company stock to be repurchased will be determined by
market conditions but will not exceed 5%, or approximately 500,000 shares, of
the Company’s issued and outstanding stock. The Company is executing
the program through open market purchases. Stock repurchased under
the repurchase program will be retired. Through December 31, 2007,
140,700 shares were repurchased.
Earnings
Per Share:
Earnings
per share (“EPS”) consists of two separate components, basic EPS and diluted
EPS. Basic EPS is computed by dividing net income by the weighted average number
of common shares outstanding for each period presented. Diluted EPS is
calculated by dividing net income by the weighted average number of common
shares outstanding plus dilutive common stock equivalents (“CSE”). 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 December 31, 2007 and 2006, there were 264,842
and 12,100 stock options, respectively, to purchase common stock, which were
excluded from the computation of earnings per share because the option price was
greater than the average market price. No stock options were
anti-dilutive at December 31, 2005. The following table is a
comparison of EPS for the years ended December 31, 2007, 2006 and
2005. EPS has been restated for a stock dividend paid on April 17,
2007.
|
(In
thousands, except per share data)
|
2007
|
2006
|
2005
|
|||||||||
|
Net
income (numerator for basic and diluted earnings per
share)
|
$ | 6,885 | $ | 10,118 | $ | 8,893 | ||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Shares
|
Per
Share
|
Shares
|
Per
Share
|
Shares
|
Per
Share
|
|||||||||||||||||||
|
Weighted
average shares outstanding for the period
|
||||||||||||||||||||||||
|
(denominator
for basic earnings per share)
|
10,389,886 | 10,418,266 | 10,116,748 | |||||||||||||||||||||
|
Earnings
per share — basic
|
$ | 0.66 | $ | 0.97 | $ | 0.88 | ||||||||||||||||||
|
Effect
of dilutive stock options
|
271,854 | 279,571 | 417,549 | |||||||||||||||||||||
|
Effect
on basic earnings per share of CSE
|
(0.01 | ) | (0.02 | ) | (0.04 | ) | ||||||||||||||||||
|
Weighted
average shares outstanding- diluted
|
10,661,740 | 10,697,837 | 10,534,297 | |||||||||||||||||||||
|
Earnings
per share — diluted
|
$ | 0.65 | $ | 0.95 | $ | 0.84 | ||||||||||||||||||
Stock Based
Compensation
:
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R (revised 2004), “Share-Based Payment”, which revises SFAS No. 123,
“Accounting for Stock-Based Compensation”, and supersedes Accounting Principles
Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees”. This statement requires an entity to recognize the cost
of employee services received in share-based payment transactions and measure
the cost on the grant-date fair value of the award. That cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award. The provisions of SFAS No. 123R
were effective January 1, 2006.
In March
2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting
Bulletin (“SAB”) No. 107 which expressed the views of the SEC regarding the
interaction between SFAS No. 123R and certain SEC rules and
regulations. SAB
No. 107 provides guidance related to the valuation of share-based payment
arrangements for public companies, including assumptions such as expected
volatility and expected term.
In 2005,
the Company vested all previously issued unvested options. As a
result the impact of the adoption of SFAS No. 123 on operations in future
periods will be the value imputed on future options grants using the methods
prescribed in SFAS No. 123R.
At
December 31, 2007, the Company maintains a Stock Option Plan (the “Plan”) under
which the Company grants options to its employees and
directors. Under terms of the plan, 1.5 million shares of common
stock, plus an annual increase equal to the number of shares needed to restore
the maximum number of shares that may be available for grant under the plan to
1.5 million shares, are reserved for such options. The Plan provides
that the exercise price of each option granted equals the market price of the
Company’s stock on the date of grant. Any options granted vest within
one to five years and have a maximum term of 10 years.
For the
year ended December 31, 2007, $125,000 was recognized in compensation expense,
with a 35% assumed tax benefit, for the Stock Option Plan. For the
year ended December 31, 2006, $15,000 was recognized in compensation expense for
the Stock Option Plan. Prior to January 1, 2006, the Company
accounted for the Stock Option Plan under the recognition and measurement
principles of APB No. 25 and related interpretations. Share-based
employee compensation costs were not reflected in net income, as all options
granted under the plan had an exercise price equal to the market value of the
underlying common stock on the date of the grant. In 2005, the
Company vested all previously issued unvested options and the Company granted
99,000 and 12,100 options, respectively, during the years ended December 31,
2007 and 2006. Compensation expense is recognized in the income statement for
only the options granted during the years ended December 31, 2007 and
2006.
Prior to
the adoption of SFAS No. 123(R), the Company presented tax benefits of
deductions resulting from the exercise of stock options as operating cash flows
in the Statement of Cash Flows. SFAS No. 123(R) requires the cash
flows resulting from all tax benefits resulting from tax deductions in excess of
compensation cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. The excess tax benefits of
$348,000 and $260,000, respectively, for the years ended December 31, 2007 and
2006 classified as a financing cash inflow were classified as an operating cash
flow prior to the adoption of 123 (R).
In
accordance with SFAS No. 123, the following table shows pro forma net income and
earnings per share assuming stock options had been expensed based on the fair
value of the options granted along with the significant assumptions used in the
Black-Scholes option valuation model (dollars in thousands, except per share
data):
|
Year
Ended
December
31, 2005
|
||||
|
Net
Income
|
$ | 8,893 | ||
|
Stock-based
employee compensation costs determined
|
||||
|
if
the fair value method had been applied to all awards,
|
||||
|
net
of
tax
|
(603 | ) | ||
|
Pro
forma net
income
|
$ | 8,290 | ||
|
Basic
Earnings per Common Share:
|
||||
|
As
reported:
|
$ | 0.88 | ||
|
Pro
forma:
|
$ | 0.82 | ||
|
Diluted
Earnings per Common Share:
|
||||
|
As
reported:
|
$ | 0.84 | ||
|
Pro
forma:
|
$ | 0.79 | ||
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 2005: dividend yield of 0%; expected volatility
of 21%; risk-free interest rate of 4.08% and an expected life of 9.0
years.
Comprehensive Income:
The
Company presents as a component of comprehensive income the amounts from
transactions and other events which currently are excluded from the consolidated
statements of income and are recorded directly to stockholders’ equity. These
amounts consist of unrealized holding gains (losses) on available for sale
securities.
The
components of comprehensive income, net of related tax, are as follows (in
thousands):
|
Year
Ended December 31
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
income
|
$ | 6,885 | $ | 10,118 | $ | 8,893 | ||||||
|
Other
comprehensive income/(loss):
|
||||||||||||
|
Unrealized
gains/(losses) on securities:
|
||||||||||||
|
Arising
during the period, net of tax/(benefit) of $(6), $103,
|
||||||||||||
|
and
$(86)
|
(12 | ) | 201 | (163 | ) | |||||||
|
Less:
reclassification adjustment for gains included in net
income,
|
||||||||||||
|
net
of tax expense of $ -, $ - and $33
|
- | - | (64 | ) | ||||||||
|
Other
comprehensive
income/(loss)
|
(12 | ) | 201 | (227 | ) | |||||||
|
Comprehensive
income
|
$ | 6,873 | $ | 10,319 | $ | 8,666 | ||||||
Variable
Interest Entities:
Republic
First Capital Trust I (“RFCT”) originally issued $6,000,000 of pooled
mandatorily redeemable preferred stock to investors and loaned the proceeds to
the Company. The securities were subsequently reissued via a call
during 2006 by Republic First Capital Trust II. Republic First
Capital Trust II holds, as its sole asset, subordinated debentures issued by the
Company in 2006. The Company issued an additional $5,000,000 of
pooled trust preferred securities in June 2007. Republic First
Capital Trust III holds, as its sole asset, the subordinated debentures issued
by the Company in 2007.
