REPUBLIC FIRST BANCORP INC - Annual Report: 2008 (Form 10-K)
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, 2008
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 16th
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:
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Common
Stock, $0.01 par value
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The
Nasdaq Stock Market
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(Title of each class)
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(Name of each exchange on which
registered)
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Securities
registered pursuant to Section 12(g) of the Act: None
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 [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” 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, 2008. The aggregate market value of $63,678,171 was based on the last sale
price on the Nasdaq Stock Market on June 30, 2008.
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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10,631,348
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Title
of Class
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Number
of Shares Outstanding as of March 6,
2009
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1
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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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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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
Financial Condition and Results of
Operations
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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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,
Financial Statement Schedules
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Signatures
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2
PART
I
Throughout
this annual report on Form 10-K, the registrant, Republic First Bancorp, Inc.,
is referred to as the “Company” or as “we.” 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 United States 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”, as that term is defined in
the U.S. Private Securities Litigation Reform Act of 1995. These
statements can be identified by reference to a future period or periods or by
the use of words such as “would be,” “could be,” “should be,” “probability,”
“risk,” “target,” “objective,” “may,” “will,” “estimate,” “project,” “believe,”
“intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions or
variations on such expressions. 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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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:
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the
ability of the Company and Pennsylvania Commerce Bancorp, Inc. to obtain
the required approvals for and complete their proposed
merger;
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general
economic conditions, including current turmoil in the financial markets
and the efforts of government agencies to stabilize the financial
system;
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adverse
changes in the Company’s loan portfolio and credit risk-related losses and
expenses;
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changes
in interest rates;
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business
conditions in the financial services industry, including competitive
pressure among financial services companies, new service and product
offerings by competitors, price pressures, and similar
items;
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deposit
flows;
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loan
demand;
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the
regulatory environment, including evolving banking industry standards,
changes in legislation or
regulation;
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changes
in accounting principles, policies and
guidelines;
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rapidly
changing technology;
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litigation
liabilities, including costs, expenses, settlements and judgments;
and
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other
economic, competitive, governmental, regulatory and technological factors
affecting the Company’s operations, pricing, products and
services.
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Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management’s analysis only as of the date
hereof. Except as required by applicable law or regulation, we do not
undertake, and specifically disclaim any 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 Annual Report on Form 10-K. Readers should carefully review the
risk factors described included in this Annual Report on Form 10-K and in other
documents the Company files from time to time with the SEC.
3
.
Republic
First Bancorp, Inc.
On
November 7, 2008, the board of directors of the Company approved a merger
agreement under which Pennsylvania Commerce Bancorp, Inc. (“Pennsylvania
Commerce”) will acquire the Company, subject to the receipt of shareholder and
regulatory approvals and the satisfaction of other customary closing
conditions. The Company has scheduled a special meeting of
shareholders to consider and vote upon the approval of the merger agreement for
March 18, 2009, and Pennsylvania Commerce has scheduled a special meeting of its
shareholders for March 19, 2009. Pennsylvania Commerce and the
Company have filed a Registration Statement on Form S-4 with the SEC that
includes a joint proxy statement of the Company and Pennsylvania Commerce, which
also constitutes a preliminary prospectus of Pennsylvania
Commerce. The registration statement has been declared effective by
the SEC, and the Company and Pennsylvania Commerce have mailed the joint proxy
statement/prospectus to their shareholders. INVESTORS ARE URGED TO
READ THE JOINT PROXY STATEMENT/PROSPECTUS AND ANY OTHER DOCUMENTS TO BE FILED
WITH THE SEC IN CONNECTION WITH THE MERGER OR INCORPORATED BY REFERENCE IN THE
JOINT PROXY STATEMENT/PROSPECTUS BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION. Investors will be able to obtain these documents free of
charge at the SEC’s web site (www.sec.gov). In addition, documents
filed with the SEC by the Company will be available free of charge by request to
Republic First Bancorp, Inc., Attention: Linda Lewis, Two Liberty Place, 50 S.
16th Street, Suite 2400, Philadelphia, PA 19102, (215) 735-4422, ext.
5332, and documents filed with the SEC by Pennsylvania Commerce will be
available free of charge by directing a request to Ms. Sherry Richart at
Pennsylvania Commerce Bancorp, Inc., 3801 Paxton Street, Harrisburg, PA, 17111
(telephone: 800-653-6104).
The
Company was organized and incorporated under the laws of the Commonwealth of
Pennsylvania in 1987 to be the holding company for Republic First Bank and, in
1999, it established a second subsidiary bank, First Bank of
Delaware. Through 2004, the Company was a two-bank holding company.
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.
First
Bank of Delaware was spun off by the Company on January 31, 2005 through a
distribution of all of the shares of FBD’s common stock to the Company’s
shareholders. Since that date, the Company has been a one bank
holding company.
As of
December 31, 2008, the Company had total assets of approximately $952.0 million,
total shareholders’ equity of approximately $79.3 million, total deposits of
approximately $739.2 million and net loans receivable outstanding of
approximately $774.7 million.
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, 2008 the Company and Republic had a total of 153 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 Deposit Insurance Fund of the FDIC. Republic
presently conducts its principal banking activities through its six 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, 2008, Republic had total assets of approximately $949.9 million,
total shareholder’s equity of approximately $89.5 million, total deposits of
approximately $750.7 million and net loans receivable of approximately $774.7
million.
4
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 its service area.
Republic
attempts to offer a high level of personalized service to both its 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.
In
relation to the offering of loan and credit facilities, 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.
As
required for liquidity purposes for the products being offered, 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, 2008
and 2007, approximately 70% and 63%, 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: Wells Fargo, Citizens, PNC, Sovereign, TD Bank
and Royal Bank America. Republic competes with new and established
local commercial banks, as well as numerous regionally based and super-regional
commercial banks. In addition 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, 2008. Loans above these amounts may be made
if the excess over the lending limit is participated to other
institutions. 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
5
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 its market area.
Operating Strategy for Business
Banking
Since
2005, Republic’s primary 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, and local, timely credit decisions. 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. We believe the
proposed merger with Pennsylvania Commerce will allow us to offer Pennsylvania
Commerce’s renowned service and convenience to our customers and to a wider
geographic area.
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. We believe when the proposed merger
with Pennsylvania Commerce is completed, an opportunity will be provided to
increase our 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 $9.8 million at
December 31, 2008, amounted to $287.3 million. The $9.8 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 its 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 twelve proprietary ATMs at branch locations
and two additional proprietary 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,
2008. 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
6
sufficient
financial strength to merit unsecured financing. Republic makes both
fixed and variable rate loans with terms typically 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 Northeast Philadelphia in second quarter
2008. Three additional branches are planned for 2009 in southern New
Jersey. 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
Board of Governors of the Federal Reserve System (the “Federal Reserve”) in
attempting to control the money supply and credit availability in order to
influence market interest rates and the national economy. In
response to the current global financial crises, the United States and other
governments have taken unprecedented steps in effort to stabilize the financial
system, and may continue to do so.
Holding Company Structure
Republic
is subject to restrictions under federal law which limit 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:
(a)
repealed
the key provisions of the Glass Steagall Act so as to permit commercial banks to
affiliate with investment banks (securities firms);
(b)
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
(c)
permitted
subsidiaries of banks to engage in a broad range of financial activities that
were not permitted for banks themselves.
7
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 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 CRA 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.
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 protect the
security and confidentiality of customer information.
Sarbanes-Oxley Act of
2002
The Sarbanes-Oxley Act of 2002
comprehensively revised the laws affecting corporate governance, auditing and
accounting, executive compensation and corporate reporting for entities, such as
the Company, with equity or debt securities registered under the Securities
Exchange Act of 1934. Among other things, Sarbanes-Oxley and its implementing
regulations have established new membership requirements and additional
responsibilities for our audit committee, imposed restrictions on the
relationship between the Company and its outside auditors (including
restrictions on the types of non-audit services our auditors may provide to us),
imposed additional responsibilities for our external financial statements on our
chief executive officer and chief financial officer, and expanded the disclosure
requirements for our corporate insiders. The requirements are intended to allow
stockholders to more easily and efficiently monitor the performance of companies
and directors.
We have taken necessary steps with
respect to achieving compliance and have updated our assessment and reporting on
internal controls through the end of 2008.
8
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 $56.3 million of dividends payable plus an additional amount equal to
its net profit for 2009, 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”.
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 has no
plans to pay cash dividends in 2009.
Deposit Insurance and
Assessments
The
deposits of Republic are insured up to applicable limits per insured depositor
by the FDIC. As an FDIC-insured bank, Republic is also subject to FDIC insurance
assessments. Beginning in 2007, the FDIC adopted a revised risk-based assessment
system to determine the assessment rates to be paid by insured institutions.
Under a final rulemaking announced by the FDIC on March 4, 2009, and depending
on the institution’s risk category, assessment rates will range from 12 to 45
basis points. Institutions in the lowest risk category will be charged a rate
between 12 and 16 basis points; these rates increase to 22, 32 and 45 basis
points, respectively, for the remaining three risk categories. These rates may
be offset in the future by any dividends declared by the FDIC if the deposit
reserve ratio increases above a certain amount. Given the state of current
economic environment, it is unlikely that the FDIC will lower these assessment
rates, and such rates may in fact increase. Because FDIC deposit insurance
premiums are “risk-based,” higher premiums would be charged to banks that have
lower capital ratios or higher risk profiles. Consequently, a decrease in
Republic’s capital ratios, or a negative evaluation by the FDIC, as Republic’s
primary federal banking regulator, may also increase Republic’s net funding
costs and reduce its net income.
Additionally,
the FDIC recently adopted an interim rule that imposes a 20 basis point
emergency special assessment on all insured depository institutions on June 30,
2009. The special assessment will be collected September 30, 2009, at the same
time that the risk-based assessments for the second quarter of 2009 are
collected. The interim rule also permits the FDIC to impose an emergency special
assessment of up to 10 basis points on all insured depository institutions
whenever, after June 30, 2009, the FDIC estimates that the fund reserve ratio
will fall to a level that the FDIC believes would adversely affect public
confidence or to a level close to zero or negative at the end of a calendar
quarter. Comments received during the public comment period may affect the
content of the final rule on this issue.
All
FDIC-insured depository institutions must also pay an annual assessment to
provide funds for the repayment of debt obligations (commonly referred to as
FICO bonds) issued by the Financing Corporation, a federal corporation, in
connection with the disposition of failed thrift institutions by the Resolution
Trust Corporation. The assessment rate for the first quarter of 2009
is set at approximately 1.14 cents per $100 of assessable deposits, and for
second quarter of 2009 at 1.04 cents per $100 of assessable deposits. 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.
Emergency Economic Stabilization Act of
2008
The
U.S. Congress adopted, and on October 3, 2008, President George W. Bush signed,
the Emergency Economic Stabilization Act of 2008 (“EESA”) which authorizes the
United States Department of the Treasury, to purchase from financial
institutions and their holding companies up to $700 billion in mortgage loans,
mortgage-related securities and certain other financial instruments, including
debt and equity securities issued by financial institutions and their holding
companies in a troubled asset relief program. The purpose of the troubled asset
relief program is to restore confidence and stability to the U.S. banking system
and to encourage financial institutions to increase their lending to customers
and to each other. The troubled asset relief program is also expected to include
direct purchases or guarantees of troubled assets of financial institutions. The
Treasury Department has allocated $250 billion towards a capital purchase
program. Under the capital purchase program, the
9
Treasury
Department will purchase debt or equity securities from participating
institutions
Temporary
Liquidity Guarantee Program
The
Federal Deposit Insurance Corporation increased deposit insurance on most
accounts from $100,000 to $250,000, until the end of 2009. In addition, pursuant
to Section 13(c)(4)(G) of the Federal Deposit Insurance Act, the Federal Deposit
Insurance Corporation has implemented two temporary programs to provide deposit
insurance for the full amount of most non-interest bearing transaction deposit
and certain other accounts through the end of 2009, and to guarantee certain
unsecured debt of financial institutions and their holding companies through
June 2012. For non-interest bearing transaction deposit accounts, including
accounts swept from a non-interest bearing transaction account into a
non-interest bearing savings deposit account, a 10 basis point annual rate
surcharge will be applied to deposit amounts in excess of $250,000. Financial
institutions could opt out of these two programs by December 5, 2008. We did opt
out of the debt guarantee program, but did not opt out of the transaction
account guarantee program. We do not expect that the assessment
surcharge will have a material impact on our results of operations.
Capital Adequacy
The
Federal Reserve 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 Federal Reserve 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 Federal Reserve 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
10
growth of
Republic cannot be determined. See “Management’s Discussion and
Analysis of Operations and Financial Condition - Results of
Operations”.
11
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.
Unfavorable
economic and market conditions due to the current global financial crisis may
adversely affect our financial position and results of operations.
Economic
and market conditions in the United States and around the world have
deteriorated significantly and may remain depressed for the foreseeable
future. Conditions such as slowing or negative growth and the
sub-prime debt devaluation crisis have resulted in a low level of liquidity in
many financial markets, and extreme volatility in credit, equity and fixed
income markets. These economic developments could have various
effects on our business, including insolvency of major customers, an
unwillingness of customers to borrow or to repay funds already borrowed and a
negative impact on the investment income the Company is able to earn on its
investment portfolio. The potential effects of the current global
financial crisis are difficult to forecast and mitigate. As a
consequence, the Company’s operating results for a particular period are
difficult to predict. Distress in the credit markets and issues
relating to liquidity among financial institutions have resulted in the failure
of some financial institutions around the world and others have been forced to
seek acquisition partners. The United States and other governments have taken
unprecedented steps in effort to stabilize the financial system, including
investing in financial institutions. There can be no assurance that these
efforts will succeed. Our business and our financial condition and
results of operations could be adversely affected by (1) continued or
accelerated disruption and volatility in financial markets; (2) continued
capital and liquidity concerns regarding financial institutions; (3) limitations
resulting from further governmental action in an effort to stabilize or provide
additional regulation of the financial system; or (4) recessionary conditions
that are deeper or longer lasting than currently anticipated.
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 and financial condition may be negatively impacted by a general
economic downturn or changes in the credit risk of our borrowers.
Republic’s
results of operations and financial condition 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 and other factors.
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 allowance for loan losses adequate to absorb losses
inherent in its loan portfolio. In maintaining 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
12
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. 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, and adversely impact our net interest
margin.
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, the Pennsylvania Department of Banking and the
FRB. 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.
We
anticipate increased and/or changes in regulations as a result of the current
turmoil in the financial markets and the efforts of government agencies to
stabilize the financial system.
13
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.
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.
14
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 listed 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.
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.
Our
disclosure controls and procedures and our internal control over financial
reporting may not achieve their intended objectives.
Our
system of internal controls cannot provide absolute assurance of achieving their
intended objectives because of inherent limitations. Internal control
processes that involve human diligence and compliance are subject to lapses in
judgment and breakdowns resulting from human failures. Internal
controls can also be circumvented by collusion or improper management
override. Because of such limitations, there is a risk that material
misstatements due to error or fraud may not be prevented or detected on a timely
basis by internal controls. In connection with management’s
assessment of our internal control over financial reporting at December 31,
2008, management identified certain material weaknesses related to other than
temporarily impaired investment securities and the financial statement reporting
process. You should see Item 9A of this report and “Management’s
Report on Internal Control Over Financial Reporting,” for additional
information.
15
Additional
Risk Factors Regarding the Proposed Merger with Pennsylvania
Commerce
Because
the market price of Pennsylvania Commerce common stock may fluctuate, the
Company’s shareholders will not know the exchange ratio or the market value of
the Pennsylvania Commerce common stock they will receive in the merger when they
vote at the special meeting.
Under the
terms of the merger agreement, the exchange ratio will be calculated on the
effective date of the merger based on the average closing price of Pennsylvania
Commerce common stock during twenty (20) consecutive trading days, ending on the
third calendar day immediately preceding the effective date of the
merger. If the third calendar day is not a trading day on the NASDAQ
Stock Market, then the twenty-day trading period will end on the trading day
immediately preceding such calendar day. The closing price of
Pennsylvania Commerce common stock as reported on the NASDAQ Stock Market was
$28.86 on November 7, 2008, the date immediately preceding the trading day on
which the merger was publicly announced. As of March 6, 2009 the
closing price of Pennsylvania Commerce common stock as reported on the NASDAQ
Stock Market was $12.82. The market price of Pennsylvania Commerce common stock
may vary from these prices. The market price of Pennsylvania Commerce
common stock may change as a result of a variety of factors, including general
market and economic conditions, changes in its business, operations and
prospects, and regulatory considerations. Many of these factors are beyond the
control of Pennsylvania Commerce. While the exchange ratio is based on $10.00
per share of the Company’s common stock and will vary depending on the average
closing price of Pennsylvania Commerce common stock, the exchange ratio cannot
exceed 0.38. As a result, the market value of shares of Pennsylvania
Commerce common stock that a shareholder of the Company will receive per share
in the merger will be less than $10.00 if the average closing price of
Pennsylvania Commerce common stock is less than $26.32. Moreover, since the
exchange ratio is based on an average closing price, the market price of
Pennsylvania Commerce on the date that the merger consideration is exchanged may
differ from the average closing price.
There
can be no assurance that the value of the Pennsylvania Commerce common stock
that Republic First shareholders receive in the merger will be $10.00 per share
of Republic First common stock.
The
market price of Pennsylvania Commerce common stock may be affected by factors
different from those affecting Republic First common stock.
Upon
completion of the merger, based on the maximum exchange ratio of 0.38 and the
number of outstanding shares, outstanding stock options and convertible
preferred securities on the companies’ respective record date, the Company’s
shareholders will own approximately 40% of the combined company. Some of
Pennsylvania Commerce’s current businesses and markets differ from those of the
Company and, accordingly, the results of operations of Pennsylvania Commerce
after the merger may be affected by factors different from those currently
affecting the results of operations of the Company.
Some
of the conditions to closing of the merger may result in delay or prevent
completion of the merger, which may adversely affect the value of the companies’
securities.
Completion
of the merger is conditioned upon the receipt of certain governmental consents
and approvals, including consents and approvals required by the Board of
Governors of the Federal Reserve and the Pennsylvania Department of Banking.
Failure to obtain these consents would prevent consummation of the merger. Even
if the approvals are obtained, the effort involved may delay consummation of the
merger. Governmental authorities may also impose conditions in connection with
the merger that may adversely affect the combined company’s operations after the
merger. Any of these events could have a negative impact on the value of
Pennsylvania Commerce’s and the Company’s securities.
Upon
completion of the merger, the Company’s shareholders will become shareholders of
a combined company that is controlled principally by current Pennsylvania
Commerce management and members of the Pennsylvania Commerce board of directors.
Senior
management of Pennsylvania Commerce will constitute the majority of the
management team of the combined company. The chairman, president and chief
executive officer of the combined company will be the current chairman,
president and chief executive officer of Pennsylvania Commerce. The
initial board of directors of the combined company will include 12 members, 8 of
whom are current members of the Pennsylvania Commerce board of directors.
The
merger may distract our management from their other responsibilities.
The
merger could cause the management of the companies to focus their time and
energies on matters related to the merger that otherwise would be directed to
the companies’ business and operations. Any such distraction on the part of
management, if
16
significant,
could affect management’s ability to service existing business and develop new
business and adversely effect the companies’ business and earnings following the
merger.
If
the merger is not completed, the companies will have incurred substantial
expenses without realizing the expected benefits.
Both the
Company and Pennsylvania Commerce have incurred expenses in connection with the
merger transaction and expect to incur additional expenses prior to completing
the merger. The completion of the merger depends on the satisfaction of
specified conditions and the receipt of regulatory approvals. We cannot
guarantee that these conditions will be met. If the merger is not completed, the
merger-related expenses that the companies will have incurred could have an
adverse impact on their financial condition without any of the expected benefits
of the merger.
None
Republic
First Bank leases approximately 39,956 square feet on two floors of Two Liberty
Place, 50 South 16th Street,
Philadelphia, Pennsylvania. The space serves as the headquarters and
executive offices of the Company and Republic. Bank office operations
and the commercial bank lending department of Republic First Bank are also
located at the site. The initial lease term will expire on December
31, 2020 and the lease contains two five year renewal options. Rent
expense commenced in June 2007 at an annual rate of approximately $562,684,
subject to certain abatements during the first twenty-eight months of the
lease.
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
2009 annual rent for such location is $113,587 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 2009 annual rent
for such location is $134,097, 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 2009 annual rental at
such location is $61,895, 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 2009
annual rent at such location is $50,106, 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 2009 annual rent at such location
is $94,705, 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 expired in August 2008, has been extended for
17
fifteen
years to August 2023, and contains an additional five-year renewal option. The
2009 annual rent for such location is $172,695, 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 2009 annual rent is $78,861 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 2009 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 2009 annual rent is
$44,000 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 2009
annual rent is $73,188, payable in monthly installments.
Republic
entered into a lease agreement that commenced December 26, 2007 for
approximately 2,710 square feet for its Torresdale office, 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
2009 annual rent is $130,000, payable in monthly installments.
Republic
purchased a parcel of land consisting of approximately 2.1 acres, on July 23,
2008, at 335 Route 70 East, Cherry Hill, New Jersey. A 4,000 square
foot branch facility is in development, and is scheduled to be opened in
2009.
Republic
entered into a lease agreement on October 29, 2008 for a building, approximately
5,000 square feet located at 30 Kings Highway East, Haddonfield, New
Jersey. This location will be utilized for its Haddonfield branch and
is scheduled to open in 2009. The initial twenty-year term of the
lease expires January 2029 with two five-year renewal options. The
2009 annual rent is to be $128,333 payable in monthly installments.
Republic
entered into purchase agreements for three parcels of land on October 12, 2008
totaling approximately 1.2 acres located at the Black Horse Pike and Ganttown
Road, Turnersville, New Jersey. A 4,000 square foot branch facility
is to be developed and is scheduled to open in 2009.
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.
Not
applicable.
18
PART
II
Market
Information
Shares of
the Company’s class of common stock are listed on the Nasdaq Global Market under
the symbol “FRBK.” The table below presents the range of high and low
trade prices reported for the common stock on the Nasdaq Global Market for the
periods indicated. Market prices reflect inter-dealer prices, without
retail mark-up, markdown, or commission, and may not necessarily reflect actual
transactions. As of January 29, 2009, there were approximately 2,400
holders of the Company’s common stock, which includes an estimate of individual
participants in security position listings. On March 6, 2009, the
closing price of a share of common stock on Nasdaq was $4.69.
|
Year
|
Quarter
|
High
|
Low
|
||||||||
|
2008………………………...
|
4th
|
$ |
9.19
|
$ |
7.26
|
||||||
|
3rd
|
10.73
|
5.71
|
|||||||||
|
2nd
|
7.75
|
4.20
|
|||||||||
|
1st
|
8.59
|
4.31
|
|||||||||
|
2007………………………...
|
4th
|
$ |
8.94
|
$ |
6.77
|
||||||
|
3rd
|
9.92
|
7.25 | |||||||||
|
2nd
|
11.93
|
9.45 | |||||||||
|
1st
|
12.09
|
11.09
|
|||||||||
Dividend
Policy
The
Company has not paid any cash dividends on its common stock and has no plans to
pay cash dividends during 2009. For
certain limitations on Republic’s ability to pay cash dividends to the Company,
see “Description of Business - Supervision and Regulation”.
19
|
As
of or for the Years Ended December 31,
|
||||||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
INCOME
STATEMENT DATA (1):
|
||||||||||||||||||||
|
Total
interest income
|
$ | 53,976 | $ | 68,346 | $ | 62,745 | $ | 45,381 | $ | 33,599 | ||||||||||
|
Total
interest expense
|
25,081 | 38,307 | 28,679 | 16,223 | 14,748 | |||||||||||||||
|
Net
interest income
|
28,895 | 30,039 | 34,066 | 29,158 | 18,851 | |||||||||||||||
|
Provision
for loan losses
|
7,499 | 1,590 | 1,364 | 1,186 | (314 | ) | ||||||||||||||
|
Non-interest
income
|
1,242 | 3,073 | 3,640 | 3,614 | 4,466 | |||||||||||||||
|
Non-interest
expenses
|
23,887 | 21,364 | 21,017 | 18,207 | 15,346 | |||||||||||||||
|
Income
(loss) from continuing operations before income taxes
(benefit)
|
(1,249 | ) | 10,158 | 15,325 | 13,379 | 8,285 | ||||||||||||||
|
Provision
(benefit) for income taxes
|
(777 | ) | 3,273 | 5,207 | 4,486 | 2,694 | ||||||||||||||
|
Income
(loss) from continuing operations
|
(472 | ) | 6,885 | 10,118 | 8,893 | 5,591 | ||||||||||||||
|
Income
from discontinued operations
|
- | - | - | - | 5,060 | |||||||||||||||
|
Income
tax on discontinued operations
|
- | - | - | - | 1,711 | |||||||||||||||
|
Net
income (loss)
|
$ | (472 | ) | $ | 6,885 | $ | 10,118 | $ | 8,893 | $ | 8,940 | |||||||||
|
PER
SHARE DATA (1)
|
||||||||||||||||||||
|
Basic
earnings per share
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.04 | ) | $ | 0.66 | $ | 0.97 | $ | 0.88 | $ | 0.57 | |||||||||
|
Income
from discontinued operations
|
- | - | - | - | 0.35 | |||||||||||||||
|
Net
income (loss)
|
$ | (0.04 | ) | $ | 0.66 | $ | 0.97 | $ | 0.88 | $ | 0.92 | |||||||||
|
Diluted
earnings per share
|
||||||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.04 | ) | $ | 0.65 | $ | 0.95 | $ | 0.84 | $ | 0.54 | |||||||||
|
Income from
discontinued operations
|
- | - | - | - | 0.33 | |||||||||||||||
|
Net
income (loss)
|
$ | (0.04 | ) | $ | 0.65 | $ | 0.95 | $ | 0.84 | $ | 0.87 | |||||||||
|
Book
value per share
|
$ | 7.46 | $ | 7.80 | $ | 7.16 | $ | 6.17 | $ | 5.49 | ||||||||||
|
BALANCE
SHEET DATA (1) (2)
|
||||||||||||||||||||
|
Total
assets (2)
|
$ | 951,980 | $ | 1,016,308 | $ | 1,008,824 | $ | 850,855 | $ | 720,412 | ||||||||||
|
Total
loans, net (3)
|
774,673 | 813,041 | 784,002 | 670,469 | 543,005 | |||||||||||||||
|
Total
investment securities (4)
|
90,066 | 90,299 | 109,176 | 44,161 | 49,160 | |||||||||||||||
|
Total
deposits
|
739,167 | 780,855 | 754,773 | 647,843 | 510,684 | |||||||||||||||
|
FHLB
& overnight advances
|
102,309 | 133,433 | 159,723 | 123,867 | 86,090 | |||||||||||||||
|
Subordinated
debt
|
22,476 | 11,341 | 6,186 | 6,186 | 6,186 | |||||||||||||||
|
Total
shareholders’ equity (2)
|
79,327 | 80,467 | 74,734 | 63,677 | 65,224 | |||||||||||||||
|
PERFORMANCE
RATIOS (1)
|
||||||||||||||||||||
|
Return
on average assets on continuing operations
|
(0.05 | )% | 0.71 | % | 1.19 | % | 1.22 | % | 0.87 | % | ||||||||||
|
Return
on average shareholders’ equity on continuing operations
|
(0.60 | )% | 8.86 | % | 14.59 | % | 15.22 | % | 10.93 | % | ||||||||||
|
Net
interest margin
|
3.28 | % | 3.26 | % | 4.20 | % | 4.23 | % | 3.15 | % | ||||||||||
|
Total
non-interest expenses as a percentage of average assets
|
2.54 | % | 2.20 | % | 2.48 | % | 2.49 | % | 2.39 | % | ||||||||||
|
ASSET
QUALITY RATIOS (1)
|
||||||||||||||||||||
|
Allowance
for loan losses as a percentage of loans (3)
|
1.07 | % | 1.04 | % | 1.02 | % | 1.12 | % | 1.22 | % | ||||||||||
|
Allowance
for loan losses as a percentage of non-performing loans
|
48.51 | % | 38.19 | % | 116.51 | % | 222.52 | % | 137.70 | % | ||||||||||
|
Non-performing
loans as a percentage of total loans (3)
|
2.21 | % | 2.71 | % | 0.87 | % | 0.50 | % | 0.88 | % | ||||||||||
|
Non-performing
assets as a percentage of total assets
|
2.72 | % | 2.55 | % | 0.74 | % | 0.42 | % | 0.75 | % | ||||||||||
|
Net
charge-offs as a percentage of average loans, net (3)
|
0.96 | % | 0.14 | % | 0.13 | % | 0.04 | % | 0.07 | % | ||||||||||
|
LIQUIDITY
AND CAPITAL RATIOS (1)
|
||||||||||||||||||||
|
Average
equity to average assets
|
8.44 | % | 8.01 | % | 8.17 | % | 7.99 | % | 7.98 | % | ||||||||||
|
Leverage
ratio
|
11.14 | % | 9.44 | % | 8.75 | % | 8.89 | % | 9.53 | % | ||||||||||
|
Tier
1 capital to risk-weighted assets
|
12.26 | % | 10.07 | % | 9.46 | % | 10.65 | % | 11.20 | % | ||||||||||
|
Total
capital to risk-weighted assets
|
13.26 | % | 11.01 | % | 10.30 | % | 11.81 | % | 12.45 | % | ||||||||||
| (1) | Reflects the spin off of First Bank of Delaware, presented as discontinued operations for 2004. |
|
(2)
|
2004
included First Bank of Delaware
|
| (3) | Includes loans held for sale |
| (4) | Includes restricted stock |
20
Item 7: Management’s Discussion and Analysis
of Results of Operations and Financial Condition
The
following is management’s discussion and analysis of the Company’s financial
condition, changes in financial condition and results of operations, liquidity
and capital resources presented in the accompanying consolidated financial
statements. This discussion should be read in conjunction with the
accompanying consolidated financial statements and the notes
thereto.
In
connection with management’s assessment of our internal control over financial
reporting at December 31, 2008, management identified certain material
weaknesses related to other than temporarily impaired investment securities and
the financial statement reporting process. You should see Item 9A of
this report and “Management’s Report on Internal Control Over Financial
Reporting,” for additional information.
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 3 of the notes to our audited 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, based upon its evaluation,
considers adequate to absorb losses inherent 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. A delay or shortfall in
amount of payments does not necessarily result in the loan being identified as
impaired.
21
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. Classification of a loan within
this category 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 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 known to it in order 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. In connection with management’s assessment of our internal control
over financial reporting at December 31, 2008, management identified certain
material weaknesses related to other than temporarily impaired investment
securities and the financial statement reporting process. See Item 9A
of this report and “Management’s Report on Internal Control Over Financial
Reporting,” for additional information.
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.
22
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
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 assets and
liabilities measured at fair value. FASB Statement No. 157 does not
change existing guidance as to whether or not an asset or liability is
carried at fair value. The new standard provides a consistent definition of
fair value which focuses on exit price and prioritizes, within a measurement of
fair value, the use of market-based inputs over entity-specific inputs. The
standard also establishes a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The standard eliminates large
position discounts for financial instruments quoted in active markets,
requires costs related to acquiring financial instruments carried at fair
value to be included in earnings as incurred and requires that an
issuer’s credit standing be considered when measuring liabilities at fair
value. The new guidance is effective for financial statements issued for
fiscal years beginning after November 15, 2007, with early
adoption permitted. The implementation of this standard did not
have a material impact on our consolidated financial statements or 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 after 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 implementation of this standard will not have a material
impact on the Company’s consolidated financial position and results of
operations.
In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" which clarifies the accounting for
convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. The FSP requires issuers to account
separately for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer's nonconvertible debt borrowing
rate when interest cost is recognized. The FSP requires bifurcation
of a component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense. The FSP requires retrospective application to the
terms of instruments as they existed for all periods presented. The
FSP is effective for fiscal years beginning after December 15, 2008, and interim
periods within those years. Early adoption is not
permitted. The Company is currently evaluating the potential impact
the new pronouncement will have on its consolidated financial
statements.
In June
2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” This FSP clarifies that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable
dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied. This FSP is effective for fiscal years
beginning after December 15, 2008. The implementation of this
standard will not have a material impact on the Company’s consolidated financial
position and results of operations.
In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN
45-4 amends and enhances disclosure
23
requirements
for sellers of credit derivatives and financial guarantees. It also
clarifies that the disclosure requirements of SFAS No. 161 are effective for
quarterly periods beginning after November 15, 2008, and fiscal years that
include those periods. FSP 133-1 and FIN 45-4 is effective for
reporting periods (annual or interim) ending after November 15,
2008. The implementation of this standard did not have a material
impact on our consolidated financial position and results of
operations.
In
December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (FIN)
46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities” (FSP SFAS 140-4
and FIN 46(R)-8). FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”, to require public entities to provide additional disclosures
about transfers of financial assets. It also amends FIN 46(R), “Consolidation of
Variable Interest Entities”, to require public enterprises, including sponsors
that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities.
Additionally, this FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE)
that holds a variable interest in the qualifying SPE but was not the transferor
of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the
transferor of financial assets to the qualifying SPE. The disclosures required
by FSP SFAS 140-4 and FIN 46(R)-8 are intended to provide greater transparency
to financial statement users about a transferor’s continuing involvement with
transferred financial assets and an enterprise’s involvement with variable
interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) is effective
for reporting periods (annual or interim) ending after December 15, 2008. The
implementation of this standard did not have an impact on the Company’s
consolidated financial position and results of operations.
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”. This FSP amends SFAS 132(R),
“Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. The disclosures about
plan assets required by this FSP shall be provided for fiscal years ending after
December 15, 2009. The Company is currently reviewing the effect this
new pronouncement will have on its consolidated financial
statements.
Results
of Operations for the years ended December 31, 2008 and 2007
Overview
The Company’s net income decreased $7.4
million, or 106.9%, to a loss of $472,000` or $
(.04) per diluted share for the year ended December 31,
2008, compared to $6.9 million, or $0.65 per diluted share for the prior
year. There was a $14.4 million, or 21.0%, decrease in total interest
income, reflecting a 3.8% decrease in average loans outstanding while interest
expense decreased $13.2 million reflecting a 1.9% decrease in average interest
bearing deposits. Accordingly, net interest income decreased $1.1
million. The provision for loan losses in 2008 increased $5.9 million
to $7.5 million, compared to $1.6 million in 2007, reflecting the impact of an
economic downturn in real estate markets. Non-interest income
decreased $1.8 million to $1.2 million in 2008 compared to $3.1 million in 2007.
The decrease reflected a $1.4 million impairment charge on a bank pooled trust
preferred security. Non-interest expenses increased $2.5 million to
$23.9 million compared to $21.4 million in 2007. The increase
reflected $1.6 million of write downs and losses on the sale of other real
estate which also reflected the impact of the economic downturn. Return on
average assets and average equity of (0.05)% and (0.60)% respectively in 2008
compared to 0.71% and 8.86% respectively in 2007.
24
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 2008, 2007
and 2006, as Republic had tax-exempt income in those years.
|
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, 2008
|
For
the Year
Ended
December
31, 2007
|
For
the Year
Ended
December
31, 2006
|
|||||||||||||||||||||||||||||||||
|
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||
|
Federal funds sold and
other
|
||||||||||||||||||||||||||||||||||||
|
interest-earning
assets
|
$ | 9,821 | $ | 218 | 2.22 | % | $ | 13,923 | $ | 686 | 4.93 | % | $ | 25,884 | $ | 1,291 | 4.99 | % | ||||||||||||||||||
|
Investment securities and
restricted
stock
|
89,365 | 5,135 | 5.75 | % | 95,715 | 5,752 | 6.01 | % | 57,163 | 3,282 | 5.74 | % | ||||||||||||||||||||||||
|
Loans
receivable
|
789,446 | 48,846 | 6.19 | % | 820,380 | 62,184 | 7.58 | % | 728,754 | 58,254 | 7.99 | % | ||||||||||||||||||||||||
|
Total
interest-earning
assets
|
888,632 | 54,199 | 6.10 | % | 930,018 | 68,622 | 7.38 | % | 811,801 | 62,827 | 7.74 | % | ||||||||||||||||||||||||
|
Other
assets
|
51,349 | 39,889 | 36,985 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 939,981 | $ | 969,907 | $ | 848,786 | ||||||||||||||||||||||||||||||
|
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Demand - non-interest
bearing
|
$ | 76,671 | $ | - | N/A | $ | 78,641 | $ | - | N/A | $ | 82,233 | $ | - | N/A | |||||||||||||||||||||
|
Demand –
interest-bearing
|
33,976 | 327 | 0.96 | % | 38,850 | 428 | 1.10 | % | 53,073 | 565 | 1.06 | % | ||||||||||||||||||||||||
|
Money market &
savings
|
222,590 | 6,150 | 2.76 | % | 266,706 | 11,936 | 4.48 | % | 240,189 | 9,109 | 3.79 | % | ||||||||||||||||||||||||
|
Time
deposits
|
397,740 | 14,844 | 3.73 | % | 361,120 | 18,822 | 5.21 | % | 304,375 | 14,109 | 4.64 | % | ||||||||||||||||||||||||
|
Total
deposits
|
730,977 | 21,321 | 2.92 | % | 745,317 | 31,186 | 4.18 | % | 679,870 | 23,783 | 3.50 | % | ||||||||||||||||||||||||
|
Total
interest-
|
||||||||||||||||||||||||||||||||||||
|
bearing
deposits
|
654,306 | 21,321 | 3.26 | % | 666,676 | 31,186 | 4.68 | % | 597,637 | 23,783 | 3.98 | % | ||||||||||||||||||||||||
|
Other
borrowings
|
121,236 | 3,760 | 3.10 | % | 133,122 | 7,121 | 5.35 | % | 88,609 | 4,896 | 5.53 | % | ||||||||||||||||||||||||
|
Total
interest-bearing
|
||||||||||||||||||||||||||||||||||||
|
liabilities
|
775,542 | 25,081 | 3.23 | % | 799,798 | 38,307 | 4.79 | % | 686,246 | 28,679 | 4.18 | % | ||||||||||||||||||||||||
|
Total
deposits and
|
||||||||||||||||||||||||||||||||||||
|
other
borrowings
|
852,213 | 25,081 | 2.94 | % | 878,439 | 38,307 | 4.36 | % | 768,479 | 28,679 | 3.73 | % | ||||||||||||||||||||||||
|
Non-interest-bearing
|
||||||||||||||||||||||||||||||||||||
|
Other
liabilities
|
8,459 | 13,734 | 10,981 | |||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
79,309 | 77,734 | 69,326 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and
|
||||||||||||||||||||||||||||||||||||
|
Shareholders’
equity
|
$ | 939,981 | $ | 969,907 | $ | 848,786 | ||||||||||||||||||||||||||||||
|
Net
interest income
(2)
|
$ | 29,118 | $ | 30,315 | $ | 34,148 | ||||||||||||||||||||||||||||||
|
Net
interest
spread
|
2.87 | % | 2.59 | % | 3.56 | % | ||||||||||||||||||||||||||||||
|
Net
interest margin
(2)
|
3.28 | % | 3.26 | % | 4.20 | % | ||||||||||||||||||||||||||||||
__________
(1)
Yields on investments are calculated based on amortized cost.