The
Company does not consolidate the RFCTs. 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 the RFCTs’ expected residual returns. The
non-consolidation results in the investment in the common stock of the RFCTs to
be included in other assets with a corresponding increase in outstanding debt of
$341,000 and $186,000 at December 31, 2007 and 2006, respectively. In addition,
the income received on the Company’s common stock investment is included in
other income. The Federal Reserve has issued final guidance on the regulatory
capital treatment for the trust-preferred securities issued by the RFCTs as a
result of the adoption of FIN 46(R). The final rule would retain the current
maximum percentage of total capital permitted for trust preferred securities at
25%, but would enact other changes to the rules governing trust preferred
securities that affect their use as part of the collection of entities known as
“restricted core capital elements”. The rule would take effect March
31, 2009; however, a five-year transition period starting March 31, 2004 and
leading up to that date would allow bank holding companies to continue to count
trust preferred securities as Tier 1 Capital after applying FIN-46(R).
Management has evaluated the effects of the final rule and does not anticipate a
material impact on its capital ratios.
Recent
Accounting Pronouncements:
In February 2006, the FASB issued SFAS
No. 155, Accounting for Certain Hybrid Financial Instruments. This statement
amends FASB Statements No. 133, Accounting for Derivative Instruments and
Hedging Activities, and No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This statement resolves
issues addressed in Statement 133 Implementation Issue No. D1, Application of
Statement 133 to Beneficial Interest in Securitized Financial Assets. This
statement is effective for all financial instruments acquired or issued after
the beginning of an entity’s first fiscal year that begins after September 15,
2006. The Company adopted this guidance on January 1, 2007. The adoption did not
have any effect on the Company’s consolidated financial position or results of
operations.
In March 2006, the FASB issued SFAS No.
156, Accounting for Servicing of Financial Asset- An Amendment of FASB Statement
No. 140. This statement amends SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, with respect to
the accounting for separately recognized servicing assets and servicing
liabilities. This statement requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value, if
practicable. It also permits, but does not require, the subsequent measurement
of servicing assets and servicing
liabilities
at fair value. The Company adopted this statement effective January 1, 2007. The
adoption did not have a material effect on the Company’s consolidated financial
position or results of operations.
In July 2006, the FASB issued FASB
Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes. This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with SFAS No.
109, Accounting for Income Taxes. This Interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This Interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This Interpretation is effective for fiscal years beginning after
December 15, 2006. The adoption did not have any impact on the Company’s
consolidated financial position or results of operations.
In September 2006, the FASB ratified
the consensus reached by the Emerging Issues Task Force (“EITF”) in Issue 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 applies to life
insurance arrangements that provide an employee with a specified benefit that is
not limited to the employee’s active service period, including certain
bank-owned life insurance (“BOLI”) policies. EITF 06-4 requires an employer to
recognize a liability and related compensation costs for future benefits that
extend to postretirement periods. EITF 06-4 is effective for fiscal years
beginning after December 15, 2007, with earlier application permitted. The
Company is continuing to evaluate the impact of this consensus, which may
require the Company to recognize an additional liability and compensation
expense related to its deferred compensation agreements.
In September 2006, the FASB ratified
the consensus reached by the EITF in Issue 06-5, Accounting for Purchases of
Life Insurance – Determining the Amount That Could Be Realized in Accordance
with FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life
Insurance. Technical Bulletin No. 85-4 states that an entity should report as an
asset in the statement of financial position the amount that could be realized
under the insurance contract. EITF 06-5 clarifies certain factors
that should be considered in the determination of the amount that could be
realized. EITF 06-5 is effective for fiscal years beginning after December 15,
2006, with earlier application permitted under certain circumstances. The
Company adopted this guidance on January 1, 2007. The adoption did
not have any effect on the Company’s consolidated financial position or results
of operations.
In September 2006, the FASB issued FASB
Statement No. 157, Fair Value Measurements, which defines fair value,
establishes a framework for measuring fair value under GAAP, and expands
disclosures about fair value measurements. FASB Statement No. 157 applies
to other accounting pronouncements that require or permit fair value
measurements. The new guidance is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and for interim periods
within those fiscal years. The Company does not anticipate any material impact
on its consolidated financial position or results of operations.
In December 2007, the FASB issued
proposed FASB Staff Position (FSP) 157-b, Effective Date of FASB Statement
No. 157, that would permit a one-year deferral in applying the measurement
provisions of statement No. 157 to non-financial assets and non-financial
liabilities (non-financial items) that are not recognized or disclosed at fair
value in an entity’s financial statements on a recurring basis (at least
annually). Therefore, if the change in fair value of a non-financial item is not
required to be recognized or disclosed in the financial statements on an annual
basis or more frequently, the effective date of application of statement 157 to
that item is deferred until fiscal years beginning after November 15, 2008
and interim periods within those fiscal years. This deferral does not apply,
however, to an entity that applies statement 157 in interim or annual financial
statements before proposed FSP 157-b is finalized. The Company is currently
evaluating the impact, if any, that the adoption of FSP 157-b will have on the
Company’s consolidated financial position or results of operations.
In September 2006, the SEC issued SAB
No. 108, Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 provides
interpretive guidance on how the effects of the carryover or reversal of prior
year misstatements should be considered in quantifying a potential current year
misstatement. Prior to SAB No. 108, companies might evaluate the materiality of
financial-statement misstatements using either the income statement or balance
sheet approach, with the income statement approach focusing on new
misstatements added in the current year, and the balance sheet approach focusing
on the cumulative amount of misstatement present in a company’s balance sheet.
Misstatements that would be material under one approach could be viewed as
immaterial under another approach, and not be corrected. SAB No. 108 now
requires that companies view financial statement misstatements as material if
they are material according to either the income statement or balance sheet
approach. The Company adopted this guidance on January 1, 2007. The
adoption did not have any effect on the Company’s consolidated financial
position or results of operations.
In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities.
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. An entity shall report unrealized gains
and losses on items for which the fair value option has been elected in earnings
at each subsequent reporting date. This statement is effective as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007.
The Company does not anticipate any material impact on its consolidated
financial position or results of operations.
In March 2007, the FASB ratified
Emerging Issues Task Force Issue No. 06-10, Accounting for Collateral Assignment
Split-Dollar Life Insurance Agreements (EITF 06-10). EITF 06-10 provides
guidance for determining a liability for the postretirement benefit obligation
as well as recognition and measurement of the associated asset on the basis of
the terms of the collateral assignment agreement. EITF 06-10 is effective for
fiscal years beginning after December 15, 2007. The Company is currently
assessing the impact of EITF 06-10 on its consolidated financial position and
results of operations.
In December 2007, the FASB issued SFAS
No. 141 (R), Business Combinations. This statement establishes principles and
requirements for how the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The guidance will become effective as of the beginning of
a company’s fiscal year beginning after December 15, 2008. This new
pronouncement will impact the Company’s accounting for business combinations
completed beginning January 1, 2009.
In December 2007, the FASB issued SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements—an
amendment of ARB No. 51. This statement establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the
beginning of a company’s fiscal year beginning after December 15, 2008. The
Company is currently evaluating the potential impact the new pronouncement will
have on its consolidated financial statements.
In December 2007, the SEC issued SAB
No. 110 which amends and replaces Question 6 of Section D.2 of Topic 14,
Share-Based Payment, of
the Staff Accounting Bulletin series. Question 6 of Section D.2 of Topic 14
expresses the views of the staff regarding the use of the “simplified” method in
developing an estimate of expected term of “plain vanilla” share options and
allows usage of the “simplified” method for share option grants prior to
December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use of the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007. SAB 110 is
effective January 1, 2008. The Company does not anticipate any
material impact on its consolidated financial position or results of
operations.
In December 2007, the SEC issued SAB
No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings
expresses the views of the staff regarding written loan commitments that are
accounted for at fair value through earnings under generally accepted accounting
principles. To make the staff's views consistent with current authoritative
accounting guidance, the SAB revises and rescinds portions of SAB No. 105,
Application of Accounting Principles to Loan
Commitments. Specifically, the SAB revises the SEC staff's views on
incorporating expected net future cash flows related to loan servicing
activities in the fair value measurement of a written loan commitment. The SAB
retains the staff's views on incorporating expected net future cash flows
related to internally-developed intangible assets in the fair value measurement
of a written loan commitment. The staff expects registrants to apply the views
in Question 1 of SAB 109 on a prospective basis to derivative loan commitments
issued or modified in fiscal quarters beginning after December 15, 2007. The
Company does not expect SAB 109 to have a material impact on its consolidated
financial statements.
In June 2007, the EITF reached a
consensus on Issue No. 06-11, Accounting for Income Tax Benefits of
Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 states
that an entity should recognize a realized tax benefit associated with dividends
on nonvested equity shares, nonvested equity share units and outstanding equity
share options charged to retained earnings as an increase in additional paid in
capital. The amount recognized in additional paid in capital should be
included in the pool of excess tax benefits available to absorb potential future
tax deficiencies on share-based payment awards. EITF 06-11 should be
applied prospectively to income tax benefits of dividends on equity-classified
share-based payment awards that are declared in fiscal years beginning after
December 15, 2007. The Company expects that EITF 06-11 will not have
an impact on its consolidated financial statements.
In May 2007, the FASB issued FASB Staff
Position (FSP) FIN 48-1, Definition of Settlement in FASB Interpretation No. 48
(FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax
position is effectively settled for the purpose of recognizing previously
unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1,
2007. The implementation of this standard did not have a material impact on the
Company’s consolidated financial position or results of operations.
In February 2007, the FASB issued
FASB Staff Position (FSP) FAS 158-1, Conforming Amendments to the
Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the
Related Staff Implementation Guides. This FSP makes conforming amendments to
other FASB statements and staff implementation guides and provides technical
corrections to SFAS No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans. The conforming amendments in this FSP
were adopted as of the effective date of SFAS No. 158. The adoption
did not have a material impact on the Company’s consolidated financial
statements or disclosures.
Reclassifications:
Certain
reclassifications have been made to the 2006 and 2005 information to conform to
the current year’s presentation. The reclassifications had no effect
on net income.
3. Investment
Securities:
Investment
securities available for sale as of December 31, 2007 are as
follows:
The
securities portfolio consists primarily of U.S government agency securities,
mortgage backed securities, municipal securities, corporate bonds and trust
preferred securities. The Company’s Asset/Liability Committee reviews all
security purchases to ensure compliance with security policy
guidelines.
The
maturity distribution of the amortized cost and estimated market value of
investment securities by contractual maturity at December 31, 2007, is as
follows:
|
Available
for Sale
|
Held
to Maturity
|
|||||||||||||||
|
(
Dollars in
thousands)
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
||||||||||||
|
Due
in 1 year or
less
|
$ | - | $ | - | $ | 80 | $ | 80 | ||||||||
|
After
1 year to 5
years
|
150 | 148 | 75 | 75 | ||||||||||||
|
After
5 years to 10
years
|
2,372 | 2,357 | 37 | 38 | ||||||||||||
|
After
10
years
|
80,728 | 81,154 | 50 | 52 | ||||||||||||
|
No
stated
maturity
|
– | – | 40 | 40 | ||||||||||||
|
Total
|
$ | 83,250 | $ | 83,659 | $ | 282 | $ | 285 | ||||||||
Expected
maturities will differ from contractual maturities because borrowers have the
right to call or prepay obligations with or without prepayment
penalties.
The
Company realized gross gains on the sale of securities of $0 in 2007; $0 in 2006
and $97,000 in 2005. The tax provision applicable to gross gains in
2005 amounted to approximately $33,000. No securities were sold at a loss in
2007, 2006, or 2005.
At
December 31, 2007 and 2006, investment securities in the amount of approximately
$1.5 million and $637,000 respectively, were pledged as
collateral for public deposits and certain other deposits as required by
law.
Temporarily
impaired securities as of December 31, 2007 are as follows:
|
(Dollars
in thousands)
|
Less
than 12 months
|
12
Months or more
|
Total
|
|||||||||||||||||||||
|
Description
of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
US
Government Agencies
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
|
Mortgage
Backed Securities
|
- | - | 137 | 3 | 137 | 3 | ||||||||||||||||||
|
Other
Securities
|
- | - | 20,452 | 507 | 20,452 | 507 | ||||||||||||||||||
|
Total
Temporarily Impaired Securities
|
$ | - | $ | - | $ | 20,589 | $ | 510 | $ | 20,589 | $ | 510 | ||||||||||||
The
impairment of the investment portfolio at December 31, 2007 totaled $510,000 in
43 securities (4 mortgage backed securities, and 39 other securities) with a
total fair value of $20.6 million at December 31, 2007. The unrealized loss is
due to changes in market value resulting from changes in market interest rates
and is considered temporary.
Temporarily
impaired securities as of December 31, 2006 are as follows:
|
(Dollars
in thousands)
|
Less
than 12 months
|
12
Months or more
|
Total
|
|||||||||||||||||||||
|
Description
of Securities
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
||||||||||||||||||
|
US
Government Agencies
|
$ | 18,488 | $ | 82 | $ | - | $ | - | $ | 18,488 | $ | 82 | ||||||||||||
|
Mortgage
Backed Securities
|
- | - | 154 | 2 | 154 | 2 | ||||||||||||||||||
|
Other
Securities
|
- | - | 9,370 | 76 | 9,370 | 76 | ||||||||||||||||||
|
Total
Temporarily Impaired Securities
|
$ | 18,488 | $ | 82 | $ | 9,524 | $ | 78 | $ | 28,012 | $ | 160 | ||||||||||||
The
impairment of the investment portfolio at December 31, 2006 totaled $160,000 in
22 securities (one US government agency security, 4 mortgage backed securities,
and 17 other securities) with a total fair value of $28.0 million at December
31, 2006. The unrealized loss is due to changes in market value resulting from
changes in market interest rates and is considered temporary.
4. Loans
Receivable:
Loans
receivable consist of the following at December 31,
|
(Dollars
in thousands)
|
2007
|
2006
|
||||||
|
Commercial
|
||||||||
|
Real
estate
secured
|
$ | 477,678 | $ | 466,636 | ||||
|
Construction
and land
development
|
228,616 | 218,671 | ||||||
|
Non
real estate
secured
|
77,347 | 71,816 | ||||||
|
Non
real estate
unsecured
|
8,451 | 8,598 | ||||||
|
Total
commercial
|
792,092 | 765,721 | ||||||
|
Residential
real estate
(1)
|
5,960 | 6,517 | ||||||
|
Consumer
and
other
|
24,302 | 20,952 | ||||||
|
Loans
receivable
|
822,354 | 793,190 | ||||||
|
Less
deferred loan
fees
|
(805 | ) | (1,130 | ) | ||||
|
Less
allowance for loan
losses
|
(8,508 | ) | (8,058 | ) | ||||
|
Total
loans receivable,
net
|
$ | 813,041 | $ | 784,002 | ||||
(1)
Residential
real estate is comprised of jumbo residential first mortgage loans for both
years presented.
The
recorded investment in loans which are impaired in accordance with SFAS No. 114,
totaled $22.3 million and $6.9 million at December 31, 2007 and 2006
respectively. The amounts of related valuation allowances were $1.6 million and
$1.8 million respectively at those dates. For the years ended December 31, 2007,
2006 and 2005, the average recorded investment in impaired loans was
approximately $16.1 million, $5.3 million and $3.5 million respectively.
Republic did not realize any interest on impaired loans during 2007, 2006 or
2005. There were no commitments to extend credit to any borrowers
with impaired loans as of the end of the periods presented herein.
As of
December 31, 2007 and 2006, there were loans of approximately $22.3 million and
$6.9 million respectively, which were classified as non-accrual. If these loans
were performing under their original contractual rate, interest income on such
loans would have increased approximately $1.4 million, $479,000 and $165,000 for
2007, 2006 and 2005 respectively. There were no loans past due 90
days and accruing at December 31, 2007 and December 31, 2006.