(2) Net
interest income and net interest margin are presented on a tax equivalent
basis. Net interest income has been increased over the financial
statement amount by $223, $276 and $82 in 2008, 2007 and 2006, respectively, to
adjust for tax equivalency. The tax equivalent net interest margin is
calculated by dividing tax equivalent net interest income by average total
interest earning assets.
25
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,
2008
vs. 2007
|
Year
ended December 31,
2007
vs. 2006
|
|||||||||||||||||||||||
|
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
|
$ | (91 | ) | $ | (377 | ) | $ | (468 | ) | $ | (589 | ) | $ | (16 | ) | $ | (605 | ) | ||||||
|
Securities
|
(366 | ) | (251 | ) | (617 | ) | 2,317 | 153 | 2,470 | |||||||||||||||
|
Loans
|
(1,919 | ) | (11,419 | ) | (13,338 | ) | 6,945 | (3,015 | ) | 3,930 | ||||||||||||||
|
Total
interest earning assets
|
$ | (2,376 | ) | $ | (12,047 | ) | $ | (14,423 | ) | $ | 8,673 | $ | (2,878 | ) | $ | 5,795 | ||||||||
|
Interest
expense of
|
||||||||||||||||||||||||
|
Deposits
|
||||||||||||||||||||||||
|
Interest-bearing demand
deposits
|
$ | 47 | $ | 54 | $ | 101 | $ | 157 | $ | (20 | ) | $ | 137 | |||||||||||
|
Money market and
savings
|
1,222 | 4,564 | 5,786 | (1,187 | ) | (1,640 | ) | (2,827 | ) | |||||||||||||||
|
Time deposits
|
(1,370 | ) | 5,348 | 3,978 | (2,958 | ) | (1,755 | ) | (4,713 | ) | ||||||||||||||
|
Total
deposit interest expense
|
(101 | ) | 9,966 | 9,865 | (3,988 | ) | (3,415 | ) | (7,403 | ) | ||||||||||||||
|
Other borrowings
|
370 | 2,991 | 3,361 | (2,381 | ) | 156 | (2,225 | ) | ||||||||||||||||
|
Total
interest expense
|
269 | 12,957 | 13,226 | (6,369 | ) | (3,259 | ) | (9,628 | ) | |||||||||||||||
|
Net interest
income
|
$ | (2,107 | ) | $ | 910 | $ | (1,197 | ) | $ | 2,304 | $ | (6,137 | ) | $ | (3,833 | ) | ||||||||
Net
Interest Income
The
Company’s tax equivalent net interest margin increased 2 basis points to 3.28%
for 2008, versus 3.26% in 2007.
While
yields on interest-bearing assets decreased 128 basis points to 6.10% in 2008
from 7.38% in 2007, the rate on total deposits and other borrowings decreased
142 basis points to 2.94% from 4.36% between those respective periods. The 142
basis point decrease in the cost of deposits and other borrowings exceeded the
128 basis point decrease in yield on interest-bearing assets by 14 basis points.
However, the net interest margin increased by a lesser 2 basis points reflecting
a reduction in the amount loan balances which are the highest yielding interest
earning assets. The decrease in yields on assets and rates on deposits and
borrowings was due primarily to the repricing of assets and liabilities as a
result of actions taken by the Federal Reserve since September
2007.
The
Company's tax equivalent net interest income decreased $1.2 million, or 3.9%, to
$29.1 million for 2008, from $30.3 million for the prior year comparable period.
As shown in the Rate Volume table above, the decrease in net interest income was
due primarily to a decrease in average interest- earning assets as well as a
larger concentration of higher rate time deposits that offset a decrease in
average money market and savings deposits. Average interest earning
assets amounted to $888.6 million for 2008 and $930.0 million for the comparable
prior year period. The $41.4 million decrease resulted from
reductions in loans, securities and federal funds sold.
The
Company’s total tax equivalent interest income decreased $14.4 million, or
21.0%, to $54.2 million for 2008, from $68.6 million for the prior year
comparable period. Interest and fees on loans decreased $13.3
million, or 21.4%, to $48.8 million for 2008, from $62.2 million for the prior
year comparable period. The decrease was due primarily to the 139
basis point decline in the yield on loans resulting primarily from the repricing
of the variable rate loan portfolio as a result of actions taken by the Federal
Reserve as well as a $30.9 million, or 3.8%, decrease in average loans
outstanding to $789.4 million from $820.4 million. Interest and
dividends on investment securities decreased $617,000, or 10.7%, to $5.1 million
2008, from $5.8 million for the prior year comparable period. This
decrease reflected a decrease in average securities outstanding of $6.4 million,
or 6.6%, to $89.4 million from $95.7 million for the prior year comparable
period. Interest on federal funds sold and other interest-earning
assets decreased $468,000, or 68.2%, reflecting decreases in short- term
interest rates and a $4.1 million decrease in average balances to $9.8 million
for 2008 from $13.9 million for the comparable prior year period.
26
The
Company’s total interest expense decreased $13.2 million, or 34.5%, to $25.1
million for 2008, from $38.3 million for the prior year comparable
period. Interest- bearing liabilities averaged $775.5 million for
2008, versus $799.8 million for the prior year comparable period, or a decrease
of $24.3 million. The decrease primarily reflected reduced funding
requirements due to a decrease in average interest earning
assets. Average deposit balances decreased $14.3 million while there
was an $11.9 million decrease in average other borrowings. The
average rate paid on interest- bearing liabilities decreased 156 basis points to
3.23% for 2008. Interest expense on time deposit balances decreased
$4.0 million to $14.8 million in 2008 from $18.8 million in the comparable prior
year period, reflecting lower rates, the impact of which more than offset the
impact of higher average balances. Money market and savings interest
expense decreased $5.8 million to $6.2 million in 2008, from $11.9 million in
the comparable prior year period. The decrease in interest expense on
deposits reflected the impact of the lower short- term interest rate environment
as well as lower average balances. Accordingly, rates on total
interest- bearing deposits decreased 142 basis points in 2008 compared to the
comparable prior year period.
Interest
expense on other borrowings decreased $3.4 million to $3.8 million in 2008,
reflecting the lower short- term interest rate environment and lower average
balances. Average other borrowings, primarily overnight FHLB
borrowings, decreased $11.9 million, or 8.9%, between the respective
periods. Rates on overnight borrowings reflected the lower short-
term interest rate environment as the rate of other borrowings decreased to
3.10% in 2008, from 5.35% in the comparable prior year period. In
addition to the overnight FHLB borrowings, other borrowings also include average
balances of $17.8 million of subordinated debentures supporting trust preferred
securities and $14.3 million of FHLB term borrowings.
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 $7.5 million for 2008 compared to $1.6 million for
2007. The majority of the increase in the provision for 2008 resulted
from specific provisions for individual loans on properties secured by real
estate. The 2007 provision reflected $283,000 for net recoveries on
tax refund loans. The remaining provisions in both periods also
reflected amounts required to increase the allowance for loan growth in
accordance with the Company’s methodology. Net charge-offs increased
from $1.1 million in 2007 to $7.6 million in 2008 and non-accrual loans
decreased from $22.3 million at December 31, 2007 to $17.3 million at December
31, 2008.
Non-Interest Income
Total
non-interest income decreased $1.8 million to $1.2 million for 2008 compared to
$3.1 million for 2007, primarily due to a $1.4 million impairment charge on a
bank pooled trust preferred security. In addition, a decrease of
$815,000 in loan advisory and servicing fees, which reflected the economic
downturn in real estate markets was partially offset by a one time $309, 000
gain from a Mastercard transaction and a $100,000 legal settlement
Non-Interest Expenses
Total
non-interest expenses increased $2.5 million, or 11.8%, to $23.9 million for
2008 from $21.4 million in 2007. Salaries and employee benefits
decreased $983,000, or 9.3%, to $9.6 million for 2008 from $10.6 million in
2007. That decrease reflected a reduction in bonuses and incentives,
deferred compensation and other benefits of $702,000.
Occupancy
expense increased $27,000, or 1.1%, to $2.4 million for 2008 compared to $2.4
million for 2007.
Depreciation
expense decreased $17,000, of 1.3%, to $1.3 million for 2008 compared to $1.3
million for 2007.
Legal
fees increased $704,000, or 93.9%, to $1.5 million for 2008 compared to $750,000
for 2007 resulting primarily from increased legal fees for loan collections and
fees related to the Company’s proposed merger with Pennsylvania
Commerce.
Other
real estate, including property write downs and losses on sales and property
maintenance expenses, increased $2.1 million to $2.1 million in 2008 compared to
$23,000 in 2007 as a result of the increase in properties taken into other real
estate owned, which reflected the economic downturn in real estate markets and
declining credit quality.
Advertising
expenses decreased $39,000, or 7.8%, to $464,000 for 2008 compared to $503,000
for 2007. The decrease was primarily due to lower levels of print
advertising.
27
Data
processing increased $152,000, or 21.9%, to $845,000 for 2008 compared to
$693,000 for 2007, primarily due to system enhancements.
Insurance
expense increased $163,000, or 41.0%, to $561,000 for 2008 compared to $398,000
for 2007, resulting primarily from higher rates.
Professional
fees increased $431,000, or 79.5%, to $973,000 for 2008 compared to $542,000 for
2007, reflecting increases in consulting fees.
Regulatory assessments and
costs increased $380,000 to $556,000 in 2008, compared to $176,000 in 2007,
resulting primarily from increases in statutory FDIC insurance
rates.
Taxes,
other decreased $92,000, or 11.2%, to $728,000 for 2008 compared to $820, 000
for 2007. The decrease reflected a reduction in Philadelphia Business
Privilege Tax which more than offset 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 decreased $308,000, or 10.0%, to $2.8 million for 2008 compared to $3.1
million for 2007. The decrease reflected a $150,000 decrease in courier fees
resulting from the imaging of checks which replaced physical couriers, and
lesser decreases in a number of other categories including printing, supplies,
director fees, fraud losses, auto expense, postage, freight and
others.
Provision
for Income Taxes
The
provision for income taxes decreased $4.1 million to a benefit of $777,000 for
2008 from $3.3 million for 2007. That decrease was primarily the
result of the decrease in pre-tax income. The effective tax rate for
2007 was 32% and because of the small benefit in 2008, the tax rate was not
meaningful in that year.
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 income 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.
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
28
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 on page 27, 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
subordinated debentures supporting trust preferred securities.
Provision for Loan
Losses
The
provision for loan losses is charged to operations in an amount necessary to
maintain the total allowance for loan losses at a level which management
determines is adequate to absorb all inherent losses in the loan
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 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.
29
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% and 34%, respectively.
Financial
Condition
December 31, 2008 Compared to
December 31, 2007
Total
assets decreased $64.3 million to $952.0 million at December 31, 2008, compared
to $1.016 billion at December 31, 2007. This net decrease reflected lower
balances of loans and federal funds sold offset by lower balances of deposits
and short-term borrowings.
30
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 gross loans decreased $38.5 million, or 4.7%, to $783.1
million at December 31, 2008, versus $821.5 million at December 31, 2007. The
decrease reflected modest decreases in commercial real estate secured,
construction and non real estate secured loans, partially offset by an increase
in non real estate unsecured 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, 2008. 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 $9.8 million at December 31, 2008, was $287.3 million. The $9.8 million
threshold approximates 10% of total regulatory 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 agency issued mortgage backed securities, municipal
securities and debt securities, which include corporate bonds and trust
preferred securities. Available-for-sale securities totaled $83.0 million at
December 31, 2008, a decrease of $627,000, or 0.7%, from year-end 2007. At
December 31, 2008 and December 31, 2007, the portfolio had respective net
unrealized losses and gains of $2.2 million and $409,000.
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, 2008, securities held to maturity totaled
$198,000, which was comparable to the $282,000 at year-end 2007. 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,
2008, FHLB stock totaled $6.7 million, an increase of $478,000, or 7.7%, from
$6.2 million at December 31, 2007.
Republic
is also required to maintain stock in Atlantic Central Bankers Bank (“ACBB”) as
a condition of a contingency line of credit. At December 31, 2008 and
2007, 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 $38.8 million, to $34.4 million at
December 31, 2008, from $73.2 million at December 31, 2007, primarily due
to a $40.8 million decrease in federal funds sold.
Fixed
Assets:
Bank
premises and equipment, net of accumulated depreciation totaled $14.2 million at
December 31, 2008 an increase of $2.9 million, or 25.9% from $11.3 million at
December 31, 2007, primarily reflecting branch expansion.
Other
Real Estate Owned:
At
December 31, 2008, the Company had assets classified as other real estate owned
with a value of $8.6 million comprised of 20 plus acres of vacant, unimproved
ground with a value of $5.2 million, a vacant 24 unit motel/condominium building
with a value of $2.3 million, a vacant, improved lot zoned for the construction
of four townhouses with a value of $1.0 million and a commercial building with a
value of $109,000. At December 31, 2007, the Company had assets
classified as
31
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.
Bank
Owned Life Insurance:
At
December 31, 2008, the value of the insurance was $12.1 million, an increase of
$400,000, or 3.4%, from $11.7 million at December 31, 2007. The
increase reflected income earned on the insurance policies.
Other
Assets:
Other
assets increased by $6.0 million to $14.0 million at December 31, 2008, from
$8.0 million at December 31, 2007, reflecting $1.7 million in current income tax
assets, the effect of $1.1 million in short-term receivables expected
to be collected in first quarter 2009, a $918,000 change in the deferred tax
asset for unrealized securities losses, a $607,000 increase in prepaid expenses
related to the issuance of trust preferred securities, a $517,000 deferred tax
asset for realized securities losses and a $375,000 increase in other prepaid
expenses.
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 decreased by $41.7 million to $739.2 million at December 31, 2008, from
$780.9 million at December 31, 2007. Average transaction accounts
decreased 13.3% or $51.0 million from the prior year end to $333.2 million in
2008. Time deposits decreased $29.3 million, or 6.9%, to $393.7
million at December 31, 2008, versus $422.9 million at the prior
year-end.
Short-Term
Borrowings and FHLB Advances:
Short-term
borrowings and FHLB advances are used to supplement deposit generation. Republic
had $25.0 million of term borrowings at December 31, 2008 and $0 at December 31,
2007, respectively. The $25.0 million of term borrowings mature June, 2010.
Republic had short-term borrowings (overnight) of $77.3 million at December 31,
2008 versus $133.4 million at the prior year-end.
Subordinated
Debt:
Subordinated
debt amounted to $22.5 million at December 31, 2008, compared to $11.3 million
at December 31, 2007, as a result of an $11.1 million issuance of subordinated
debentures to support trust preferred securities issued in June
2008. The new debentures were issued with an annual rate of 8% and
are convertible into the Company’s common stock at a conversion ratio based on
$6.50 per share of Company common stock.
Shareholders’
Equity:
Total
shareholders’ equity decreased $1.1 million to $79.3 million at December 31,
2008, versus $80.5 million at December 31, 2007. This decrease was
primarily the result of an increase in the unrealized loss on
securities.
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.
32
Financial
instruments whose contract amounts represent potential credit risk are
commitments to extend credit of approximately $83.1 million and $160.2 million
and standby letters of credit of approximately $5.3 million and $4.6 million at
December 31, 2008 and 2007, respectively. Commitments often
expire without being drawn upon. The $83.1 million of commitments to extend
credit at December 31, 2008, 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.
Contractual obligations and other
commitments
The following table sets forth
contractual obligations and other commitments representing required and
potential cash outflows as of December 31, 2008:
|
(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
|
$ | 47,732 | $ | 1,666 | $ | 4,115 | $ | 4,333 | $ | 37,618 | ||||||||||
|
Remaining
contractual maturities of time
deposits
|
393,666 | 370,442 | 22,274 | 950 | - | |||||||||||||||
|
Subordinated
debt
|
22,476 | - | - | - | 22,476 | |||||||||||||||
|
Employment
agreements
|
530 | 530 | - | - | - | |||||||||||||||
|
Former
CEO SERP
|
40 | 40 | - | - | - | |||||||||||||||
|
Director
and Officer retirement plan
obligations
|
1,391 | 205 | 277 | 227 | 682 | |||||||||||||||
|
Loan
commitments
|
83,073 | 70,160 | 5,115 | 1,424 | 6,374 | |||||||||||||||
|
Standby
letters of credit
|
5,314 | 5,010 | 201 | 103 | - | |||||||||||||||
|
Total
|
$ | 554,222 | $ | 448,053 | $ | 31,982 | $ | 7,037 | $ | 67,150 | ||||||||||
As
of December 31, 2008, the Company had entered into non-cancelable lease
agreements for its main office and operations center, eleven current Republic
retail branch facilities, and a new branch facility scheduled to open in 2009,
expiring through August 31, 2037, including renewal options. The leases are
accounted for as operating leases. The minimum rental payments required under
these leases are $47.7 million through the year 2037, including renewal
options. The Company has entered into an employment agreement with
the CEO of the Company. The aggregate commitment for future salaries and
benefits under this employment agreement at December 31, 2008 is approximately
$530,000. The Company has retirement plan agreements with certain
directors and officers. The accrued benefits under the plan at
December 31, 2008 was approximately $1.4 million, with a minimum age of 65
established to qualify for the payments.
At
December 31, 2008, 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 $288.4 million, which
represented 36.8% of gross loans receivable at December 31, 2008. 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 real estate agents and
managers amounted to $99.8 million, which represented 12.7% of gross loans
receivable at December 31, 2008. Loan
33
concentrations
are considered to exist when amounts are 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. Generally, the Company limits long-term fixed rate assets and
liabilities in its efforts to manage interest rate risk.
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 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 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, as 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 on the following
page.
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 table presents a summary of the Company’s interest rate sensitivity
GAP at December 31, 2008. 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 a portion of
the trust preferred securities is variable and adjusts quarterly.