The
majority of loans outstanding are with borrowers in the Company’s marketplace,
Philadelphia and surrounding suburbs, including southern New Jersey. In addition
the Company has loans to customers whose assets and businesses are concentrated
in real estate. Repayment of the Company’s loans is in part dependent upon
general economic conditions affecting the Company’s market place and specific
industries. The Company evaluates each customer’s credit worthiness on a
case-by-case basis. The amount of collateral obtained is based on management’s
credit evaluation of the customer. Collateral varies but primarily includes
residential, commercial and income-producing properties. At December 31, 2007,
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 $261.9 million, which represented 31.9% of gross loans
receivable at December 31, 2007. Various types of real estate are included in
this category, including industrial, retail shopping centers, office space,
residential multi-family and others. In addition, credits were
extended for single family construction in the amount of $101.6 million, which
represented 12.4% of gross loans receivable at December 31,
2007. Loan concentrations are considered to exist when there are
amounts loaned to a multiple number of borrowers engaged in similar activities
that management believes would cause them to be similarly impacted by economic
or other conditions.
Included
in loans are loans due from directors and other related parties of $13.9 million
and $18.0 million at December 31, 2007 and 2006, respectively. All loans made to
directors have substantially the same terms and interest rates as other bank
borrowers. The Board of Directors approves loans to individual directors to
confirm that collateral requirements, terms and rates are comparable to other
borrowers and are in compliance with underwriting policies. The following
presents the activity in amounts due from directors and other related parties
for the years ended December 31, 2007 and 2006.
|
(Dollars
in thousands)
|
2007
|
2006
|
||||||
|
Balance
at beginning of
year
|
$ | 18,033 | $ | 25,054 | ||||
|
Additions
|
4,807 | 2,969 | ||||||
|
Repayments
|
(8,966 | ) | (9,990 | ) | ||||
|
Balance
at end of
year
|
$ | 13,874 | $ | 18,033 | ||||
5. Allowance
for Loan Losses:
Changes
in the allowance for loan losses for the years ended December 31, are as
follows:
|
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Balance
at beginning of
year
|
$ | 8,058 | $ | 7,617 | $ | 6,684 | ||||||
|
Charge-offs
|
(1,506 | ) | (1,887 | ) | (1,163 | ) | ||||||
|
Recoveries
|
366 | 964 | 910 | |||||||||
|
Provision
for loan
losses
|
1,590 | 1,364 | 1,186 | |||||||||
|
Balance
at end of
year
|
$ | 8,508 | $ | 8,058 | $ | 7,617 | ||||||
6. Premises
and Equipment:
A summary
of premises and equipment is as follows:
|
(Dollars
in thousands)
|
Useful lives
|
2007
|
2006
|
||||||
|
Land
|
Indefinite
|
$ | 200 | $ | 200 | ||||
|
Furniture
and
equipment
|
3
to 13 years
|
11,247 | 8,814 | ||||||
|
Bank
building
|
40
years
|
845 | 809 | ||||||
|
Leasehold
improvements
|
1
to 30 years
|
8,760 | 4,229 | ||||||
| 21,052 | 14,052 | ||||||||
|
Less
accumulated
depreciation
|
(9,764 | ) | (8,404 | ) | |||||
|
Net
premises and
equipment
|
$ | 11,288 | $ | 5,648 | |||||
Depreciation
expense on premises, equipment and leasehold improvements amounted to $1.4
million, $1.0 million and $1.0 million in 2007, 2006 and 2005
respectively.
7. Borrowings:
Republic
has a line of credit for $15.0 million available for the purchase of federal
funds from a correspondent bank. At December 31, 2007 and 2006, Republic had $0
outstanding on this line.
Republic
has a line of credit with the Federal Home Loan Bank of Pittsburgh,
collateralized by loans and securities, with a maximum borrowing capacity of
$211.5 million as of December 31, 2007. This maximum borrowing capacity is
subject to change on a monthly basis. As of December 31, 2007 and 2006, there
were no term advances outstanding on this line of credit. As of
December 31, 2007 and 2006, there were $113.4 million and $139.7 million of
overnight advances outstanding against these lines. The interest
rates on overnight advances at December 31, 2007 and 2006 were 3.81% and 5.41%,
respectively. The maximum amount of term advances outstanding at any
month-end was $0 in 2007 and $0 in 2006. The maximum amount of
overnight borrowings outstanding at any month-end was $186.7 million in 2007 and
$164.7 million in 2006. Average amounts outstanding of term advances
for 2007, 2006 and 2005 were $0, $0 and $3.8 million, respectively; and the
related weighted average interest rates for 2007, 2006 and 2005 were 0%, 0% and
6.80%, respectively. Average amounts outstanding of overnight
borrowings for 2007, 2006 and 2005 were $110.3 million, $72.1 million and $65.7
million, respectively; and the related weighted average interest rates for 2007,
2006 and 2005 were 5.22%, 5.28% and 3.61%, respectively.
Republic
had uncollateralized overnight advances with a depository institution
respectively at December 31, 2007 and 2006, of $20.0 million and $20.0
million. The respective interest rates on overnight advances at
December 31, 2007 and 2006 were 3.50% and 5.22%. The maximum amount
of such overnight advances outstanding at any month-end was $20.0 million in
2007 and $20.0 million in 2006. Average amounts outstanding of
overnight advances for 2007, 2006, and 2005 were $14.0 million, $10.7, and $0,
respectively; and the related weighted average interest rates for 2007, 2006,
and 2005 were 5.25%, 5.27%, and 0%, respectively.
Subordinated
debt and corporation-obligated-mandatorily redeemable capital securities of
subsidiary trust holding solely junior obligations of the
corporation:
In 2001, the Company, through a pooled
offering, issued $6.2 million of corporation-obligated mandatorily redeemable
capital securities of the subsidiary trust holding solely junior subordinated
debentures of the corporation more commonly known as Trust Preferred Securities.
The purpose of the issuance was to increase capital as a result of
the Company's continued loan and core deposit growth. The trust
preferred securities qualify as Tier 1 capital for regulatory purposes in
amounts up to 25% of total Tier 1 capital. The Company had the ability to call
the securities on any interest payment date after five years, without a
prepayment penalty, notwithstanding their final 30 year maturity. The interest
rate was variable and adjustable semi-annually at 3.75% over the 6 month London
Interbank Offered Rate (“Libor”). The Company did call the securities
in December 2006 and then issued $6.2 million in Trust Preferred Securities at a
variable interest rate, adjustable quarterly, at 1.73% over the 3 month
Libor. The Company may call the securities on any interest payment
date after five years. The interest rates at December 31, 2007 and
2006 were 6.85% and 7.08%, respectively.
In 2007, the Company, through a pooled
offering, issued an additional $5.2 million of corporation-obligated mandatorily
redeemable capital securities of the subsidiary trust holding solely junior
subordinated debentures of the corporation more commonly known as Trust
Preferred Securities for the same purpose as the 2001 issuance. The
Company has the ability to call the securities or any interest payment date
after five years, without a prepayment penalty, notwithstanding their final 30
year maturity. The interest rate is variable, adjustable quarterly,
at 1.55% over the 3 month Libor. The interest rate at December 31,
2007 was 6.67%.