34
Interest
Sensitivity Gap
At
December 31, 2008
(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
|
$ | 28,330 | $ | 10,953 | $ | 23,754 | $ | 13,801 | $ | 8,282 | $ | 5,115 | $ | 3,227 | $ | 18,097 | $ | 111,559 | $ | 111,575 | ||||||||||||||||||||
|
Average
interest rate
|
.34 | % | 2.50 | % | 5.80 | % | 5.80 | % | 5808 | % | 5.80 | % | 5.80 | % | 5.98 | % | ||||||||||||||||||||||||
|
Loans
receivable
|
419,490 | 40,963 | 65,874 | 97,349 | 65,684 | 49,366 | 24,009 | 20,347 | 783,082 | 783,000 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
4.52 | % | 6.30 | % | 6.46 | % | 6.46 | % | 6.45 | % | 6.53 | % | 6.09 | % | 6.51 | % | ||||||||||||||||||||||||
|
Total
|
447,820 | 51,916 | 89,628 | 111,150 | 73,966 | 54,481 | 27,236 | 38,444 | 894,641 | 894,575 | ||||||||||||||||||||||||||||||
|
Cumulative
Totals
|
$ | 447,820 | $ | 499,736 | $ | 589,364 | $ | 700,514 | $ | 774,480 | $ | 828,961 | $ | 856,197 | $ | 894,641 | ||||||||||||||||||||||||
|
Interest
Sensitive Liabilities:
|
||||||||||||||||||||||||||||||||||||||||
|
Demand
Interest Bearing(1)
|
$ | 21,522 | $ | - | $ | - | $ | 21,522 | $ | - | $ | - | $ | - | $ | - | $ | 43,044 | $ | 43,044 | ||||||||||||||||||||
|
Average
interest rate
|
1.00 | % | - | - | 1.00 | % | - | - | - | - | ||||||||||||||||||||||||||||||
|
Savings
Accounts (1)
|
5,667 | - | - | 5,666 | - | - | - | - | 11,333 | 11,333 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
1.50 | % | - | - | 1.50 | % | - | - | - | - | ||||||||||||||||||||||||||||||
|
Money
Market Accounts(1)
|
110,155 | - | - | 110,155 | - | - | - | - | 220,310 | 220,310 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
1.50 | % | - | - | 1.50 | % | - | - | - | - | ||||||||||||||||||||||||||||||
|
Time
Deposits
|
243,345 | 37,016 | 90,081 | 21,528 | 746 | 471 | 479 | - | 393,666 | 395,570 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
2.44 | % | 3.39 | % | 3.79 | % | 3.84 | % | 3.53 | % | 4.01 | % | 3.71 | % | - | |||||||||||||||||||||||||
|
FHLB
and Short Term
|
||||||||||||||||||||||||||||||||||||||||
|
Advances
|
77,309 | - | - | 25,000 | - | - | - | - | 102,309 | 103,340 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
.45 | % | - | - | 3.36 | % | - | - | - | - | ||||||||||||||||||||||||||||||
|
Subordinated
Debt
|
22,476 | - | - | - | - | - | - | - | 22,476 | 22,476 | ||||||||||||||||||||||||||||||
|
Average
interest rate
|
5.89 | % | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||
|
Total
|
480,474 | 37,016 | 90,081 | 183,871 | 746 | 471 | 479 | 793,138 | 796,073 | |||||||||||||||||||||||||||||||
|
Cumulative
Totals
|
$ | 480,474 | $ | 517,490 | $ | 607,571 | $ | 791,442 | $ | 792,188 | $ | 792,659 | $ | 793,138 | $ | 793,138 | ||||||||||||||||||||||||
|
Interest
Rate
|
||||||||||||||||||||||||||||||||||||||||
|
Sensitivity
GAP
|
$ | (32,654 | ) | $ | 14,900 | $ | (453 | ) | $ | (72,721 | ) | $ | 73,220 | $ | 54,010 | $ | 26,757 | $ | 38,444 | |||||||||||||||||||||
|
Cumulative
GAP
|
$ | (32,654 | ) | $ | (17,754 | ) | $ | (18,207 | ) | $ | (90,928 | ) | $ | (17,708 | ) | $ | 36,302 | $ | 63,059 | $ | 101,503 | |||||||||||||||||||
|
Interest
Sensitive Assets/
|
||||||||||||||||||||||||||||||||||||||||
|
Interest
Sensitive
|
||||||||||||||||||||||||||||||||||||||||
|
Liabilities
|
93 | % | 97 | % | 97 | % | 89 | % | 98 | % | 105 | % | 108 | % | 113 | % | ||||||||||||||||||||||||
|
Cumulative
GAP/
|
||||||||||||||||||||||||||||||||||||||||
|
Total
Earning Assets
|
-4 | % | -2 | % | -2 | % | -10 | % | -2 | % | 4 | % | 7 | % | 11 | % | ||||||||||||||||||||||||
|
(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 as yield
curve relationships, the volume and mix of assets and liabilities and general
market conditions.
35
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, 2008 and reflects the changes to NPV as a result of immediate
and sustained changes in interest rates as indicated.
|
Change
in
|
NPV
as % of Portfolio
|
||||||||||||||||||||
|
Interest
Rates
|
Net
Portfolio Value
|
Value
of Assets
|
|||||||||||||||||||
|
In
Basis Points
|
|||||||||||||||||||||
|
(Rate
Shock)
|
Amount
|
$
Change
|
%
Change
|
NPV
Ratio
|
Change
|
||||||||||||||||
|
(Dollars
in Thousands)
|
|||||||||||||||||||||
|
200bp
|
$ |
132,424
|
$ |
5,542
|
4.37%
|
14.06%
|
57bp | ||||||||||||||
|
100
|
130,162
|
3,280
|
2.59
|
13.82
|
33 | ||||||||||||||||
|
Static
|
126,882
|
--
|
-- |
13.49
|
--
|
||||||||||||||||
|
(100)
|
122,728
|
(4,154)
|
(3.27) |
13.08
|
(41)
|
||||||||||||||||
| (200) |
119,967
|
(6,915)
|
(5.45) |
12.82
|
(67)
|
||||||||||||||||
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,
2008.
|
Change
in Interest Rates in Basis
Points
(Rate Shock)
|
Net
Interest Income
|
$
Change
|
%
Change
|
|||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||
|
200bp
|
$ |
28,408
|
$ |
(92)
|
(.32%)
|
|||||||||
|
100
|
28,979
|
479
|
1.68
|
|||||||||||
|
Static
|
28,500
|
--
|
--
|
|||||||||||
| (100) |
28,530
|
30 |
.11
|
|||||||||||
|
(200)
|
28,794
|
294
|
1.03
|
|||||||||||
The above
table indicates that as of December 31, 2008, 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, 2008, subject to the significant
limitations specified in the following paragraph, would approximate the static
scenario. However, higher net interest income than shown could result by the
effective execution of various deposit pricing and other related
strategies.
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
36
would
occur, if deposit rates continue to lag prime rate reductions, in falling rate
scenarios. Conversely, in rising rate scenarios, competitors deposit
rates would be an important determinant for any increases in interest
income.
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 has sponsored three outstanding issues of corporation-obligated
mandatorily redeemable capital securities of a subsidiary trust holding solely
junior subordinated debentures of the corporation more commonly known as trust
preferred securities. The subsidiary trusts are not consolidated with the
Company for financial reporting purposes. The purpose of the
issuances of these securities was to increase capital. The trust preferred
securities qualify as Tier 1 capital for regulatory purposes in amounts up to
25% of total Tier 1 capital.
In
December 2006, Republic Capital Trust II (“Trust II”) issued $6.0 million of
trust preferred securities to investors and $0.2 million of common securities to
the Company. Trust II purchased $6.2 million of junior subordinated
debentures of the Company due 2037, and the Company used the proceeds
to call the securities of Republic Capital Trust I (“Trust I”). The
debentures supporting Trust II have 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 caused Republic Capital Trust III (“Trust III”), through a
pooled offering, to issue $5.0 million of trust preferred securities to
investors and $0.2 million common securities to the Company. Trust
III purchased $5.2 million of junior subordinated debentures of the Company due
2037, which have a variable interest rate, adjustable quarterly, at 1.55% over
the 3 month Libor. 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
Company caused Republic First Bancorp Capital Trust IV (“Trust IV”) to issuance
of $10.8 million of convertible trust preferred securities in June 2008 as part
of the Company’s strategic capital plan. The securities were
purchased by various investors, including Vernon W. Hill, II, founder and
chairman (retired) of Commerce Bancorp, former director of Pennsylvania Commerce
and, since the investment, a consultant to the Company, a family trust of Harry
D. Madonna, chairman, president and chief executive officer of the Company, and
Theodore J. Flocco, Jr., who, since the investment, has been a director of the
Company. Trust IV also issued $0.4 million of common securities to
the Company. Trust IV purchased $11.1 million of junior subordinated
debentures due 2038, which pay interest at an annual rate of 8.0% and are
callable after the fifth year. The trust preferred securities of
Trust IV are convertible into approximately 1.7 million shares of common stock
of the Company, based on a conversion price of $6.50 per share of Company common
stock.
The
shareholders’ equity of the Company as of December 31, 2008, totaled
approximately $79.3 million compared to approximately $80.5 million as of
December 31, 2007. This decrease of approximately $1.1 million was comprised of
other comprehensive loss of $1.7 million and 2008 net loss of $472,000,
partially offset by $931,000 from stock option exercises. The book value per
share of the Company’s common stock decreased from $7.80 as of December 31,
2007, based upon 10,320,908 shares outstanding, as adjusted for treasury stock
to $7.46 as of December 31, 2008, based upon 10,631,348 shares outstanding at
December 31, 2008, as adjusted for treasury stock.
Regulatory
Capital Requirements
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
37
(within
limits), certain excess levels of perpetual preferred stock and certain types of
“hybrid” capital instruments, subordinated debt and other preferred stock.
Applying the federal guidelines, the ratio of qualifying total capital to
weighted-risk assets, was 13.26% and 11.01% at December 31, 2008 and 2007,
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, 2008 and 2007 were 12.26% and 10.07%,
respectively. At December 31, 2008 and 2007, 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, 2008 and 2007, the Company’s leverage ratio was 11.14% and 9.44%,
respectively. Accordingly, at December 31, 2008 and 2007, the Company was
considered “well capitalized” under FRB and FDIC regulations.
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,
2008 and 2007:
|
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, 2008
|
||||||||||||||||||||||||
|
Total
risk based capital
|
||||||||||||||||||||||||
|
Republic
|
$ | 99,329 | 11.90 | % | $ | 66,750 | 8.00 | % | $ | 83,437 | 10.00 | % | ||||||||||||
|
Company.
|
110,927 | 13.26 | % | 66,915 | 8.00 | % | - | - | ||||||||||||||||
|
Tier
one risk based capital
|
||||||||||||||||||||||||
|
Republic
|
90,921 | 10.90 | % | 33,375 | 4.00 | % | 50,062 | 6.00 | % | |||||||||||||||
|
Company.
|
102,518 | 12.26 | % | 33,458 | 4.00 | % | - | - | ||||||||||||||||
|
Tier
one leverage capital
|
||||||||||||||||||||||||
|
Republic
|
90,921 | 9.91 | % | 45,890 | 5.00 | % | 45,890 | 5.00 | % | |||||||||||||||
|
Company.
|
102,518 | 11.14 | % | 46,001 | 5.00 | % | - | - | ||||||||||||||||
|
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 | % | - | - | ||||||||||||||||
Management
believes that the Company and Republic met, as of December 31, 2008 and 2007,
all capital adequacy requirements to which they are subject. As of December 31,
2008, 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.
38
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, federal banking regulators
are required to 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 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 8.33% as of December 31, 2008,
from 7.92% as of December 31, 2007. The increase at year-end 2008 was the
result of the $64.3 million decrease in total assets at December 31, 2008
compared to December 31, 2007. The Company’s average equity to assets
ratio for 2008, 2007 and 2006 was 8.44%, 8.01% and 8.17%, respectively. The
Company’s average return on equity for 2008, 2007 and 2006 was (0.60) %, 8.86%
and 14.59%, respectively; and its average return on assets for 2008, 2007 and
2006, was ( 0.05)%, 0.71% and 1.19%, 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 $34.4 million at December 31, 2008, compared to $73.2
million at December 31, 2007. Loan maturities and repayments are another
source of asset liquidity. At December 31, 2008, Republic estimated that in
excess of $50.0 million of loans would mature or repay in the six-month period
ended June 30, 2009. 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, 2008, Republic had $67.4 million in unused lines of credit
available under arrangements with the FHLB and with correspondent banks,
compared to $113.1 million at December 31, 2007. The decrease in available
lines resulted from the reduction in the secured lines of available
credit. 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, 2008, the Company had outstanding commitments (including unused
lines of credit and letters of credit) of $88.4 million.
Certificates
of deposit scheduled to mature in one year totaled $370.4 million at December
31, 2008. 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, 2008. Republic had drawn down $0 on
this line at December 31, 2008. Republic has also established a line of credit
with the Federal Home Loan Bank of Pittsburgh with a maximum borrowing capacity
of approximately $205.7 million. That $205.7 million capacity is
reduced by advances outstanding to arrive at the unused line of credit
available. As of December 31, 2008 and 2007, Republic had borrowed
$92.0 million and $113.4 million, respectively from the FHLB. Investment
securities represent a primary source of liquidity for Republic. Accordingly,
investment decisions
39
generally
reflect liquidity over other considerations. Additionally, Republic
has uncollateralized overnight advances with PNC. As of December 31,
2008 and 2007, there were $10.0 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. In addition, 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 issued mortgage backed
securities, municipal securities, corporate bonds and trust preferred
securities. The Company’s ALCO monitors and approves all security
purchases. The decline in securities in 2007 primarily reflected the
maturity of an eighteen month security. The increase in the total
amortized cost of securities in 2008 primarily reflected the purchase of
mortgage backed securities.
A summary
of investment securities available-for-sale and investment securities
held-to-maturity at December 31, 2008, 2007 and 2006 follows.
|
Investment
Securities Available for Sale at December 31,
|
||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||
|
U.S.
Government
Agencies
|
$ | - | $ | - | $ |
18,570
|
||||||||
|
Mortgage
backed Securities/CMOs
(1)
|
60,859 | 55,579 |
58,642
|
|||||||||||
|
Municipal
Securities
|
10,073 | 12,338 |
11,533
|
|||||||||||
|
Corporate
Bonds
|
5,988 | 4,995 |
-
|
|||||||||||
|
Trust
Preferred
Securities
|
8,003 | 10,058 |
12,586
|
|||||||||||
|
Other
securities
|
279 | 280 |
281
|
|||||||||||
|
Total
amortized cost of
securities
|
$ | 85,202 | $ | 83,250 | $ |
101,612
|
||||||||
|
|
||||||||||||||
|
Total
fair value of investment
securities
|
$ | 83,032 | $ | 83,659 | $ |
102,039
|
||||||||
|
Investment
Securities Held to Maturity at December 31,
|
||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||
|
U.S.
Government
Agencies
|
$ | 3 | $ | 3 | $ | 3 | ||||||||
|
Mortgage
backed Securities/CMOs
(1)
|
15 | 15 | 58 | |||||||||||
|
Municipal
Securities
|
30 | 90 | 100 | |||||||||||
|
Other
securities
|
150 | 174 | 172 | |||||||||||
|
Total
amortized cost of investment securities
|
$ | 198 | $ | 282 | $ | 333 | ||||||||
|
Total
fair value of investment
securities
|
$ | 214 | $ | 285 | $ | 338 | ||||||||
(1) Substantially
all of these obligations consist of U.S. Government Agency issued
securities.
40
The
following table presents the contractual maturity distribution and weighted
average yield of the securities portfolio of the Company at December 31, 2008.
Mortgage backed securities are presented without consideration of amortization
or prepayments.
|
Investment
Securities Available for Sale at December 31, 2008
|
|||||||||||||||||||||||||||||||||||||||||||
|
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
|
- | - | 105 | 5.87 | % | - | - | 62,571 | 5.72 | % | 62,676 | 60,859 | 5.72 | % | |||||||||||||||||||||||||||||
|
Municipal
securities
|
- | - | - | - | - | - | 9,123 | 4.29 | % | 9,123 | 10,073 | 4.29 | % | ||||||||||||||||||||||||||||||
|
Corporate
Bonds
|
- | - | - | - | 3,043 | 6.36 | % | 3,000 | 5.96 | % | 6,043 | 5,988 | 6.16 | % | |||||||||||||||||||||||||||||
|
Trust
Preferred securities
|
- | - | - | - | - | - | 4,932 | 5.40 | % | 4,932 | 8,003 | 5.40 | % | ||||||||||||||||||||||||||||||
|
Other securities
|
- | - | 155 | 4.40 | % | 103 | 5.05 | % | - | - | 258 | 279 | 4.66 | % | |||||||||||||||||||||||||||||
|
Total
AFS securities
|
$ | - | - | $ | 260 | 4.99 | % | $ | 3,146 | 6.22 | % | $ | 79,626 | 5.55 | % | $ | 83,032 | $ | 85,202 | 5.58 | % | ||||||||||||||||||||||
|
Investment
Securities Held to Maturity at December 31, 2008
|
||||||||||||||||||||||||||||||||||||||||
|
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 | 3.31 | % | $ | - | - | $ | 3 | 3.31 | % | |||||||||||||||||||||||
|
Mortgage
backed securities
|
- | - | - | - | - | - | 15 | 7.48 | % | 15 | 7.48 | % | ||||||||||||||||||||||||||||
|
Municipal
securities
|
- | - | - | - | - | - | 30 | 7.51 | % | 30 | 7.51 | % | ||||||||||||||||||||||||||||
|
Other
securities
|
- | - | 110 | 6.31 | % | - | - | 40 | 0.00 | % | 150 | 4.64 | % | |||||||||||||||||||||||||||
|
Total
HTM securities
|
$ | - | - | $ | 110 | 6.31 | % | $ | 3 | 3.31 | % | $ | 85 | 3.96 | % | $ | 198 | 5.26 | % | |||||||||||||||||||||
Fair
Value of Financial Instruments
The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by obtaining quoted market
prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices. For certain securities which are not
traded in active markets or are subject to transfer restrictions, valuations are
adjusted to reflect illiquidity and/or non-transferability, and such adjustments
are generally based on available market evidence (Level 3). In the
absence of such evidence, management’s best estimate is
used. Management’s best estimate consists of both internal and
external support on certain Level 3 investments. Internal cash flow
models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from
broker/dealers (where available) were used to support fair values of certain
Level 3 investments.
The types
of instruments valued based on quoted market prices in active markets include
all of the Company’s U.S. government and agency securities,
municipal obligations and corporate bonds. Such instruments are generally
classified within level 2 of the fair value hierarchy. As required by SFAS No.
157, the Company does not adjust the quoted price for such
instruments.
Level
3 is for positions that are not traded in active markets or are subject to
transfer restrictions, and may be adjusted to reflect illiquidity and/or
non-transferability, with such adjustment generally based on available market
evidence. In the absence of such evidence, management’s best estimate is used.
Subsequent to inception, management only changes level 3 inputs and assumptions
when corroborated by evidence such as transactions in similar instruments,
completed or pending third-party transactions in the underlying investment or
comparable entities, subsequent rounds of financing, recapitalizations and other
transactions across the capital structure, offerings in the equity or debt
markets, and changes in financial ratios or cash flows.
The
Level 3 investment securities classified as available for sale are comprised of
various issues of bank pooled trust preferred securities. Bank pooled trust
preferred consists of the debt instruments of various banks, diversified by the
number of participants in the security as well as geographically. The securities
are performing according to terms, however the secondary market for such
securities has become inactive, and such securities are therefore classified as
Level 3 securities. The fair value analysis does not reflect or represent the
actual terms or prices at which any party could purchase the securities. There
is currently no secondary market for the securities and there can be no
assurance that any secondary market for the securities will
develop.