8. Deposits:
The
following is a breakdown, by contractual maturities of the Company’s time
certificate of deposits for the years 2008 through 2012, which includes brokered
certificates of deposit of approximately $125.0 million with original terms of
one to two months.
|
(Dollars
in thousands)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Time
Certificates of Deposit
|
$ | 406,945 | $ | 12,769 | $ | 2,430 | $ | 288 | $ | 448 | $ | 55 | $ | 422,935 | ||||||||||||||
|
9.
|
Income
Taxes
:
|
The
following represents the components of income tax expense (benefit) for the
years ended December 31, 2007, 2006 and 2005, respectively.
|
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Current
provision
|
||||||||||||
|
Federal:
|
||||||||||||
|
Current
|
$ | 3,429 | $ | 5,429 | $ | 4,808 | ||||||
|
Deferred
|
(156 | ) | (222 | ) | (322 | ) | ||||||
|
Total
provision for income
taxes
|
$ | 3,273 | $ | 5,207 | $ | 4,486 | ||||||
The
following table accounts for the difference between the actual tax provision and
the amount obtained by applying the statutory federal income tax rate of 35.0%
for the years ended December 31, 2007 and 2006 and 34.0% for the year ended
December 31, 2005.
|
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
|||||||||
|
Tax
provision computed at statutory
rate
|
$ | 3,556 | $ | 5,364 | $ | 4,549 | ||||||
|
Effect
of 35% rate
bracket
|
(75 | ) | (75 | ) | - | |||||||
|
Other
|
(208 | ) | (82 | ) | (63 | ) | ||||||
|
Total provision for income
taxes
|
$ | 3,273 | $ | 5,207 | $ | 4,486 | ||||||
The
approximate tax effect of each type of temporary difference that gives rise to
net deferred tax assets included in other assets in the accompanying
consolidated balance sheets at December 31, 2007 and 2006 are as
follows:
|
2007
|
2006
|
|||||||
|
Allowance
for loan
losses
|
$ | 2,866 | $ | 2,713 | ||||
|
Deferred
compensation
|
664 | 674 | ||||||
|
Unrealized
gain on securities available for
sale
|
(139 | ) | (145 | ) | ||||
|
Deferred
loan
costs
|
(543 | ) | (535 | ) | ||||
|
Other
|
(9 | ) | (30 | ) | ||||
|
Net
deferred tax
asset
|
$ | 2,839 | $ | 2,677 | ||||
The
realizability of the deferred tax asset is dependent upon a variety of factors,
including the generation of future taxable income, the existence of taxes paid
and recoverable, the reversal of deferred tax liabilities and tax planning
strategies. Based upon these and other factors, management believes that it is
more likely than not that the Company will realize the benefits of these
deferred tax assets.
All tax
years for which the Internal Revenue Service has statutory authority to conduct
audits are open, and there are no audits in progress for any years.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes on January 1, 2007. As a result of the
implementation of FIN 48, the Company maintains a $193,000 liability for
unrecognized tax benefits related to tax positions associated with tax positions
related to the current year and prior years.The Company recognizes interest
accrued related to unrecognized tax benefits in interest expense and penalties
in operating expenses. At December 31, 2007, $75,000 is accrued for interest and
penalties.
10. Financial
Instruments with Off-Balance Sheet Risk:
The
Company is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the financial
statements.
Credit
risk is defined as the possibility of sustaining a loss due to the failure of
the other parties to a financial instrument to perform in accordance with the
terms of the contract. The maximum exposure to credit loss under commitments to
extend credit and standby letters of credit is represented by the contractual
amount of these instruments. The Company uses the same underwriting standards
and policies in making credit commitments as it does for on-balance-sheet
instruments.
Financial
instruments whose contract amounts represent potential credit risk are
commitments to extend credit of approximately $160.2 million and $163.2 million
and standby letters of credit of approximately $4.6 million and $7.3 million
at
December 31, 2007 and 2006, respectively. Commitments often
expire without being drawn upon. Of the $160.2 million of commitments to extend
credit at December 31, 2007, substantially all were variable rate
commitments.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and many require the
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Company evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained upon extension of
credit is based on management’s credit evaluation of the customer. Collateral
held varies but may include real estate, marketable securities, pledged
deposits, equipment and accounts receivable.
Standby
letters of credit are conditional commitments issued that guarantee the
performance of a customer to a third party. The credit risk and collateral
policy involved in issuing letters of credit is essentially the same as that
involved in extending loan commitments. The amount of collateral obtained is
based on management’s credit evaluation of the customer. Collateral held varies
but may include real estate, marketable securities, pledged deposits, equipment
and accounts receivable. Management believes that the proceeds
obtained through a liquidation of such collateral would be sufficient to cover
the maximum potential amount of future payments required under the corresponding
guarantees. The current amount of liability as of December 31, 2007
and 2006 for guarantees under standby letters of credit issued is not
material.
Contingencies
also include a standby letter of credit issued by an unrelated bank in the
amount of $170,000 which was required by a lessor.
11. Commitments:
Lease
Arrangements:
As of
December 31, 2007, the Company had entered into non-cancelable leases expiring
through August 31, 2037, including renewal options. The leases are accounted for
as operating leases. The minimum annual rental payments required under these
leases are as follows:
|
(Dollars
in thousands)
|
||||
|
Year
Ended
|
Amount
|
|||
|
2008
|
$ | 1,394 | ||
|
2009
|
1,538 | |||
|
2010
|
1,888 | |||
|
2011
|
1,947 | |||
|
2012
|
2,000 | |||
|
Thereafter
|
36,159 | |||
|
Total
|
$ | 44,926 | ||
The
Company incurred rent expense of $1.4 million, $1.1 million and $922,000 for the
years ended December 31, 2007, 2006 and 2005, respectively.
Republic
entered into a lease agreement that commenced June 1, 2007 for approximately
53,275 square feet on two floors of Two Liberty Place, 1601 Chestnut St.,
Philadelphia, Pennsylvania, as its new headquarter facilities. The
space is occupied by the Company, the executive offices of Republic and an
unaffiliated company which assumes its proportionate share of related
costs. Back office operations of Republic and commercial bank lending
of Republic is also located therein. The initial thirteen year, seven
month lease term contains two five year renewal options and the initial lease
term will expire on December 31, 2020. Annual rent expense commenced
at $750,245 less the following abatement periods: (1) the first twenty-eight
months for 5,815 square feet of space and (2) the following periods for the
remaining rentable area: (a) the first six months of the first lease year, (b)
the first four months of the second lease year, and (c) the first four months of
the third lease year.
Employment
Agreements:
The
Company has entered into an employment agreement with the CEO of the Company
which provides for the payment of base salary and certain benefits through the
year 2009. The aggregate commitment for future salaries and benefits under this
employment agreement at December 31, 2007, is approximately $1.0
million.
The
Company has entered into an employment agreement with the President of Republic
which provides for the payment of base salary and certain benefits through the
year 2009. The aggregate commitment for future salaries and benefits
under this employment agreement at December 31, 2007, is approximately
$700,000.
Other:
The
Company’s CEO was of counsel to a law firm effective January 2, 2002 until June
30, 2005. In 2005 the Company paid $272,000 in legal fees to that firm which
were primarily for loan workout and collection matters.
The
Company and Republic are from time to time a party (plaintiff or defendant) to
lawsuits that are in the normal course of business. While any litigation
involves an element of uncertainty, management, after reviewing pending actions
with its legal counsel, is of the opinion that the liability of the Company and
Republic, if any, resulting from such actions will not have a material effect on
the financial condition or results of operations of the Company and
Republic.
12. Regulatory
Capital:
Dividend
payments by Republic to the Company are subject to the Pennsylvania Banking Code
of 1965 (the “Banking Code and the Federal Deposit Insurance Act (the “FDIA”).
Under the Banking Code, no dividends may be paid except from “accumulated net
earnings” (generally, undivided profits). Under the FDIA, an insured bank may
pay no dividends if the bank is in arrears in the payment of any insurance
assessment due to the FDIC. Under current banking laws, Republic would be
limited to $56.8 million of dividends plus an additional amount equal to its net
profit for 2008, up to the date of any such dividend declaration. However,
dividends would be further limited in order to maintain capital ratios. The
Company may consider dividend payments in 2008.
State and
Federal regulatory authorities have adopted standards for the maintenance of
adequate levels of capital by Republic. Federal banking agencies impose three
minimum capital requirements on the Company’s risk-based capital ratios based on
total capital, Tier 1 capital, and a leverage capital ratio. The risk-based
capital ratios measure the adequacy of a bank’s capital against the riskiness of
its assets and off-balance sheet activities. Failure to maintain adequate
capital is a basis for “prompt corrective action” or other regulatory
enforcement action. In assessing a bank’s capital adequacy, regulators also
consider other factors such as interest rate risk exposure; liquidity, funding
and market risks; quality and level or earnings; concentrations of credit;
quality of loans and investments; risks of any nontraditional activities;
effectiveness of bank policies; and management’s overall ability to monitor and
control risks.
Management
believes that Republic meets, as of December 31, 2007, all capital adequacy
requirements to which it is subject. As of December 31, 2007, the FDIC
categorized Republic as well capitalized under the regulatory framework for
prompt corrective action provisions of the Federal Deposit Insurance
Act. There are no calculations or events since that notification that
management believes have changed Republic’s category.