41
The following table presents a
reconciliation of the securities available for sale measured as fair
value on a recurring basis using significant unobservable imputs (level 3)
for the year ended December 31:
|
2008
|
||||
|
(In
Thousands)
|
||||
|
Beginning
balance, January 1
|
$ | - | ||
|
Securities
transferred to Level 3 measurement during 2008
|
9,986 | |||
|
Unrealized
losses arising during 2008
|
(2,999 | ) | ||
|
Impairment
charge on Level 3 security
|
(1,438 | ) | ||
|
Other,
including proceeds from calls of investment securities
|
(617 | ) |
|
Ending
balance, December 31
|
$ | 4,932 | ||||||
A third party pricing service was used
in the development of the fair market valuation. The calculations used to
determine fair value are based on the attributes of the trust preferred
securities, the financial condition of the issuers of the trust preferred
securities, and market based assumptions. The INTEX CDO Deal Model Library was
utilized to obtain information regarding the attributes of each security and its
specific collateral as of December 31, 2008. Financial information on the
issuers was also obtained from Bloomberg, the FDIC and the Office of Thrift
Supervision. Both published and unpublished industry sources were utilized in
estimating fair value. Such information includes loan prepayment speed
assumptions, discount rates, default rates, and loss severity percentages. Due
to the current state of the global capital and financial markets, the fair
market valuation is subject to greater uncertainty that would otherwise
exist.
Fair market valuation for each security
was determined based on discounted cash flow analyses. The cash flows are
primarily dependent on the estimated speeds at which the trust preferred
securities are expected to prepay, the estimated rates at which the trust
preferred securities are expected to defer payments, the estimated rates at
which the trust preferred securities are expected to default, and the severity
of the losses on securities which default.
Prepayment Assumptions. Due
to the lack of new trust preferred issuances and the relativity poor conditions
of the financial institution industry, the rate of voluntary prepayments are
estimated at 0%.
Prepayments affect the securities in
three ways. First, prepayments lower the absolute amount of excess spread, an
important credit enhancement. Second, the prepayments are directed to the senior
tranches, the effect of which is to increase the overcollateralization of the
mezzanine layer, the layer at which the Company is located in each of the
securities. However, the prepayments can lead to adverse selection in which the
strongest institutions have prepaid, leaving the weaker institutions in the
pool, thus mitigating the effect of the increased overcollateralization. Third,
prepayments can limit the numeric and geographic diversity of the pool, leading
to concentration risks.
Deferral and Default Rates.
Trust preferred securities include a provision that allows the issuing bank to
defer interest payments for up to five years. The estimates for the rates of
deferral are based on the financial condition of the trust preferred issuers in
the pool. Estimates for the conditional default rates are based on the trust
preferred securities themselves as well as the financial condition of the trust
preferred issuers in the pool.
Estimates for the near-term rates of
deferral and conditional default are based on key financial ratios relating to
the financial institutions’ capitalization, asset quality, profitability and
liquidity. Each bank in each security is evaluated based on ratings from outside
services including Standard & Poors, Moodys, Fitch, Bankrate.com and The
Street.com. Recent stock price information is also considered, as well as the 52
week high and low, for each bank in each security. Finally, the receipt of TARP
funding is considered, and if so, the amount.
Estimates for longer term rates of
deferral and defaults are based on historical averages based on a research
report issued by Salomon Smith Barney in 2002. Default is defined as any
instance when a regulator takes an active role in a bank’s operations under a
supervisory action. This definition of default is distinct from failure. A bank
is considered to have defaulted if it falls below minimum capital requirements
or becomes subject to regulatory actions including a written agreement, or a
cease and desist order.
The rates of deferral and conditional
default are estimated at 0.36%.
Loss Severity. The fact that
an issuer defaults on a loan, does not necessarily mean that the investor will
lose all of their investment. Thus, it is important to understand not only the
default assumption, but also the expected loss given a default, or the loss
severity assumption.
Both Standard & Poors and Moody’s
Analytics have performed and published research that indicate that recoveries on
trust preferred securities are low (less than 20%). The loss severity estimates
are estimated at a range of 80% to 100%.
Ratings Agencies. The major
ratings agencies have recently been cutting the ratings on various trust
preferred securities
42
Bond Waterfall. The trust
preferred securities have several tranches: Senior tranches, Mezzanine tranches
and the Residual or income tranches. The Company invested in the mezzanine
tranches for all of its trust preferred securities. The Senior and Mezzanine
tranches were overcollateralized at issuance, meaning that the par value of the
underlying collateral was more than the balance issued on the tranches. The
terms generally provide that if the performing collateral balances fall below
certain triggers, then income is diverted from the residual tranches to pay the
Senior and Mezzanine tranches. However, if significant deferrals occur, income
could also be diverted from the Mezzanine tranches to pay the Senior
tranches.
Internal Rate of Return.
Internal rates of return are the pre-tax yield rates used to discount the future
cash flow stream expected from the collateral cash flow. The marketplace for the
trust preferred securities at December 31, 2008 was not active. This is
evidenced by a significant widening of the bid/ask spreads the markets in which
the trust preferred securities trade and then by a significant decrease in the
volume of trades relative to historical levels. The new issue market is also
inactive.
SFAS No. 157-3 provides guidance on the
discount rates to be used when a market is not active. The discount rate should
take into account the time value of money, price for bearing the uncertainty in
the cash flows and other case specific factors that would be considered by
market participants, including a liquidity adjustment. The discount rate used is
a LIBOR 3-month forward looking curve plus 700 basis points.
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, 2008. Individual customers may have several loans often secured by
different collateral. Such relationships in excess of $9.8 million (an internal
monitoring guideline which approximates 10% of capital and reserves) at December
31, 2008, amounted to $287.3 million. There were no loans in excess of the legal
lending limit at December 31, 2008.
The
Company’s total loans decreased $38.5 million, or 4.7%, to $783.1 million at
December 31, 2008, from $821.5 million at December 31, 2007. That decrease
reflected a $21.4 million, or 4.5%, decrease in real estate secured loans, which
represents the Company’s largest loan category. The decrease also
reflected a $12.6 million, or 5.5%, decrease in construction loans and a
decrease of $17.1 million, or 22.2%, decrease in non real estate secured loans,
which was partially offset by a $13.1 million, or 154.8%, increase in non real
estate unsecured loans.
43
The
following table sets forth the Company’s gross loans by major categories for the
periods indicated:
|
At
December 31,
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Commercial:
|
||||||||||||||||||||
|
Real estate
secured
|
$ | 456,273 | $ | 477,678 | $ | 466,636 | $ | 447,673 | $ | 351,314 | ||||||||||
|
Construction and land
development
|
216,060 | 228,616 | 218,671 | 141,461 | 107,462 | |||||||||||||||
|
Non real estate
secured
|
60,203 | 77,347 | 71,816 | 49,515 | 57,361 | |||||||||||||||
|
Non real estate
unsecured
|
21,531 | 8,451 | 8,598 | 10,620 | 8,917 | |||||||||||||||
|
Total
commercial
|
754,067 | 792,092 | 765,721 | 649,269 | 525,054 | |||||||||||||||
|
Residential
real estate
(1)
|
5,347 | 5,960 | 6,517 | 7,057 | 8,219 | |||||||||||||||
|
Consumer
and
other
|
24,165 | 24,302 | 20,952 | 23,050 | 17,048 | |||||||||||||||
|
Total
loans
|
783,579 | 822,354 | 793,190 | 679,376 | 550,321 | |||||||||||||||
|
Deferred
loan
fees
|
497 | 805 | 1,130 | 1,290 | 632 | |||||||||||||||
|
Total loans, net of deferred
loan fees
|
$ | 783,082 | $ | 821,549 | $ | 792,060 | $ | 678,086 | $ | 549,689 | ||||||||||
(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, 2008
|
||||||||||||||||||||
|
(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
|
$ | 79,637 | $ | 9,727 | $ | - | $ | 3,779 | $ | 93,143 | ||||||||||
|
1-5
years
|
246,164 | 15,366 | - | 485 | 262,015 | |||||||||||||||
|
After
5 years
|
99,164 | 12,497 | 5,347 | 4,090 | 121,098 | |||||||||||||||
|
Total fixed
rate
|
424,965 | 37,590 | 5,347 | 8,354 | 476,256 | |||||||||||||||
|
Adjustable
Rate
|
||||||||||||||||||||
|
1
year or less
|
95,222 | 138,522 | - | 874 | 234,618 | |||||||||||||||
|
1-5
years
|
16,569 | 16,940 | - | 176 | 33,685 | |||||||||||||||
|
After
5 years
|
1,251 | 23,008 | - | 14,761 | 39,020 | |||||||||||||||
|
Total
adjustable rate
|
113,042 | 178,470 | - | 15,811 | 307,323 | |||||||||||||||
|
Total
|
$ | 538,007 | $ | 216,060 | $ | 5,347 | $ | 24,165 | $ | 783,579 | ||||||||||
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, 2008, 60.8% of total loans were fixed rate compared to 57.0% at
December 31, 2007.
44
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,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Loans
accruing, but past due 90 days or more
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
|
Restructured
loans
|
- | - | - | - | - | |||||||||||||||
|
Non-accrual
loans
|
||||||||||||||||||||
|
Commercial
|
2,758 | 14,757 | 6,448 | 2,725 | 3,914 | |||||||||||||||
|
Construction
|
13,666 | 6,747 | 173 | 492 | 656 | |||||||||||||||
|
Residential
real estate
|
- | - | - | - | - | |||||||||||||||
|
Consumer
and other
|
909 | 776 | 295 | 206 | 284 | |||||||||||||||
|
Total
non-accrual loans
|
17,333 | 22,280 | 6,916 | 3,423 | 4,854 | |||||||||||||||
|
Total
non-performing loans (1)
|
17,333 | 22,280 | 6,916 | 3,423 | 4,854 | |||||||||||||||
|
Other
real estate owned
|
8,580 | 3,681 | 572 | 137 | 137 | |||||||||||||||
|
Total
non-performing assets (1)
|
$ | 25,913 | $ | 25,961 | $ | 7,488 | $ | 3,560 | $ | 4,991 | ||||||||||
|
Non-performing
loans as a percentage of total
|
||||||||||||||||||||
|
loans, net of unearned income
(1)
|
2.21 | % | 2.71 | % | 0.87 | % | 0.50 | % | 0.88 | % | ||||||||||
|
Non-performing
assets as a percentage of total assets
|
2.72 | % | 2.55 | % | 0.74 | % | 0.42 | % | 0.75 | % | ||||||||||
|
(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.
|
Non-accrual
loans decreased $4.9 million, to $17.3 million at December 31, 2008, from $22.3
million at December 31, 2007. An analysis of 2008 activity is as
follows. The $4.9 million decrease reflected $15.8 million of
transfers of loans to two customers to other real estate owned after related
2008 charge-offs of $4.2 million and payoffs of $1.3 million. The
resulting decrease was partially offset by the transition of fifteen loans
totaling $16.5 million to non-accrual status. 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, 2008, all identified problem loans are included in the
preceding table, or are internally classified with a specific reserve allocation
in the allowance for loan losses (see “Allowance For Loan Losses”).
45
The
following summary shows the impact on interest income of non-accrual loans,
subsequent to being placed on non-accrual, for the periods
indicated:
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Interest
income that would have been recorded
|
||||||||||||||||||||
|
had
the loans been in accordance with their
|
||||||||||||||||||||
|
original
terms
|
$ | 553,000 | $ | 1,447,000 | $ | 479,000 | $ | 165,000 | $ | 391,000 | ||||||||||
|
Interest
income included in net income
|
$ | - | $ | - | $ | - | $ | - | $ | 170,000 | ||||||||||
At
December 31, 2008, 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 $288.4 million, which
represented 36.8% of gross loans receivable at December 31, 2008. 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 to real estate agents and
managers in the amount of $99.8 million, which represented 12.7% of gross loans
receivable at December 31, 2008. 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, 2008 as defined by the Federal
Reserve.
Allowance
for Loan Losses
A
detailed analysis of the Company’s allowance for loan losses for the years ended
December 31, 2008, 2007, 2006, 2005 and 2004 is as follows: (Dollars in
thousands)
|
For
the Year Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Balance
at beginning of
period
|
$ | 8,508 | $ | 8,058 | $ | 7,617 | $ | 6,684 | $ | 7,333 | ||||||||||
|
Charge-offs:
|
||||||||||||||||||||
|
Commercial
|
7,778 | 1,503 | 601 | 29 | 1,036 | |||||||||||||||
|
Tax
refund loans
|
- | - | 1,286 | 1,113 | 700 | |||||||||||||||
|
Consumer
|
19 | 3 | - | 21 | 186 | |||||||||||||||
|
Total
charge-offs
|
7,797 | 1,506 | 1,887 | 1,163 | 1,922 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Commercial
|
119 | 81 | 37 | 287 | 1,383 | |||||||||||||||
|
Tax
refund
loans
|
77 | 283 | 927 | 617 | 200 | |||||||||||||||
|
Consumer
|
3 | 2 | - | 6 | 4 | |||||||||||||||
|
Total
recoveries
|
199 | 366 | 964 | 910 | 1,587 | |||||||||||||||
|
Net
charge-offs
|
7,598 | 1,140 | 923 | 253 | 335 | |||||||||||||||
|
Provision
for loan
losses
|
7,499 | 1,590 | 1,364 | 1,186 | (314 | ) | ||||||||||||||
|
Balance
at end of
period
|
$ | 8,409 | $ | 8,508 | $ | 8,058 | $ | 7,617 | $ | 6,684 | ||||||||||
|
Average
loans outstanding
(1)
|
$ | 789,446 | $ | 820,380 | $ | 728,754 | $ | 602,031 | $ | 493,635 | ||||||||||
|
As
a percent of average loans (1):
|
||||||||||||||||||||
|
Net
charge-offs
|
0.96 | % | 0.14 | % | 0.13 | % | 0.04 | % | 0.07 | % | ||||||||||
|
Provision
for loan
losses
|
0.95 | % | 0.19 | % | 0.19 | % | 0.20 | % | (0.06 | )% | ||||||||||
|
Allowance
for loan
losses
|
1.07 | % | 1.04 | % | 1.11 | % | 1.27 | % | 1.35 | % | ||||||||||
|
Allowance
for loan losses to:
|
||||||||||||||||||||
|
Total
loans, net of unearned income
|
1.07 | % | 1.04 | % | 1.02 | % | 1.12 | % | 1.22 | % | ||||||||||
|
Total
non-performing
loans
|
48.51 | % | 38.19 | % | 116.51 | % | 222.52 | % | 137.70 | % | ||||||||||
__________
(1) Includes
non-accruing loans.
46
In 2008,
the Company charged-off loans to three customers totaling $7.6 million prior to
the transfer of the remaining loan balances to other real estate
owned. In 2007, the Company charged-off commercial loans to three
borrowers totaling $1.4 million. There were no charge-offs on tax
refund loans in 2008 and 2007 as the Company did not purchase tax refund loans
in those years. Recoveries on tax refund loans decreased to $77,000
in 2008, from $283,000 in 2007 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 management determines is adequate to absorb
inherent losses in the loan portfolio. 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 allowance for loan losses. 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, 2008.
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)
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Allocation
of the
allowance
for loan
losses
(1):
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
Amount
|
%
of
Loans
|
||||||||||||||||||||||||||||||
|
Commercial
|
$ | 4,721 | 68.6 | % | $ | 5,303 | 68.5 | % | $ | 5,852 | 69.0 | % | $ | 5,074 | 74.8 | % | $ | 5,016 | 75.9 | % | ||||||||||||||||||||
|
Construction
|
3,278 | 27.6 | % | 2,739 | 27.8 | % | 1,714 | 27.6 | % | 1,417 | 20.8 | % | 783 | 19.5 | % | |||||||||||||||||||||||||
|
Residential
real estate
|
41 | 0.7 | % | 43 | 0.7 | % | 48 | 0.8 | % | 71 | 1.0 | % | 33 | 1.5 | % | |||||||||||||||||||||||||
|
Consumer
and other
|
241 | 3.1 | % | 174 | 3.0 | % | 156 | 2.6 | % | 231 | 3.4 | % | 115 | 3.1 | % | |||||||||||||||||||||||||
|
Unallocated
|
128 | - | 249 | - | 288 | - | 824 | - | 737 | - | ||||||||||||||||||||||||||||||
|
Total
|
$ | 8,409 | 100 | % | $ | 8,508 | 100 | % | $ | 8,058 | 100 | % | $ | 7,617 | 100 | % | $ | 6,684 | 100 | % | ||||||||||||||||||||
__________
(1) Gross
loans net of unearned income.
The
methodology utilized to determine 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 2008, excluding tax refund loans,
the Company experienced net charge-offs to average loans of approximately
0.96%. Net recoveries and net charge-offs, respectively, excluding
tax refund loans, to average loans were 0.17%, 0.08%, (0.04)% and (0.03)% in
2007, 2006, 2005 and 2004. 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 longer than over the
past five years, the Company maintained those percentages in 2008. Due to
the economic downturn, 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 “internally
classified accruing loans” 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. 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. As of December 31, 2008, the unallocated
component decreased $121,000 to $128,000 from
47
$249,000
at December 31, 2007. Total loans at December 31, 2008, decreased to
$783.1 million from $821.5 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, 2008, loans made for commercial and construction, residential
mortgage and consumer purposes, respectively, amounted to $754.1 million, $5.3
million and $24.2 million.
The
recorded investment in loans that are impaired in accordance with SFAS No. 114
totaled $18.3 million, $22.3 million and $6.9 million at December 31, 2008, 2007
and 2006 respectively. The amounts of related valuation allowances were $2.4
million, $1.6 million and $1.8 million respectively at those
dates. There were no impaired loans at December 31, 2008 or 2007, for
which no specific reserve was recorded. For the years ended December
31, 2008, 2007 and 2006 the average recorded investment in impaired loans was
approximately $10.6 million, $16.1 million, and $5.3 million,
respectively. Republic earned $70,000 of interest income on impaired
loans (internally classified accruing loans) in 2008. The Company did
not recognize any interest income on impaired loans during 2007 or
2006. 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, 2008 and 2007, internally classified accruing loans totaled
approximately $947,000 and $702,000 respectively. The amounts of
related valuation were $151,000 and $56,000 respectively at those
dates. Republic had delinquent loans as follows: (i) 30 to 59 days
past due, at December 31, 2008 and 2007, in the aggregate principal amount of
$8.9 million and $3.6 million respectively; and (ii) 60 to 89 days past due, at
December 31, 2008 and 2007 in the aggregate principal amount of $3.6 million and
$1.6 million respectively.
The
following table is an analysis of the change in Other Real Estate Owned for the
years ended December 31, 2008 and 2007.
Dollars
in thousands
|
2008
|
2007
|
|||||||
|
Balance
at January
1,
|
$ | 3,681 | $ | 572 | ||||
|
Additions,
net
|
21,384 | 3,639 | ||||||
|
Sales
|
14,870 | 530 | ||||||
|
Writedowns/losses
on sales
|
1,615 | - | ||||||
|
Balance
at December
31,
|
$ | 8,580 | $ | 3,681 | ||||
Deposit
Structure
Of the
total daily average deposits of approximately $731.0 million held by Republic
during the year ended December 31, 2008, approximately $76.7 million, or 10.5%,
represented non-interest bearing demand deposits, compared to approximately
$78.6 million, or 10.6%, of total daily average deposits during 2007. Total
deposits at December 31, 2008, consisted of $70.8 million in
non-interest-bearing demand deposits, $43.0 million in interest-bearing demand
deposits, $231.6 million in savings and money market accounts, $139.7 million in
time deposits under $100,000 and $254.0 million in time deposits greater than
$100,000.