The
following table presents the Company’s and Republic’s capital regulatory ratios
at December 31, 2007 and 2006:
|
Actual
|
For
Capital
Adequacy
Purposes
|
To
be well
capitalized
under
regulatory
capital guidelines
|
||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
||||||
|
At
December 31, 2007
|
||||||||||||
|
Total
risk based capital
|
||||||||||||
|
Republic
|
$99,634
|
11.02%
|
$72,534
|
8.00%
|
$90,667
|
10.00%
|
||||||
|
Company.
|
99,704
|
11.01%
|
72,638
|
8.00%
|
-
|
-
|
||||||
|
Tier
one risk based capital
|
||||||||||||
|
Republic
|
91,126
|
10.08%
|
36,267
|
4.00%
|
54,400
|
6.00%
|
||||||
|
Company.
|
91,196
|
10.07%
|
36,319
|
4.00%
|
-
|
-
|
||||||
|
Tier
one leverage capital
|
||||||||||||
|
Republic
|
91,126
|
9.45%
|
48,225
|
5.00%
|
48,225
|
5.00%
|
||||||
|
Company.
|
91,196
|
9.44%
|
48,294
|
5.00%
|
-
|
-
|
||||||
|
At
December 31, 2006
|
||||||||||||
|
Total
risk based capital
|
||||||||||||
|
Republic
|
$88,256
|
10.28%
|
$61,009
|
8.00%
|
$76,261
|
10.00%
|
||||||
|
Company.
|
88,510
|
10.30%
|
61,098
|
8.00%
|
-
|
-
|
||||||
|
Tier
one risk based capital
|
||||||||||||
|
Republic
|
80,198
|
9.34%
|
30,505
|
4.00%
|
45,757
|
6.00%
|
||||||
|
Company.
|
80,452
|
9.46%
|
30,549
|
4.00%
|
-
|
-
|
||||||
|
Tier
one leverage capital
|
||||||||||||
|
Republic
|
80,198
|
8.72%
|
45,989
|
5.00%
|
45,989
|
5.00%
|
||||||
|
Company.
|
80,452
|
8.75%
|
45,990
|
5.00%
|
-
|
-
|
||||||
|
13.
|
Benefit
Plans:
|
Supplemental
Retirement Plan:
The
Company maintains a Supplemental Retirement Plan for its former Chief Executive
Officer which provides for payments of approximately $100,000 a year. At
December 31, 2007, approximately $143,000 remained to be paid. A life insurance
contract has been purchased to insure the payments.
Defined
Contribution Plan:
The
Company has a defined contribution plan pursuant to the provision of 401(k) of
the Internal Revenue Code. The Plan covers all full-time employees who meet age
and service requirements. The plan provides for elective employee contributions
with a matching contribution from the Company limited to 4% of total salary. The
total expense charged to Republic, and included in salaries and employee
benefits relating to the plan was $249,000 in 2007, $255,000 in 2006 and
$245,000 in 2005.
Directors’
and Officers’ Plans:
The
Company has agreements with insurance companies to provide for an annuity
payment upon the retirement or death of certain Directors and Officers, ranging
from $15,000 to $25,000 per year for ten years. The agreements were modified for
most participants in 2001, to establish a minimum age of 65 to qualify for the
payments. All participants are fully vested. The accrued benefits under the plan
at December 31, 2007, 2006 and 2005 totaled $1.5 million, $1.6 million, and $1.5
million, respectively. The expense for the years ended December 31, 2007, 2006
and 2005, totaled $71,000, $108,000, and $172,000, respectively. The Company
funded the plan through the purchase of certain life insurance contracts. The
cash surrender value of these contracts (owned by the Company) aggregated $2.1
million and $2.0 million at December 31, 2007 and 2006, respectively, which
is included in other assets.
The
Company maintains a deferred compensation plan for certain officers, wherein a
percentage of base salary is contributed to the plan, and utilized to buy stock
of the Company. To promote officer retention, a three year vesting
period applies for each contribution. As of December 31, 2007
$125,000 was vested. Expense for 2007, 2006, and 2005 was $194,000,
$95,000 and $43,000, respectively. During 2005, the Company
established a rabbi trust to fund the deferred compensation plans. An
administrator has been designated as Trustee of the trust. Also,
certain of the obligations to participants are satisfied with contracts through
a counterparty, BNP Parabas. Approximately 38,000, 21,062 and 44,893
respective shares of the Company’s common stock were purchased for $355,000,
$237,000 and $573,000 by this trust in 2007, 2006 and 2005, respectively, for
the benefit of certain officers and directors that acquired shares through our
deferred compensation plan. As of December 31, 2007, the trust holds
approximately 108,224 shares of the Company’s common stock as well as an
additional $12,000 in cash. The assets of the trust and BNP Parabas
contracts are sufficient to cover the liabilities of the Company’s deferred
compensation plan.
14. Fair
Value of Financial Instruments:
The
disclosure of the fair value of all financial instruments is required, whether
or not recognized on the balance sheet, for which it is practical to estimate
fair value. In cases where quoted market prices are not available, fair values
are based on assumptions including future cash flows and discount rates.
Accordingly, the fair value estimates cannot be substantiated, may not be
realized, and do not represent the underlying value of the Company.
The
Company uses the following methods and assumptions to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash,
Cash Equivalents, Accrued Interest Receivable and Payable:
The
carrying value is a reasonable estimate of fair value.
Investment Securities Held to
Maturity and Available for Sale
:
For
investment securities with a quoted market price, fair value is equal to quoted
market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Restricted
Stock:
Restricted
stock represents equity interest in FHLB Stock and ACBB Stock, and is carried at
costs because it does not have a readily determinable fair value as its
ownership is restricted and it lacks a market. The carrying value is a
reasonable estimate of fair value.
Loans:
For
variable-rate loans that reprice frequently and with no significant change in
credit risk, fair value is the carrying value. For other categories of loans
such as commercial and industrial loans, real estate mortgage and consumer
loans, fair value is estimated based on the present value of the estimated
future cash flows using the current rates at which similar loans would be made
to borrowers with similar collateral and credit ratings and for similar
remaining maturities.
Bank
Owned Life insurance:
The fair
value of bank owned life insurance is based on the estimated realizable market
value of the underlying investments and insurance reserves.
Deposit
Liabilities:
For
checking, savings and money market accounts, fair value is the amount payable on
demand at the reporting date. For time deposits, fair value is estimated using
the rates currently offered for deposits of similar remaining
maturities.
Borrowings:
Fair
values of borrowings are based on the present value of estimated cash flows,
using current rates, at which similar borrowings could be obtained by Republic
or the Company with similar maturities.
Commitments
to Extend Credit and Standby Letters of Credit:
The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparts.
For fixed rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair value
of letters of credit is based on fees currently charged for similar
arrangements.
At
December 31, 2007 and December 31, 2006, the carrying amount and the estimated
fair value of the Company’s financial instruments are as follows:
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash and cash
equivalents
|
$ | 73,225 | $ | 73,225 | $ | 83,127 | $ | 83,127 | ||||||||
|
Investment securities available
for sale
|
83,659 | 83,659 | 102,039 | 102,039 | ||||||||||||
|
Investment securities held to
maturity
|
282 | 285 | 333 | 338 | ||||||||||||
|
Restricted
stock
|
6,358 | 6,358 | 6,804 | 6,804 | ||||||||||||
|
Loans receivable,
net
|
813,041 | 814,037 | 784,002 | 777,503 | ||||||||||||
|
Bank owned life
insurance
|
11,718 | 11,718 | 11,294 | 11,294 | ||||||||||||
|
Accrued interest
receivable
|
5,058 | 5,058 | 5,370 | 5,370 | ||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Deposits:
|
||||||||||||||||
|
Demand, savings and money
market
|
$ | 357,920 | $ | 357,920 | $ | 385,950 | $ | 385,950 | ||||||||
|
Time
|
422,935 | 422,704 | 368,823 | 367,200 | ||||||||||||
|
Subordinated
debt
|
11,341 | 11,341 | 6,186 | 6,186 | ||||||||||||
|
Short-term
borrowings
|
133,433 | 133,433 | 159,723 | 159,723 | ||||||||||||
|
Accrued interest
payable
|
3,719 | 3,719 | 5,224 | 5,224 | ||||||||||||
|
December
31, 2007
|
December
31, 2006
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Off
Balance Sheet financial instruments:
|
||||||||||||||||
|
Commitments
to extend credit
|
- | - | - | - | ||||||||||||
|
Standby
letters-of-credit
|
- | - | - | - | ||||||||||||
15. Stock
Based Compensation:
The
Company maintains a Stock Option Plan (the “Plan”) under which the Company
grants options to its employees and directors. Under the terms of the plan, 1.5
million shares of common stock, plus an annual increase equal to the number of
shares needed to restore the maximum number of shares that may be available for
grant under the plan to 1.5 million shares, are reserved for such options. The
Plan provides that the exercise price of each option granted equals the market
price of the Company’s stock on the date of grant. Any option granted vests
within one to five years and has a maximum term of ten years. The Black-Scholes
option pricing model is utilized to determine the fair value of stock options.
In 2007 the following assumptions were utilized: a dividend yield of 0%;
expected volatility of 25.24%; risk-free interest rate of 4.70% and an expected
life of 7.0 years. In 2006 the following assumptions were
utilized: a dividend yield of 0%; expected volatility of 29.03%;
risk-free interest rate of 4.83% and an expected life of 7.0 years. A
dividend yield of 0% is utilized, because cash dividends have never been paid.
The expected life reflects a 3 to 4 year “all or nothing” vesting period, the
maximum ten year term and review of historical behavior. The volatility was
based on Bloomberg’s seven year volatility calculation for “FRBK” stock. The
risk-free interest rate is based on the seven year Treasury bond. No shares
vested in 2007, but expense is recognized ratably over the period required to
vest. There were 12,100 unvested options at January 1, 2007
with a fair value of $61,710 with $46,282 of that amount remaining to be
recognized as expense. At December 31, 2007 there were 105,050
unvested options with a fair value of $486,885 with $346,012 of that amount
remaining to be recognized as expense. At that date, the intrinsic
value of the 737,841 options outstanding was $413,191 while the intrinsic value
of the 632,791 exercisable (vested) options was $923,875. During 2007, 6,050
options were forfeited with a weighted average grant fair value of
$30,855.
A summary
of the status of the Company’s stock options under the Plan as of December 31,
2007, 2006 and 2005 and changes during the years ended December 31, 2007, 2006,
and 2005 are presented below:
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
|
Outstanding,
beginning of year
|
661,449 | $ | 5.55 | 780,309 | $ | 5.43 | 1,120,477 | $ | 4.25 | |||||||||||||||
|
Granted
|
99,000 | 11.77 | 12,100 | 12.14 | 190,961 | 10.14 | ||||||||||||||||||
|
Exercised
|
(16,558 | ) | 2.81 | (128,973 | ) | 5.44 | (524,545 | ) | 2.43 | |||||||||||||||
|
Forfeited
|
(6,050 | ) | 12.14 | (1,987 | ) | 6.74 | (6,584 | ) | 6.43 | |||||||||||||||
|
Outstanding,
end of year
|
737,841 | 6.39 | 661,449 | 5.55 | 780,309 | 5.43 | ||||||||||||||||||
|
Options
exercisable at year-end
|
632,791 | 5.49 | 649,349 | 5.43 | 780,309 | 5.43 | ||||||||||||||||||
|
Weighted
average fair value of options granted during the year
|
$ | 4.61 | $ | 5.10 | $ | 4.08 | ||||||||||||||||||
|
For
the Years Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Number
of Options exercised
|
16,558 | 128,973 | ||||||
|
Cash
received
|
$ | 46,463 | $ | 700,326 | ||||
|
Intrinsic
value
|
117,766 | 733,022 | ||||||
|
Tax
benefit
|
41,218 | 259,550 | ||||||
The
following table summarizes information about options outstanding at December 31,
2007.
|
Options
outstanding
|
Options
exercisable
|
||||||||
|
Range
of exercise Prices
|
Number
outstanding at December
31,
2007
|
Weighted
Average
remaining
contractual
life
(years)
|
Weighted
Average
exercise
price
|
Shares
|
Weighted
Average
Exercise
Price
|
||||
|
$1.81
|
106,586
|
3.0
|
$1.81
|
106,586
|
$1.81
|
||||
|
$2.72
to $3.55
|
170,687
|
4.2
|
2.94
|
170,687
|
2.94
|
||||
|
$3.76
to $4.62
|
27,275
|
3.8
|
4.00
|
27,275
|
4.00
|
||||
|
$6.03
to $6.74
|
168,451
|
6.1
|
6.22
|
168,451
|
6.22
|
||||
|
$9.94
to $12.14
|
264,842
|
8.0
|
10.81
|
159,792
|
10.16
|
||||
|
737,841
|
$6.39
|
632,791
|
$5.49
|
||||||
|
For
the Year Ended December 31, 2007
|
||||||||
|
Number
of Shares
|
Weighted
average grant date fair value
|
|||||||
|
Nonvested
at beginning of year
|
12,100 | $ | 5.10 | |||||
|
Granted
|
99,000 | 4.61 | ||||||
|
Forfeited
|
(6,050 | ) | (5.10 | ) | ||||
|
Nonvested
at end of year
|
105,050 | $ | 4.64 | |||||
During
the year ended December 31, 2007, $125,000 was recognized in compensation
expense, with a 35% assumed tax benefit, for the Plan. During the
year ended December 31, 2006, $15,000 was recognized in compensation expense for
the Plan.
16. Segment
Reporting:
The
Company has one reportable segment: community banking. The community
bank segments primarily encompasses the commercial loan and deposit activities
of Republic, as well as consumer loan products in the area surrounding its
branches.
17.
Transactions with Affiliate:
At
December 31, 2007 and 2006, Republic had outstanding balances of $24.1 million
and $21.6 million, respectively, of commercial loans, which had been
participated to FBD, a wholly owned subsidiary prior to January 1,
2005. FBD also sold its tax refund loans to Republic in
2006. Such loans were repaid by U.S. Treasury-issued tax refunds paid
directly to FBD in the first and second quarters of that
year. Accordingly, there were no such loans outstanding at December
31, 2006. FBD did not offer tax refund loans in 2007. As
of December 31, 2007 and 2006 Republic had outstanding balances of $42.0 million
and $40.9 million of commercial loan balances it had purchased from
FBD. The above loan participations and sales were made at arms
length. They are made as a result of lending limit and other
regulatory requirements.
18. Parent
Company Financial Information
The
following financial statements for Republic First Bancorp, Inc. should be read
in conjunction with the consolidated financial statements and the other notes
related to the consolidated financial statements.