48
The
following table is a distribution of Republic’s deposits for the periods
indicated:
|
At
December 31,
|
||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Demand
deposits, non-interest bearing
|
$ | 70,814 | $ | 99,040 | $ | 78,131 | $ | 88,862 | $ | 97,790 | ||||||||||
|
Demand
deposits, interest bearing
|
43,044 | 35,235 | 47,573 | 69,940 | 54,762 | |||||||||||||||
|
Money
market & savings deposits
|
231,643 | 223,645 | 260,246 | 223,129 | 170,980 | |||||||||||||||
|
Time
deposits
|
393,666 | 422,935 | 368,823 | 265,912 | 187,152 | |||||||||||||||
|
Total
deposits
|
$ | 739,167 | $ | 780,855 | $ | 754,773 | $ | 647,843 | $ | 510,684 | ||||||||||
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, 2008, 2007
and 2006.
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Average
Balance
|
Rate
|
Average
Balance
|
Rate
|
Average
Balance
|
Rate
|
|||||||||||||||||||
|
Demand
deposits, non-interest-
bearing
|
$ | 76,671 | - | % | $ | 78,641 | - | % | $ | 82,233 | - | % | ||||||||||||
|
Demand
deposits, interest-bearing
|
33,976 | 0.96 | % | 38,850 | 1.10 | % | 53,073 | 1.06 | % | |||||||||||||||
|
Money
market & savings deposits
|
222,590 | 2.76 | % | 266,706 | 4.48 | % | 240,189 | 3.79 | % | |||||||||||||||
|
Time
deposits
|
397,740 | 3.73 | % | 361,120 | 5.21 | % | 304,375 | 4.64 | % | |||||||||||||||
|
Total
deposits
|
$ | 730,977 | 2.92 | % | $ | 745,317 | 4.18 | % | $ | 679,870 | 3.50 | % | ||||||||||||
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, 2008.
|
Certificates
of Deposit
|
||||
|
(Dollars
in thousands)
|
||||
|
2008
|
||||
|
Maturing
in:
|
||||
|
Three
months or
less
|
$ |
218,310
|
||
|
Over
three months through six months
|
18,090
|
|||
|
Over
six months through twelve months
|
15,750
|
|||
|
Over
twelve
months
|
1,808
|
|||
|
Total
|
$ |
253,958
|
||
The
following is a breakdown, by contractual maturities of the Company’s time
certificates of deposit for the years 2009 through 2013, which includes brokered
certificates of deposit of approximately $136.8 million with original terms of
one to two months.
(Dollars in thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
||||||||||||||||||||
| $ | 370,442 | $ | 21,528 | $ | 746 | $ | 471 | $ | 479 | $ | - | $ | 393,666 | |||||||||||||
49
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 each of the Company’s current and former subsidiary
trusts, Trust I, Trust II, Trust III and Trust IV, qualifies as a variable
interest entity under FIN 46. Trust I originally issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the
Company. The securities were subsequently refinanced via a call
during 2006 from proceeds of an issuance by Trust II. Trust II holds,
as its sole asset, subordinated debentures issued by the Company in
2006. The Company issued an additional $5.0 million of pooled
trust preferred securities in June 2007. Trust III holds, as its sole
asset, subordinated debentures issued by the Company in 2007. In June
2008, the Company issued an additional $10.8 million of convertible trust
preferred securities. Trust IV holds as its sole asset, subordinated
debentures issued by the Company in 2008.
The
Company does not consolidate its subsidiary trusts. 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 trusts' expected
residual returns. The non-consolidation results in the investment in the common
securities of the trusts to be included in other assets with a corresponding
increase in outstanding debt of $676,000. In addition, the income received on
the Company’s investment in the common securities of the trusts 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 the capital trusts 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.
See
“Management Discussion and Analysis of Results of Operations and Financial
Condition – Interest Rate Risk Management”.
The
consolidated financial statements of the Company begin on Page 76.
Item 9: Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure
None
50
Evaluation of Disclosure Controls
and Procedures. As of December 31, 2008, the end of the period
covered by this Annual Report on Form 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, 2008, 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
registered public accounting firm, 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, 2008 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 the
Company did not maintain effective internal control over financial reporting as
of December 31, 2008, due to the identification and effect of the following
material weaknesses:
|
|
•
|
a
lack of adequate controls over accounting for other than temporarily
impaired investment securities in accordance with Statement of Financial
Accounting Standards No. 115, and
|
|
|
•
|
a
lack of effective controls over the financial statement reporting process,
including controls to ensure that footnote disclosures are complete and
accurate, and that the financial statements and related footnotes are
presented and reviewed in a timely
fashion.
|
Management’s
report on internal control over financial reporting is set forth at page 73, and is
incorporated in this item 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 at page 74 and is incorporated
in this item by reference.
Changes in Internal Control Over
Financial Reporting. As previously reported in the Company’s
Current Report on Form 8-K filed with the SEC on November 10, 2008, Paul
Frenkiel resigned his position as Executive Vice President and Chief Financial
Officer of the Company and Republic on November 7, 2008, and on such date Edward
J. Ryan was appointed to serve as the acting Chief Financial Officer of the
Company and Republic.
Not
applicable
51
PART
III
|
Directors,
Executive Officers and Corporate
Governance
|
The
Company’s by-laws provide
that the board may consist of not less than five directors and not more than 25
directors, classified into three classes, as nearly equal in number as possible,
with the specific number of directors fixed from time to time by resolution of
the board. The members of one class of directors is elected at each
annual meeting and each class of directors serves for approximately three
years. Information regarding the current members of the Company’s
board of directors follows.
William W. Batoff, age 73,
has been a director of the Company and Republic since 1988 and a director of
First Bank of Delaware since 1999. Since 1996, he has been the
Managing Director of William W. Batoff Associates, a government relations
consulting firm. Prior to that, Mr. Batoff was a senior consultant of
Cassidy & Associates, a government relations consulting firm, since 1992,
and has been a Presidential Appointee to the Advisory Board of the Pension
Benefit Guarantee Corporation (PBGC) a United States Government
Agency.
Robert J. Coleman, age 71,
has been a director of the Company and Republic since April 2003. He
has also been the Chairman and Chief Executive Officer of Marshall, Dennehey,
Warner, Coleman & Goggin, a defense litigation law firm, since
1974.
Theodore J. Flocco, Jr., C.P.A. age 64, has been
a director of the Company and Republic since June 2008. Before his
retirement from Ernst & Young LLP, Mr. Flocco was Senior Audit Partner and
advised many of the largest SEC regulated clients of the Philadelphia office for
more than 35 years, including several regional and local banks. Mr.
Flocco’s appointment to the board of directors resulted from investments by
Vernon W. Hill, II, founder and chairman (retired) of Commerce Bancorp, and a
former director and current shareholder of Pennsylvania Commerce, and a group of
three other investors, including Mr. Flocco, in a private placement of $10.8
million of convertible trust preferred securities sponsored by Republic
First. In connection with the investments, Mr. Hill entered into a
consulting agreement with Republic First which, among other things, provides Mr.
Hill the right to designate one individual to the board of directors, and Mr.
Flocco is Mr. Hill’s designee for that position. Mr. Flocco has
experience in the banking, mutual fund, real estate and manufacturing and
distribution industries. His responsibilities at Ernst & Young LLP included
consulting with senior executives and directors of companies on accounting and
strategic business issues, mergers and acquisitions, public offerings and SEC
registrations. He has extensive experience in the public offering market, having
spearheaded more than 100 public equity and debt offerings.
Lyle W. Hall, Jr., age 64,
has been a director of the Company and Republic since April 2004. He
has been a director of First Bank of Delaware since November
2007. Mr. Hall has been the President of Deilwydd Partners, a real
estate and financial consulting company, since 1987. Prior to that,
Mr. Hall was the Executive Vice President and Director of Butcher & Company,
a New York Stock Exchange Investment Banking Company. Mr. Hall is a
Certified Public Accountant and a member of the American Institute of Certified
Public Accountants.
Harry D. Madonna, age 66 has
been the chairman of the Company and Republic since 1988, and chief executive
officer of Republic First and Republic First Bank since January
2002. Mr. Madonna has been chairman of the board of directors of
First Bank of Delaware since 1999, and its chief executive officer since January
2002. Mr. Madonna was of counsel to Spector Gadon & Rosen, P.C.,
a general practice law firm located in Philadelphia, Pennsylvania, from January
1, 2002 until June 30, 2005, and prior to that, was a partner of Blank Rome
Comisky & McCauley LLP, a general practice law firm located in Philadelphia,
Pennsylvania, since 1980.
Neal I. Rodin, age 62, has
been a director of the Company and Republic since 1988. Mr. Rodin has
been the Managing Director of the Rodin Group, an international real estate
investment company, since 1988, and has been the President of IFC, an
international financing and investing company, since 1975.
Barry L. Spevak, age 48, has
been a director of the Company and Republic since April 2004. He has
also been a partner with Miller Downey Spevak Kaffenberger, Limited, a certified
public accounting firm, since 1991 and serves on the board of directors of the
Recording for the Blind and Dyslectic.
Harris Wildstein, Esq., age
62, has been a director of the Company and Republic since 1988. Since
1999, Mr. Wildstein has been a director of the First Bank of
Delaware. Since September 2004, Mr. Wildstein has been an owner and
officer of Lifeline
52
Funding,
LLC. He has been the Vice President of R&S Imports, Ltd., an
automobile dealership, since 1977, and President of HVW, Inc., an automobile
dealership, since 1982.
As noted
above, Messrs. Madonna, Batoff, Hall and Wildstein are members of First Bank of
Delaware’s Board of Directors. First Bank of Delaware’s class of
common stock is registered with the Federal Deposit Insurance Corporation, or
“FDIC,” pursuant to section 12 of the Securities Exchange Act of 1934, as
amended. Mr. Rodin and Mr. Batoff are brothers-in-law.
Executive
Officers
The
following sets forth certain information regarding executive officers of the
Company. Information pertaining to Harry D. Madonna, who is both a director and
the chief executive officer of the Company and Republic, may be found in the
section entitled Directors.
Edward J. Ryan, 53, has been
the acting Chief Financial Officer of the Company and Republic since November
2008, and previously served as the Controller of the Company and Republic since
October 2005. From 1999 to October 2005, Mr. Ryan served as the
Accounting Manager for American Business Financial Services Inc.
Carol L. Hunter, 60, has been
the Chief Credit Officer of Republic since January 2008, and previously as a
Senior Credit Officer of Republic since March 2007. From 1984 to February
2007, served in various functions at PNC Bank, most recently as a Senior
Business Advisor for Commercial Banking.
Compliance
with Section 16(a) of the Exchange Act
Section
16(a) of the Exchange Act requires the Company’s officers and Directors and
persons who own more than 10% of a registered class of the Company’s equity
securities (collectively, the “Reporting Persons”) to file reports of ownership
and changes in ownership with the SEC and to furnish the Company with copies of
these reports. Based on the Company’s review of the copies of the
reports filed by such persons and written representations, the Company believes
that all filings required to be made by Reporting Persons for the period from
January 1, 2008 through December 31, 2008 were made on a timely basis except for
three untimely Form 4s reporting ten transactions filed by William W. Batoff,
one untimely Form 4 reporting one transaction and one Form 5 reporting a
transaction that should have been reported on Form 4 filed by Robert J. Coleman,
one untimely Form 4 reporting one transaction filed by Louis J. DeCesare, Jr.,
two untimely Form 4s reporting two transactions filed by Lyle W. Hall, Jr., one
untimely Form 3 filed by Carol Hunter, four untimely Form 4s reporting six
transactions filed by Harry D. Madonna, two untimely Form 4s reporting six
transactions filed by Neal Rodin, two untimely Form 4s reporting three
transactions filed by Barry Spevak, and two untimely Form 4s reporting five
transactions filed by Harris Wildstein.
Code
of Ethics
The
Company has adopted a code of ethics that applies to the Company’s principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The text of the
Company’s code of ethics is available on the Company’s website at www.rfbkonline.com.
Audit
Committee and Financial Expert
The
board of directors of the Company has designated a standing audit
committee. Messrs. Hall (chair), Batoff and Spevak serve as members
of the Audit Committee. The board of directors has determined that
Mr. Hall is an “audit committee financial expert” as that term is defined in
Item 407(d)(5) of Regulation S-K, and is “financially sophisticated,” as that
term is defined under Nasdaq rules. All members of the Audit
Committee are independent under Nasdaq listing standards, including the
independence criteria applicable to audit committee members.
53
Compensation
Discussion and Analysis
Overview of the Executive
Compensation Program. The Company’s executive compensation program
includes a number of fixed and variable compensation and benefit components,
typical of programs among comparable community banking and financial services
companies in our local and regional marketplace.
The
program seeks to provide participating executives with an industry-competitive
level of total compensation when their collective and individual performances
meet or exceed the goals approved by the board of directors, the compensation
committee or the chief executive officer.
Compensation Philosophy and Program
Objectives. We believe that the compensation program for executives
should directly support the achievement of annual, longer-term and strategic
goals of the business, and, thereby, align the interests of executives with the
interests of the Company’s shareholders.
We
believe the current program provides sufficient levels of fixed income, in the
forms of base salary and health and welfare benefits, to attract high caliber
executive talent to the organization. It also provides competitive
annual bonus and longer-term incentive opportunities to encourage specific
performance and to reward the successful efforts of executives.
The
incentive opportunities are based on competitive industry practice, an
executive’s role in the organization, and performance.
Our
current program contains certain deferred post-employment compensation features,
provided on a selective basis, to encourage retention through long-term wealth
accumulation opportunities and to assure transition support in the event of
substantial organization or ownership change. These provisions are
designed to support retention of good performers by the
organization.
We
believe that the features and composition of the current program are consistent
with practices of other comparable community banking and financial services
organizations in our marketplace and that the program balances the need for
competitive pay opportunities at the executive level with shareholders’
expectations for reasonable return on their investment.
Program Management. The
compensation committee of the board of directors has primary responsibility for
the design and administration of the compensation of the chief executive officer
of the Company and Republic, and makes recommendations with respect to the
compensation program for other executive officers. The compensation
committee will consider the make-up and administration of the executive
compensation program in light of changing organization needs and operating
conditions and changing trends in industry practice. The compensation
committee has the power and authority to retain consultants and, in 2006,
retained Strategic Compensation Planning, Inc., of Malvern, PA, to assist the
compensation committee in structuring the employment agreements for the chief
executive officer of the Company and Republic. See “Executive
Compensation” on page 59 for more
information regarding this employment agreement.
Role of Executive Management in the
Pay Decision Process. The compensation committee is
responsible for approving compensation of the chief executive officer of the
Company and Republic. It will also make recommendations with respect
to the compensation of other executive officers. In formulating its
decisions, the compensation committee may seek information about the performance
of the business, organization staffing requirements and the performance levels
of incumbent executives from the chief executive officer. It will
also utilize the services of the Company’s chief financial officer and other
officers of the Company to the extent the compensation committee deems
appropriate.
Program Review and Pay Decision
Process. Annually, the compensation committee reviews
information on executive compensation levels in the industry and industry
program practices, reviews the Company’s compensation program, and considers
adjustments to the program, salary adjustments and incentive
awards. The compensation committee will examine the current
compensation and benefit levels of incumbent executives in light of their
continuing or changing roles in the business and the assessments of their
individual performances by the compensation committee or the Chief Executive
Officer. It will also determine annual bonus compensation, after
consideration of Company and individual performance, but which is ultimately
discretionary.
The
compensation committee may also be called upon to consider pay related decisions
throughout the calendar year as executives are reassigned or promoted and new
executives join the organization. In these instances, the
compensation
54
committee
will review all aspects of the executive’s compensation including base salary
level, annual incentive opportunities, longer-term incentive awards,
participation in special benefit plans, and employment contract provisions, if
applicable.
Pay Decision Factors and
Considerations. The following factors typically influence
compensation committee decisions on pay and benefits for Company
executives:
Salary: executive’s overall
performance during the year ending, changes in organization role and scope of
responsibility, current salary in relation to the position’s market value, any
significant changes in the industry’s pay practices for comparable
positions.
Annual Bonus Compensation:
competitive industry practice with respect to size of awards, actual performance
(achievement) against goals and objectives.
Longer-term Incentive Awards:
competitive industry practice with respect to size of awards, recent performance
of the Company and the individual executive, applicable accounting rules for
expensing equity awards, and shareholder concerns about dilution and
overhang.
Nonqualified Compensation and
Benefits: tax rules on qualified benefit plans, likely replacement income
benefits for executives compared to other categories of employees within the
organization, competitive industry practice for comparable type and level of
executive positions.
Perquisites: the needs of the
executive’s position, frequency of travel to other Company locations, or to meet
with Company clients and prospective clients, and competitive industry practices
for comparable executive roles.
Employment Agreements: where
they serve Company needs for confidentiality about business practices and plans
and preservation of the customer base (noncompetition and nonsolicitation
provisions) and competitive industry practices.
Basis for Defining Competitive
Compensation Levels and Practices. The types and levels of
compensation included in the Company’s executive compensation program are
generally consistent with current features and programming trends among similar
size and type organizations in the Company’s local and regional
marketplace.
The
compensation committee reviews survey reports on national and regional
compensation practice within Company’s industry group, focusing on pay levels
and practices among community banking and diversified financial services
institutions based in the Mid-Atlantic Region and specifically the Greater
Philadelphia metropolitan marketplace having assets of $800 million to $1.5
billion. This range of institutions represents banking companies that
are somewhat smaller and somewhat larger than Company. The asset
range will be modified from time to time as Company’s operating circumstances
change.
For the
2008 program planning cycle, the compensation committee reviewed executive
compensation information from the following institutions in Pennsylvania,
Delaware, and New Jersey:
|
Abington
Community Bancorp, Inc.
|
Greater
Community Bancorp
|
|
|
Bancorp,
Inc.
|
Leesport
Financial Corp.
|
|
|
Bryn
Mawr Bank Corp.
|
Royal
Bancshares of Pennsylvania
|
|
|
First
Chester County Corp.
|
Program
Components. There are six (6) elements in the current
executive compensation program:
Base Salary. Base
salary opportunities are targeted at the median level of industry practice for
comparable jobs in like size and type community banking and financial service
organizations. Within the defined competitive range, an executive’s
salary level is based initially on his qualifications for the assignment and
experience in similar level and type roles. Ongoing, salary
adjustments reflect the individual’s overall performance of the job against
organization expectations and may also reflect changes in industry practices.
Health & Welfare
Benefits. Executives participate in Company’s qualified health
& welfare benefits program on the same terms and conditions as all other
employees of the Company.
55
Annual Performance
Incentives. The Company pays bonus compensation which provides
executives with opportunities to earn additional cash compensation in a given
year. Bonus compensation is discretionary, but Company and business
unit operating results and individual performance contributions are
considered. Typical annual performance metrics for Company executives
include net income, loan and deposit growth and net interest
margin. The determination of actual bonus amounts is not formulaic,
but, rather, the result of a review of achievements by the chief executive
officer and the compensation committee and the application of prevailing
industry practices on annual incentive awards.