BALANCE
SHEETS
December
31, 2007 and 2006
(Dollars
in thousands)
|
2007
|
2006
|
|||||||
|
ASSETS:
|
||||||||
|
Cash
|
$ | 296 | $ | 113 | ||||
|
Corporation-obligated
mandatorily redeemable
capital
securities of subsidiary trust holding junior
obligations
of the
corporation
|
341 | 186 | ||||||
|
Investment in
subsidiaries
|
91,397 | 80,480 | ||||||
|
Other
assets
|
962 | 920 | ||||||
|
Total
Assets
|
$ | 92,996 | $ | 81,699 | ||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY
:
|
||||||||
|
Liabilities:
|
||||||||
|
Accrued
expenses
|
$ | 1,188 | $ | 779 | ||||
|
Corporation-obligated
mandatorily redeemable
|
||||||||
|
securities of
subsidiary trust holding solely junior
|
||||||||
|
subordinated
debentures of the
corporation
|
11,341 | 6,186 | ||||||
|
Total
Liabilities
|
12,529 | 6,965 | ||||||
|
Shareholders’
Equity:
|
||||||||
|
Preferred
stock
|
- | - | ||||||
|
Common
stock
|
107 | 97 | ||||||
|
Additional paid in
capital
|
75,321 | 63,342 | ||||||
|
Retained
earnings
|
8,927 | 13,511 | ||||||
|
Treasury stock at
cost
|
(2,993 | ) | (1,688 | ) | ||||
|
Stock
held by deferred compensation
plan
|
(1,165 | ) | (810 | ) | ||||
|
Accumulated other comprehensive
income
|
270 | 282 | ||||||
|
Total Shareholders’
Equity
|
80,467 | 74,734 | ||||||
|
Total Liabilities and
Shareholders’
Equity
|
$ | 92,996 | $ | 81,699 | ||||
STATEMENTS
OF INCOME AND CHANGES IN SHAREHOLDERS’ EQUITY
For
the years ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Interest
income
|
$ | 19 | $ | 16 | $ | 13 | ||||||
|
Dividend
income from
subsidiaries
|
2,006 | 539 | 444 | |||||||||
|
Total
income
|
2,025 | 555 | 457 | |||||||||
|
Trust
preferred interest
expense
|
631 | 525 | 444 | |||||||||
|
Expenses
|
89 | 30 | 8 | |||||||||
|
Total
expenses
|
720 | 555 | 452 | |||||||||
|
Net
income before
taxes
|
1,305 | - | 5 | |||||||||
|
Federal
income
tax
|
- | - | 2 | |||||||||
|
Income
before undistributed income of
subsidiaries
|
1,305 | - | 3 | |||||||||
|
Total
equity in undistributed income of
subsidiaries
|
5,580 | 10,118 | 8,890 | |||||||||
|
Net
income
|
$ | 6,885 | $ | 10,118 | $ | 8,893 | ||||||
|
Shareholders’
equity, beginning of
year
|
$ | 74,734 | $ | 63,677 | $ | 65,224 | ||||||
|
First
Bank of Delaware
spin-off
|
- | - | (11,396 | ) | ||||||||
|
Stock
based
compensation
|
125 | 15 | - | |||||||||
|
Exercise
of stock
options
|
47 | 700 | 1,275 | |||||||||
|
Purchase
of treasury
shares
|
(1,305 | ) | - | (143 | ) | |||||||
|
Tax
benefit of stock options
exercises
|
348 | 260 | 624 | |||||||||
|
Stock
purchase for deferred compensation
plan
|
(355 | ) | (237 | ) | (573 | ) | ||||||
|
Net
income
|
6,885 | 10,118 | 8,893 | |||||||||
|
Change
in unrealized gain (loss) on securities available for sale
|
(12 | ) | 201 | (227 | ) | |||||||
|
Shareholders’
equity, end of
year
|
$ | 80,467 | $ | 74,734 | $ | 63,677 | ||||||
STATEMENTS
OF CASH FLOWS
For
the years ended December 31, 2007, 2006 and 2005
(Dollars
in thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income
|
$ | 6,885 | $ | 10,118 | $ | 8,893 | ||||||
|
Adjustments to reconcile net
income to net cash
|
||||||||||||
|
provided by (used in) operating
activities:
|
||||||||||||
|
Tax
benefit of stock option exercises
|
- | - | 624 | |||||||||
|
Stock
purchases for deferred compensation plan
|
(355 | ) | (237 | ) | (573 | ) | ||||||
|
Stock
based compensation
|
125 | 15 | - | |||||||||
|
Increase in other
assets
|
(391 | ) | (74 | ) | (757 | ) | ||||||
|
(Decrease) increase in other
liabilities
|
409 | (89 | ) | 847 | ||||||||
|
Equity in undistributed income
subsidiaries
|
(5,580 | ) | (10,118 | ) | (8,890 | ) | ||||||
|
Net cash provided by (used in)
operating activities
|
1,093 | (385 | ) | 144 | ||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Investment in
subsidiary
|
(5,000 | ) | (900 | ) | (1,800 | ) | ||||||
|
Purchase
of corporation- obligated
|
||||||||||||
|
mandatorily
redeemable capital
|
||||||||||||
|
securities
of subsidiary trust holding
|
||||||||||||
|
junior
obligations of the corporation
|
(155 | ) | - | - | ||||||||
|
Net cash used in investing
activities
|
(5,155 | ) | (900 | ) | (1,800 | ) | ||||||
|
Cash
from Financing Activities:
|
||||||||||||
|
Exercise of stock
options
|
47 | 700 | 1,275 | |||||||||
|
Issuance
of corporation- obligated
|
||||||||||||
|
mandatorily
redeemable securities
|
||||||||||||
|
of
subsidiary trust holding solely
|
||||||||||||
|
junior
subordinated debentures
|
||||||||||||
|
of
the corporation
|
5,155 | - | - | |||||||||
|
Purchase
of treasury shares
|
(1,305 | ) | - | (143 | ) | |||||||
|
Tax
benefit of stock option exercises
|
348 | 260 | - | |||||||||
|
Net cash provided by financing
activities
|
4,245 | 960 | 1,132 | |||||||||
|
(Decrease)
increase in cash
|
183 | (325 | ) | (524 | ) | |||||||
|
Cash,
beginning of period
|
113 | 438 | 962 | |||||||||
|
Cash,
end of period
|
$ | 296 | $ | 113 | $ | 438 | ||||||
19. Quarterly
Financial Data (Unaudited):
The following tables are summary
unaudited income statement information for each of the quarters ended during
2007 and 2006.
Summary
of Selected Quarterly Consolidated Financial Data
|
For
the Quarter Ended, 2007
|
||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||
|
Income
Statement Data:
|
||||||||||||||||
|
Total
interest
income
|
$ | 16,405 | $ | 17,677 | $ | 17,187 | $ | 17,077 | ||||||||
|
Total
interest
expense
|
9,245 | 9,873 | 9,677 | 9,512 | ||||||||||||
|
Net
interest
income
|
7,160 | 7,804 | 7,510 | 7,565 | ||||||||||||
|
Provision
for loan
losses
|
165 | 1,282 | 63 | 80 | ||||||||||||
|
Non-interest
income
|
918 | 760 | 755 | 640 | ||||||||||||
|
Non-interest
expense
|
5,598 | 5,488 | 5,283 | 4,995 | ||||||||||||
|
Provision
for income
taxes
|
738 | 558 | 951 | 1,026 | ||||||||||||
|
Net
income
|
$ | 1,577 | $ | 1,236 | $ | 1,968 | $ | 2,104 | ||||||||
|
Per
Share Data:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net
income
|
$ | 0.15 | $ | 0.12 | $ | 0.19 | $ | 0.20 | ||||||||
|
Diluted
:
|
||||||||||||||||
|
Net
income
|
$ | 0.15 | $ | 0.12 | $ | 0.18 | $ | 0.20 | ||||||||
|
For
the Quarter Ended, 2006
|
||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||
|
Income
Statement Data:
|
||||||||||||||||
|
Total
interest
income
|
$ | 17,081 | $ | 16,031 | $ | 14,570 | $ | 15,063 | ||||||||
|
Total
interest
expense
|
8,837 | 7,704 | 6,384 | 5,754 | ||||||||||||
|
Net
interest
income
|
8,244 | 8,327 | 8,186 | 9,309 | ||||||||||||
|
Provision
(recovery) for loan
losses
|
(10 | ) | - | 61 | 1,313 | |||||||||||
|
Non-interest
income
|
807 | 874 | 844 | 1,115 | ||||||||||||
|
Non-interest
expense
|
5,351 | 5,503 | 5,122 | 5,041 | ||||||||||||
|
Provision
for income
taxes
|
1,225 | 1,263 | 1,320 | 1,399 | ||||||||||||
|
Net
income
|
$ | 2,485 | $ | 2,435 | $ | 2,527 | $ | 2,671 | ||||||||
|
Per
Share Data:
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net
income
|
$ | 0.24 | $ | 0.23 | $ | 0.24 | $ | 0.26 | ||||||||
|
Diluted:
|
||||||||||||||||
|
Net
income
|
$ | 0.23 | $ | 0.23 | $ | 0.24 | $ | 0.25 | ||||||||
87