Longer-term Performance
Incentives. Executives are eligible to participate in
longer-term incentive award plans established to focus executive efforts on the
strategic directions and goals of the business and to reward them for their
successes in increasing enterprise value. Awards can result in
additional cash compensation or equity grants in the form of stock options or
restricted stock. While the size of such awards may increase or
decrease based on current business performance, it is the intention of the
compensation committee to recommend some combination of the available awards at
least annually as an incentive to focus executives future efforts on longer-term
needs and objectives of the business.
Equity
Grant Plans. Our Amended and Restated Stock Option and Restricted
Stock Plan authorizes us to grant options to purchase shares of common stock to
our employees, directors and consultants. We can also grant
restricted stock to these same audiences. Our compensation committee
is the administrator of all stock grant plans. Stock option or
restricted stock grants may be made at the commencement of employment and from
time to time to meet other specific retention or performance objectives, or for
other reasons. Periodic grants of stock options or restricted stock
are made at the discretion of the compensation committee to eligible employees
and, in appropriate circumstances, the compensation committee considers the
recommendations of the chief executive officer.
Deferred
Compensation. At the end of the calendar year, named executive
officers may receive, at the compensation committee’s discretion, a contribution
equal to some percentage of their base salary or base salary and bonus, usually
10%-25%, into our deferred compensation plan. Contributions vest over
three (3) years. The value and any earnings on participant accounts
are determined by the changes in value of the Company’s common
stock. Receipt of the deferred compensation and earnings is deferred
to normal retirement.
Nonqualified Benefits and
Perquisites. We currently do not offer a nonqualified
supplemental retirement income plan (SERP) to any of our executives, but our
chief executive officer, as a former non-employee director, has an account
balance in a now frozen retirement income plan for Company Directors.
Perquisites
for Company executives are generally limited automobile allowance or use of a
Company-provided automobile, and, in a very few instances, a club
membership. Typically, these perquisites are provided in instances
where such benefits can facilitate the conduct of business with corporate and
high net worth clients.
Employment
Agreements and Change of Control. Our chief executive officer has an
employment agreement with the Company and Republic. The agreement
includes a change of control severance provision. See “Executive
Compensation” on page 59 for additional information regarding this
agreement.
Post
Retirement Income Benefits. When retired, former Company executives
are only eligible to receive replacement income benefits from our qualified
retirement income plans, the same plans covering other employees of the
Company. We do not currently sponsor any type of supplemental
retirement income plan for highly compensated employees, although we may
consider instituting such a plan in the future.
Severance
in the Event of Termination Not for Cause or Change of Control. Our
chief executive officer has specific severance arrangements in place with the
Company in the event of a termination of their employment not related to a
change of control and in the event of a change of control. Under this
arrangement, our chief executive officer would receive three times the sum of
his then-current base salary plus the average of his bonuses for the prior three
years. All outstanding equity grants and other benefit provisions
would fully vest. We also maintain a change in control policy which
would provide a severance benefit to executive officers upon certain changes of
control. See “Severance and Change in Control Benefits” at page
62.
Tax
Gross-up Provision. The employment agreement for our chief executive
officer provides for an excise tax liability gross-up payment following a change
of control if his severance benefits exceed the then-current standards under
Internal Revenue Code Section 4999.
56
Status of the Program and Likely
Practices Going Forward. The general structure of the Company executive
compensation program was established several years ago and it has been
continuously refined to meet the changing needs of the business and to maintain
a competitive posture in the marketplace for executive talent.
Due to
the Company’s recent financial and operating results, the compensation committee
determined not to award any bonus compensation to our chief executive officer
for 2007 or 2008, and only modest bonus compensation to certain other executive
officers. The compensation committee will evaluate award
opportunities for executives, consistent with performance results.
Both
stock option grants and deferred compensation contributions are likely to
continue with the size of awards tracking with the performance results of the
business.
It is
possible that some of these future grants may include performance vesting in
lieu of the traditional time vesting requirements attached to past
grants.
Nonqualified
Benefits. The compensation committee may evaluate the need and
effectiveness of a supplemental retirement income plan for certain highly
compensated employees in the future.
Perquisites. We
believe the Company’s perquisites have always been modest, offering use of a
Company vehicle primarily to those executives who travel among Company’s branch
offices and operations centers and those who frequently meet with clients and
prospects offsite. Similarly, club memberships are only provided for
those executives who can utilize them in conducting the Company’s
business.
Employment
Agreements. The compensation committee has responsibility for
review of current and proposed employment agreements and will specifically
authorize contract renewals.
Compliance with Sections 162(m) and
409A of the Internal Revenue Code. Section 162(m) of the
Internal Revenue Code provides that publicly held corporations may not deduct
compensation paid to certain executive officers in excess of $1,000,000
annually, with certain exemptions for qualified “performance-based”
compensation. The Company has obtained shareholder approval of its
stock option plan, and compensation earned pursuant to such plans is exempt from
the Section 162(m) limit. Since we retain discretion over bonuses and certain
amounts contributed to the deferred compensation plan, such amounts will not
qualify for the exemption for performance-based compensation. Such
amounts have not been at levels that, together with other compensation,
approached the $1,000,000 limit. Due to the relatively conservative
amount of annual compensation, the Company believes its compensation policies
reflect due consideration of Section 162(m). We reserve the right,
however, to use our judgment to authorize compensation payments that do not
comply with the exemptions in Section 162(m) when we believe that such payments
are appropriate and in the best interests of our shareholders, after taking into
consideration changing business conditions or the executive officer’s
performance.
It is
also our intention to maintain our executive compensation arrangements in
conformity with the requirements of Section 409A of the Internal Revenue Code,
which imposes certain restrictions on deferred compensation arrangements. We
have been engaged in a process of reviewing and modifying our deferred
compensation arrangements since the enactment of Section 409A in 2004 in order
to maintain compliance under Section 409A.
Executive
Compensation
The
following table shows the annual compensation of the Company’s chief executive
officer, chief financial officer and the three most highly compensated executive
officers of the company other than the chief executive officer and chief
financial officer for the fiscal year ended December 31,
2008. Collectively, these officers are referred to as our “named
executive officers.” Messrs. DeCesare and Frenkiel were no longer
serving as executive officers of the Company at December 31, 2008.
57
|
|
2008 Summary
Compensation Table
|
The
following table shows the annual compensation of the Company’s named executive
officers for the fiscal years ended December 31, 2008, 2007 and
2006.
|
Name
and Principal
Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Option
Awards
(1) ($)
|
Change
in
Pension
Value
($)
|
All
Other
Compensation
($)
|
Total
($)
|
|
Harry
D. Madonna, President and
Chief
Executive Officer
(2)
|
2008
|
390,225
|
-
|
21,330
|
-
|
150,427
|
561,982
|
|
2007
|
356,384
|
-
|
16,731
|
8,110
|
174,290
|
555,515
|
|
|
2006
|
330,000
|
250,000
|
-
|
7,799
|
128,843
|
716,642
|
|
|
Louis
J. DeCesare
Former
President and
Chief
Operating Officer (3)
|
2008
|
461,751
|
-
|
21,330
|
-
|
14,265
|
497,346
|
|
2007
|
250,000
|
-
|
16,731
|
-
|
110,739
|
377,470
|
|
|
2006
|
200,000
|
125,000
|
-
|
-
|
66,952
|
391,952
|
|
|
Paul
Frenkiel
Former
Chief Financial
Officer
(4)
|
2008
|
121,537
|
-
|
6,338
|
-
|
33,820
|
161,695
|
|
2007
|
113,750
|
-
|
6,971
|
-
|
32,237
|
152,958
|
|
|
2006
|
104,000
|
13,000
|
-
|
-
|
31,516
|
148,516
|
|
|
Carol
L. Hunter
Chief
Credit Officer (5)
|
2008
|
116,427
|
4,250
|
3,617
|
-
|
16,295
|
140,589
|
|
2007
|
66,937
|
-
|
-
|
-
|
961
|
67,898
|
|
|
2006
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
Edward
J. Ryan
Chief
Financial Officer (6)
|
2008
|
96,161
|
4,000
|
-
|
-
|
4,006
|
104,167
|
|
2007
|
93,173
|
8,000
|
-
|
-
|
4,047
|
105,220
|
|
|
2006
|
82,000
|
500
|
-
|
-
|
2,158
|
84,658
|
|
|
|
(1)
|
The
amount shown is the dollar amount recognized for financial statement
reporting purposes with respect to the referenced fiscal year in
accordance with FAS 123R. Assumptions made in the valuation of
option awards for financial statement reporting purposes are discussed in
Note 3. “Summary of Significant Accounting Policies - Stock Based
Compensation” in the Notes to Consolidated Financial Statements, included
at page 85.
|
|
(2)
|
In
2008, 2007 and 2006, respectively, all other compensation for Harry D.
Madonna includes $15,778, $12,192 and $13,510 of automobile and
transportation allowance, $26,405, $12,380 and $27,485 of business
development expense including a club membership which is sometimes used
for personal purposes, $3,727, $3,736 and $4,145 for a supplemental
long-term disability policy, $4,692, $3,732 and $4,200 matching
contributions by Republic First to Republic First’s 401(k) plan, and
$99,825, $142,250 and $79,503 contributions by Republic First to the
deferred compensation plan maintained for the benefit of its officers and
directors.
|
|
(3)
|
In
2008, 2007 and 2006, respectively, other compensation for Louis J.
DeCesare includes $10,568, $18,905 and $11,230 of automobile and
transportation allowance, $2,466, $7,834 and $12,540 of business
development expense including a club membership which was sometimes used
for personal purposes, $1,231, $9,000 and $0 for a 401k match, and $0,
$75,000 and $43,182 contributions by the Company to the deferred
compensation plan maintained for the benefit of its officers and
directors.
|
58
|
(4)
|
In
2008, 2007 and 2006, respectively, other compensation for Paul Frenkiel
includes $5,265, $5,070 and $4,550 of automobile and transportation
allowance, $5,122, $4,417 and $4,819 for a 401k match, and $23,433,
$22,750 and $22,147 contributions by the Company to the deferred
compensation plan maintained for the benefit of its officers and
directors.
|
|
(5)
|
In
2008, 2007 and 2006, respectively, other compensation for Carol L. Hunter
includes $4,820, $961 and $0 for a 401k match, and $11,475, $0 and $0
contributions by the Company to the deferred compensation plan maintained
for the benefit of its officers and
directors.
|
|
(6)
|
In
2008, 2007 and 2006, respectively, other compensation for Edward J. Ryan
includes $4,006, $4,047 and $2,158 for a 401k
match.
|
|
|
2008 Grants of
Plan-Based Awards Table
|
|
Name
|
Grant
Date
|
All
Other Option
Awards:
Number
of
Securities
Underlying
Options
(#)
|
Exercise
or Base
Price
of Option
Awards
($ / Sh)
|
Closing
Price on
Grant
Date ($ / Sh)
|
Grant
Date Fair
Value
of Stock
and
Option
Awards
(1) ($)
|
|
Harry
D. Madonna
|
January
23, 2008
|
12,000
|
5.99
|
6.30
|
24,480
|
|
Louis
J. DeCesare
|
January
23, 2008
|
12,000
|
5.99
|
6.30
|
24,480
|
|
Carol
L. Hunter
|
January
23, 2008
|
5,000
|
6.35
|
6.30
|
10,850
|
|
(1)
|
The
grant date fair value was determined in accordance with FAS 123R, by the
Black-Scholes option pricing model. The following assumptions
were utilized: a dividend yield of 0%; expected volatility of 24.98%; a
risk-free interest rate of 3.08% and an expected life of 7.0
years. Options vest after four years from the date of grant,
and are subject to acceleration upon completion of the
merger.
|
The
Company’s compensation committee met on January 22, 2008 to authorize the
granting of the options in the table shown above, and the grant date was January
23, 2008. Options issued to Mr. Madonna and Mr. DeCesare represented the annual
grant of options as per their employment contracts. The grant date exercise
price was the price as of the most recent close on January 22, 2008, of
$5.99.
Summary Compensation and Grants of
Plan-Based Awards. Our named executive officers receive from
the Company a combination of base salary, health and welfare benefits, bonus
compensation, long-tern incentive compensation in the form of stock option
awards, qualified and nonqualified deferred compensation and
perquisites. Bonus compensation is paid at the discretion of the
compensation committee of the Company’s board of directors after consideration
of numerous factors, which may include net income, core deposits, loan growth,
income from loan programs, and other factors set by the compensation
committee.
Effective
January 1, 2007, the Company and Republic entered into an employment agreement
with Mr. Madonna. The compensation paid to Mr. Madonna is determined,
in large part, by the terms of his employment agreement, which is described
below. Mr. Madonna and Pennsylvania Commerce will enter into a new
employment agreement prior to the effective time of the merger which will
supersede Mr. Madonna’s existing employment agreement with the Company and
Republic.
Mr.
Madonna currently serves as chairman of the board, president and chief executive
officer of the Company and Republic under the terms of an agreement with an
initial term of three years beginning January 1, 2007 at an annual base salary
of $330,000. Pursuant to the terms of the agreement, Mr. Madonna’s
annual base salary increased to $363,000 on April 1, 2007, increased an
additional 10% on April 1, 2008, and is scheduled to increase an additional 10%
on April 1, 2009. The Company and Republic may terminate Mr.
Madonna’s agreement with notice at least six months prior to the scheduled
expiration/renewal date or any time for good reason. Mr. Madonna may
terminate the agreement upon six months notice. Mr. Madonna is also
eligible to receive an annual bonus in an amount set by the sole discretion and
determination of the compensation committee of the Company’s board of directors
upon achieving mutually agreed upon budget criteria. He will also
receive 25% of base salary and most recent bonus as deferred
compensation. Annually, for each of the three years of the agreement,
Mr. Madonna will receive 12,000 stock options at an exercise price equal to the
stock’s market price on the date of
59
grant,
which will vest four years after the grant. Mr. Madonna will be
provided an automobile and will be reimbursed for its operation, maintenance and
insurance expenses. Additionally, he will receive health and
disability insurance available to all employees, term life insurance for three
times his salary, business related travel and entertainment expenses and club
dues and expenses. The agreement with Mr. Madonna provides for
severance and change in control payments, which are discussed below under the
caption, “Severance and Change in Control Benefits” at page 62. It also
provides for the non-disclosure by Mr. Madonna of confidential information
acquired by him in the context of his employment with the Company and
Republic.
|
|
2008 Outstanding
Equity Awards At Fiscal Year-End
Table
|
|
Option
Awards
|
||||
|
Name
|
Number
of Securities
Underlying
Unexercised
Options
(#)
Exercisable (1)
|
Number
of Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(1)(2)
|
Option
Exercise Price
($)
(1)
|
Option
Expiration
Date
|
|
Harry
D. Madonna
|
12,000
|
5.99
|
January
23, 2018
|
|
|
13,200
|
11.77
|
January
2, 2017
|
||
|
27,104
|
10.05
|
April
20, 2015
|
||
|
25,342
|
6.16
|
January
1, 2014
|
||
|
Paul
Frenkiel
|
5,500
|
11.77
|
January
2, 2017
|
|
|
Carol
L. Hunter
|
5,000
|
6.35
|
January
23, 2018
|
|
|
(1)
|
The
number of shares of common stock underlying options and the option
exercise prices have been adjusted in accordance with their terms as a
result of the Company’s 10% stock dividend in April, 2007.
|
|
(2)
|
All
unexercisable options will vest on the earlier of the fourth anniversary
of the date of grant, or upon completion of the
merger.
|
|
|
2008 OPTION EXERCISES
AND STOCK VESTED
|
Option
Awards
|
Name
|
Number
of Shares
Acquired
on Exercise (#)
|
Value
Realized on Exercise ($)
|
|
Harry
D. Madonna (1)
|
77,516
|
166,779
|
|
Louis
J. DeCesare (2)
|
42,561
|
161,983
|
|
(1)
|
Options
to purchase 23,851, 23,851 and 29,814 shares at per share exercise prices
of $3.12, $2.77 and $1.81, respectively, were exercised on May 30,
2008. The value realized on exercise has been determined based
on the closing price of the Company common stock on May 30, 2008, which
was $4.66.
|
|
(2)
|
Options
to purchase 12,000, 3,727, 17,888, 4,473 and 4,473 shares at per share
exercise prices of $5.99, $3.76, $6.16, $2.77 and $2.72, respectively,
were exercised on August 29, 2008. The value realized on exercise has been
determined based on the closing price of the Company common stock on
August 29, 2008, which was $8.99.
|
60
|
|
2007 Pension Benefits
Table
|
|
Name
|
Plan
Name
|
Number
of Years Credited
Service
(#) (1)
|
Present
Value of
Accumulated
Benefit ($)
|
|
Harry
D. Madonna
|
Supplemental
retirement benefits
|
16
|
210,883
|
|
(1)
|
Mr.
Madonna’s years of credited service and the present value of his
accumulated benefit were determined as of December 31, 2008, which is the
same pension plan measurement date that the Company used for financial
statement reporting purposes with respect to its audited financial
statements for the fiscal year ended December 31,
2008.
|
In 1992,
the Company adopted a supplemental retirement plan for non-employee
directors. The plan was frozen to new participants in 1992, but the
Company continues to maintain the plan for participants who served as
non-employee directors in 1992. At that time, Mr. Madonna was a
non-employee director and he continues to be a participant in the
plan. The present value of accumulated benefit was calculated based
upon the actuarial present value of accumulated benefits, calculated as of
December 31, 2008, as follows. The plan provides for a retirement benefit of
$25,000 per year for ten years, which payments may begin at the later
of actual retirement date or 65 years of age. As Mr. Madonna has
reached 65 years of age, the amount shown as the present value of the
accumulated benefit is the amount necessary to fund $25,000 annual payments over
a ten year period commencing as December 31, 2008, the end of the Company’s most
recently completed fiscal year, determined using a 4% discount
rate. Upon completion of the merger, in satisfaction of all his
rights under this arrangement, Mr. Madonna will be entitled to receive
approximately $250,000.
|
|
2008 Nonqualified
Deferred Compensation Table
|
|
Name
|
Executive
Contributions
in Last
Fiscal
Year ($)
|
Registrant
Contributions
in Last
Fiscal
Year (1) ($)
|
Aggregate
Earnings
in
Last Fiscal Year
($)
(2)
|
Aggregate
Balance at
Last
Fiscal Year-End
(3)
($)
|
|
Harry
D. Madonna
|
-
|
99,825
|
(59,216)
|
331,343
|
|
Louis
J. DeCesare (4)
|
-
|
-
|
-
|
-
|
|
Paul
Frenkiel
|
-
|
23,433
|
2,386
|
89,604
|
|
Carol
L. Hunter
|
-
|
11,475
|
904
|
12,379
|
|
(1)
|
Company
contributions are also included as other compensation in the Summary
Compensation Table.
|
|
(2)
|
Participant
accounts are credited with gains, losses and expenses as if they had been
invested in the common stock of the Company. The amount
reported is not included in the Summary Compensation
Table.
|
|
(3)
|
The
aggregate balances include company contributions of $99,825, $142,250 and
$79,503 for Mr. Madonna, $23,433, $22,750 and $22,147 for Mr. Frenkiel and
$11,475, $0 and $0 for Ms. Hunter, all included as other compensation in
the Summary Compensation Table for 2008, 2007 and 2006,
respectively. Company contributions to the deferred
compensation plan vest over a three year period or completion of the
merger. At December 31, 2008, the vested balances for Mr.
Madonna, Mr. Frenkiel and Ms. Hunter were $80,060, $17,001, and $0,
respectively.
|
|
(4)
|
Mr.
DeCesare had no contributions or aggregate earnings in 2008, because when
his employment ceased, he was entitled only to a distribution of the
vested portion of his account applicable to prior years. The amount of
that distribution was $21,434.
|
The
Company has caused a deferred compensation plan to be maintained for the benefit
of its officers and directors. The plan, which permits participants
to make contributions up to the amount of his or her salary subject to
applicable limitations under the Internal Revenue Code. In addition,
the Company may make discretionary contributions to the plan, typically a
percentage of the participant’s base salary or annual cash
compensation. The Company’s contributions to the plan for the benefit
of Mr. Madonna are limited by the amounts specified in his January 2007
employment agreement. The value and any earnings on participant
accounts are determined by the changes in value of the Company’s common
stock. The plan
61
provides
for distributions upon retirement and, subject to applicable limitations under
the Internal Revenue Code, limited hardship withdrawals.
Severance and Change in Control
Benefits. Mr. Madonna’s employment agreement with the Company
and Republic provides for certain severance and change in control
benefits. Upon the occurrence of a change in control (as defined in
the agreements), or termination for any reason other than death, resignation by
the executive without cause (as defined in the agreements) and termination by
the Company or Republic with good reason (as defined in the agreements), Mr.
Madonna would receive a severance payment equal to three times his annual base
salary plus three times his average bonus over the prior three
years. Mr. Madonna would receive three years of health and life
insurance or cash in an amount equal to the cost of such
insurance. Mr. Madonna would receive an automobile. Mr.
Madonna would also receive a “gross-up” payment as reimbursement for any
additional excise taxes if triggered under section 4999 of the Internal Revenue
Code. If a change in control occurred December 31, 2008, or Mr.
Madonna’s employment was terminated December 31, 2008 for any reason other than
death, resignation by Mr. Madonna without cause or termination by the Company or
Republic with good reason, Mr. Madonna would have received cash severance, life
and health insurance benefits, automobile allowances and tax gross ups
aggregating approximately $2.0 million. Payments following a change
in control are to be made in a lump sum. In all other instances,
payments are to be made over 36 months.
In
connection with his agreement to enter into a new employment agreement with
Pennsylvania Commerce, Mr. Madonna will not be entitled to any change in control
compensation as a result of the merger.
Director
Compensation
The
following table sets forth information regarding compensation paid by the
Company to its current non-employee directors during 2008.
|
|
2008 Director
Compensation Table
|
|
Name
|
Fees
Earned or
Paid
in Cash
($)
|
Option
Awards
(1)
(2)
($)
|
Change
in
Pension
Value
and
Nonqualified
Deferred
Compensation
Earnings (3)
($)
|
All
Other
Compensation
(4)
($)
|
Total
($)
|
|
William
W. Batoff
|
30,000
|
7,240
|
2,775
|
11,000
|
51,015
|
|
Robert
J. Coleman
|
27,250
|
7,240
|
-
|
11,000
|
45,490
|
|
Theodore
J. Flocco, Jr. (5)
|
8,000
|
-
|
-
|
6,000
|
14,000
|
|
Lyle
W. Hall, Jr.
|
38,500
|
7,240
|
-
|
11,000
|
56,740
|
|
Neal
I. Rodin
|
33,500
|
7,240
|
7,799
|
11,000
|
59,539
|
|
Barry
L. Spevak
|
34,625
|
7,240
|
-
|
11,000
|
52,865
|
|
Harris
Wildstein Esq.
|
31,500
|
7,240
|
7,499
|
11,000
|
57,239
|
|
(1)
|
The
amount shown is the dollar amount recognized for financial statement
reporting purposes with respect to the referenced fiscal year in
accordance with FAS 123R. Assumptions made in the valuation of
option awards for financial statement reporting purposes are discussed in
Note 3. “Summary of Significant Accounting Policies - Stock Based
Compensation” in the Notes to Consolidated Financial Statements, for the
year ended December 31, 2007, included at page 85. In 2008, the
following assumptions were utilized: a dividend yield of 0%; expected
volatility of 24.98%; a risk-free interest rate of 3.08% and an
expected life of 7.0 years..
|
| (2) | Each director, other than Mr. Flocco, received a grant of 3,300 options (as adjusted as a result of the Company’s 10% stock dividend in April, 2007) on January 2, 2007. Each such option vests three years after the date of grant, subject to acceleration upon completion of the merger. The fair value as of the date of grant for each director was $15,210. Each director, other than Mr. Flocco, received a grant of 3,000 options on January 23, 2008. Each such option vests three years after the date of grant, subject |
62
|
to
acceleration upon completion of the merger. The fair value as
of the date of grant for each director was $6,510. As of December 31,
2008, the following directors had the following outstanding options: Mr.
Batoff, 13,996; Mr. Coleman, 13,996; Mr. Hall, 13,996; Mr. Rodin 13,996;
Mr. Spevak, 13,996; and Mr. Wildstein, 70,914.
|
|
|
(3)
|
Amounts
shown represent the 2008 expense for supplemental retirement benefits for
directors who served as such in 1992, the year in which the benefit
originated. The benefit is not provided to directors who joined the board
of directors since 1992.
|
|
(4)
|
Amounts
shown represent payments to directors for business development and other
expenses incurred in their capacity as
directors.
|
|
(5)
|
Mr.
Flocco was appointed to the board of directors in June
2008.
|
Employee
directors receive no additional compensation for their service on the
board. During 2008, non-employee directors received a $6,000
quarterly retainer. The audit committee chair received $1,500 for
each audit committee meeting attended and each other member of the audit
committee received $1,000 for each audit committee meeting
attended. The chair of all other board committees received $750 for
each committee meeting attended and each other member of those committees
received $500 for each committee meeting attended. During 2008,
non-employee directors also received an additional retainer of $1,000 per month
from February through December for business development and other expenses
incurred in connection with their service as directors. Messrs. Hall
and Rodin each received $4,000 for service on the special committee of the board
designated in connection with the merger.
Non-employee
directors are eligible to receive grants of stock options under the Company’s
stock option plan and restricted stock plan and grants are made from time to
time, typically on an annual basis. Non-employee directors are also
eligible to participate in a deferred compensation plan.
Compensation
Committee Interlocks and Insider Participation
During
2008, Messrs. Batoff, Hall, and Rodin served as members of the compensation
committee of the Company’s board of directors. No member of the
compensation committee during 2008 ever served as an officer or employee of the
Company or Republic. There are no compensation committee interlocks
between the Company or Republic and any other entity, involving the Company’s or
Republic’s, or such entity’s, executive officers or board members.
Compensation
Committee Report
The
compensation committee has reviewed and discussed the Compensation Discussion
& Analysis required by Item 402(b) of Regulation S-K with management and,
based on such review and discussions, the compensation committee recommended to
the Board of Directors that the Compensation Discussion & Analysis be
included in this Annual Report on Form 10-K.
|
COMPENSATION
COMMITTEE
|
|
|
William
W. Batoff, Chairman
|
|
|
Lyle
W. Hall, Jr.
|
|
|
Neal
I. Rodin
|
63
Equity
Compensation Plan Information
The following table sets forth
information as of December 31, 2008, 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
|
467,988
|
$8.33
|
(1)
|
|
Equity
compensation plans not approved by security holders: Incentives to acquire
new employees
|
-
|
-
|
-
|
|
Total
|
467,988
|
$8.33
|
(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.
|
Voting
Securities and Principal Holders Thereof
The
following table sets forth, as of March 6, 2009, information with respect to the
holdings of Company securities of all persons which the Company, pursuant to
filings with the SEC and the Company’s stock transfer records, has reason to
believe may be beneficial owners of more than five percent (5%) of the Company’s
outstanding common stock, each current director, each named executive officer,
and all of the Company’s directors and executive officers as a
group.
|
Name of Beneficial Owner
(1)
|
Number of Shares
Beneficially Owned (2)
|
Percent of
Common Stock (2)
|
|
Vernon
W. Hill, II (3)
|
960,000
|
8.3%
|
|
Harry
D. Madonna (4)
|
1,042,164
|
9.9%
|
|
William
W. Batoff (5)
|
173,658
|
1.6%
|
|
Robert
J. Coleman (6)
|
161,368
|
1.5%
|
|
Theodore
J. Flocco, Jr. (7)
|
36,923
|
*
|
|
Lyle
W. Hall, Jr. (8)
|
54,106
|
*
|
|
Neal
I. Rodin (9)
|
207,182
|
1.9%
|
|
Barry
L. Spevak (10)
|
28,164
|
*
|
|
Harris
Wildstein (11)
|
838,893
|
7.8%
|
|
Carol
L. Hunter
|
-
|
*
|
|
Edward
J. Ryan
|
-
|
*
|
|
Louis
J. DeCesare (12)
|
58,040
|
*
|
|
Paul
Frenkiel (13)
|
15,127
|
*
|
|
Directors
and executive officers as a group
(10
persons)
|
2,592,458
|
23.2%
|
|
*
|
Represents
less than 1% of the issued and outstanding
shares.
|
64
|
(1)
|
Unless
otherwise indicated, the address of each beneficial owner is c/o Republic
First Bancorp, Inc., Two Liberty Place, 50 S. 16th Street, Suite 2400,
Philadelphia, PA 19102. The group of directors and
executive officers was determined as of March 6, 2009 and does not reflect
any changes in management since that
date.
|
|
(2)
|
The
securities “beneficially owned” by an individual are determined in
accordance with the definition of “beneficial ownership” set forth in Rule
13d-3 under the Securities Exchange Act of 1934, as
amended. Any person who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise has or
shares: voting power, which includes the power to vote, or to direct the
voting of, common stock; and/or, investment power, which includes the
power to dispose, or to direct the disposition of, common stock, is
determined to be a beneficial owner of the common stock. All
shares are subject to the named person’s sole voting and investment power
unless otherwise indicated. Shares beneficially owned include
shares issuable upon exercise of options which are currently exercisable
or which will be exercisable within 60 days of March 6, 2009, and upon
conversion of convertible securities which are currently convertible or
which will be convertible within 60 days of March 6,
2009. Percentage calculations presume that the identified
individual or group exercise and convert all of his or their respective
options and convertible securities, and that no other holders of options
or convertible securities exercise their options or convert their
convertible securities. As of March 6, 2009 there were
10,631,348 shares of the Company’s common stock outstanding.
|
|
(3)
|
Information
with respect to beneficial ownership is based on a Schedule 13D filed with
the SEC on June 20, 2008 by Vernon W. Hill, II and Theodore J. Flocco,
Jr. Includes 6,000 capital securities of Republic First Bancorp
Capital Trust IV held by Mr. Hill, which are currently convertible into
923,077 shares of common stock, and 240 capital securities of Republic
First Bancorp Capital Trust IV held by Mr. Flocco, which are currently
convertible into 36,923 shares of common stock. The address of
Mr. Hill is 17000 Horizon Way, Suite 100, Mt. Laurel,
NJ 08054.
|
|
(4)
|
Includes
52,446 shares of common stock issuable subject to options which are
currently exercisable and 2,264 capital securities of Republic First
Bancorp Capital Trust IV held by a family trust, which are currently
convertible into 348,308 shares of common
stock.
|
|
(5)
|
Includes
7,696 shares of common stock issuable subject to options which are
currently exercisable.
|
|
(6)
|
Includes
7,696 shares of common stock issuable subject to options which are
currently exercisable.
|
|
(7)
|
Includes
240 capital securities of Republic First Bancorp Capital Trust IV which
are currently convertible into 36,923 shares of common
stock.
|
|
(8)
|
Includes
7,696 shares of common stock issuable subject to options which are
currently exercisable.
|
|
(9)
|
Includes
7,696 shares of common stock issuable subject to options which are
currently exercisable.
|
|
(10)
|
Includes
7,696 shares of common stock issuable subject to options which are
currently exercisable.
|
|
(11)
|
Includes
64,614 shares of common stock subject to options which are currently
exercisable. Also includes 15,828 shares in trust for his daughter, 12,235
shares with power of attorney for his mother, 21,092 shares owned by his
son, and 2,032 shares held by his wife.
|
| (12) | Mr. DeCesare terminated his employment as an executive officer and resigned his position as a director on June 21, 2008. The reported beneficial ownership includes 15,479 shares held by Mr. DeCesare as of February 20, 2008 and 42,561 shares insued to Mr. DeCesare on August 29, 2008 upon his exercise of options. |
| (13) | Mr. Frenkiel terminated his employment as an executive officer on November 7, 2008. The reported beneficial ownership includes shares held by Mr. Frenkiel as of March 6, 2009. |
65
Item 13: Certain Relationships and
Related Transactions, and Director Independence
Transactions
with related persons
On June
10, 2008, a family trust of Harry D. Madonna, chairman, chief executive officer
and president of the Company and Republic, and Theodore J. Flocco, Jr., a
director of the Company and Republic, along with Vernon W. Hill, II and other
investors, purchased capital securities of Trust IV. Mr. Madonna’s
family trust purchased 3,000 capital securities and Mr. Flocco purchased 240
capital securities, and Mr. Hill purchased 6,000 capital securities, each for
$1,000 per capital security. Mr. Hill, at the time of his investment,
entered into a consulting agreement with the Company, pursuant to which he
provides advisory and consulting services to the Company with respect to
strategic matters and opportunities, such as the planned merger with
Pennsylvania Commerce, as well as the Company’s business and
operations. Among other things, the consulting agreement provides Mr.
Hill the right to designate one individual to the board of directors, and Mr.
Flocco is Mr. Hill’s designee for that position.
Republic
has made, and expects to continue to make, loans in the future to directors and
executive officers of the Company and Republic, and to their family members, and
to firms, corporations, and other entities in which they and their family
members maintain interests. None of such loans are, as of the date of this
Annual Report on Form 10-K, or were at December 31, 2008, nonaccrual, past due,
restructured or potential problems, and all of such loans were made in the
ordinary course of business, on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable loans with persons not related to the Company or Republic and did not
involve more than the normal risk of collectibility or present other unfavorable
features.
Prior to
January 31, 2005, First Bank of Delaware was a wholly owned subsidiary of the
Company. Four of the Company’s eight directors, Messrs. Batoff, Hall,
Madonna and Wildstein, are members of First Bank of Delaware’s five person
board. At the time First Bank of Delaware was spun off from the
Company, Republic and BSC Services Corporation, a wholly-owned subsidiary of
First Bank of Delaware, entered into a number of agreements pursuant to which
BSC Services Corporation provided services to Republic, including a financial
accounting and reporting service agreement, compliance services agreement,
operation and data processing services agreement; and human resources and
payroll services agreement. These agreements provided for shared data
processing, accounting, employee leasing, human resources, credit and compliance
services. During 2008, the Company and First Bank of Delaware began
to transition away from this relationship. In July 2008, Republic and
First Bank of Delaware entered into a number of agreements, similar to those
between BSC Services Corporation and Republic, but pursuant to which Republic
would provide services to First Bank of Delaware. These agreements
include a financial accounting and reporting service agreement, compliance and
audit services agreement, operations, data processing and administrative
services agreement, human resources and payroll services agreement, and credit
and loan administration services agreement. In August 2008, BSC
Services Corporation discontinued its operations and all of its employees were
transferred to the direct employ of either the Republic of First Bank of
Delaware. Republic paid BSC Services Corporation $8.2 million in 2008
for services provided. For services provided in 2008, after changes
in the relationship between Republic and First Bank of Delaware, First Bank of
Delaware paid Republic $215,000.
Review,
approval or ratification of transactions with related persons
All
transactions with related persons are approved by the Board of Directors of the
Company.
Director
Independence
The
Company’s common stock is listed on the NASDAQ Global Market and the Company’s
board of directors has determined the independence of the members of its board
and committees under the NASDAQ listing standards. The Company’s
board of directors determined that under NASDAQ independence standards Messrs.
Batoff, Coleman, Flocco, Hall, Rodin and Spevak, constituting a majority of the
members of the the Company’s board of directors, are independent, and that all
of the members of the audit, nominating and compensation committees are
independent. The Company’s directors who were determined to not be
independent were Messrs. Madonna and Wildstein. In
determining the independence of Mr. Flocco, the board considered a consulting
arrangement pursuant to which Mr. Flocco earned $32,500 during
2008.
66
The
following table presents fees for the audit of the Company’s annual financial
statements and internal controls over financial reporting and other professional
services by Beard Miller Company LLP, the Company’s independent registered
public accounting firm, for the two years ended December 31, 2008.
|
|
2008
|
2007
|
||||||
|
|
|
|
||||||
|
Audit
Fees:
|
$ | 180,900 | $ | 167,662 | ||||
|
|
||||||||
|
Audit-Related
Fees:
|
34,235 | |||||||
|
|
||||||||
|
Tax
Fees:
|
20,000 | 20,639 | ||||||
|
|
||||||||
|
All
Other Fees:
|
||||||||
|
|
||||||||
|
Total
Fees
|
$ | 235,135 | $ | 188,301 | ||||
Audit
Fees consist of fees billed for professional services rendered for the audit of
the Company’s consolidated financial statements, internal control over financial
reporting and review of the interim consolidated financial statements included
in quarterly reports and services that are normally provided by Beard Miller
Company LLP in connection with statutory and regulatory filings or
engagements.
Audit-Related
Fees consist of fees billed for assurance and related services that are
reasonably related to the performance of the audit or review of the Company’s
consolidated financial statements and are not reported under “Audit
Fees.”
Tax Fees
consist of fees billed for professional services for tax compliance, tax advice
and tax planning. These services include assistance regarding federal
and state tax compliance, tax audit defense, customs and duties, and mergers and
acquisitions.
All Other
Fees consist of fees billed for products and services provided by the
independent registered public accounting firm, other than those services
described above.
67
PART IV
A. Financial
Statements
|
|
(1)
|
Management’s
Report on Internal Control Over Financial
Reporting
|
|
|
(2)
|
Reports
of Independent Registered Public Accounting
Firm
|
|
|
(3)
|
Consolidated
Balance Sheets as of December 31, 2008 and
2007
|
|
|
(4)
|
Consolidated
Statements of Operations for the years ended December 31, 2008, 2007 and
2006
|
|
|
(5)
|
Consolidated
Statements of Changes in Shareholders’ Equity for the years ended December
31, 2008, 2007 and 2006
|
|
|
(6)
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008, 2007 and
2006
|
|
|
(7)
|
Notes
to Consolidated Financial
Statements
|
68
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
|
|
|
2.1
|
Agreement
and Plan of Merger, dated as of November 7, 2008, between Pennsylvania
Commerce Bancorp, Inc.
and
Republic First Bancorp, Inc.
|
|
Incorporated
by reference to Form 8-K Filed November 12, 2008
|
|
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
|
|
4.1
|
The
Company will furnish to the SEC upon request copies of the following
documents relating to the Company’s Floating Rate Junior Subordinated Debt
Securities due 2037: (i) Indenture dated as of December 27, 2006, between
the Company and Wilmington Trust Company, as trustee; (ii) Amended and
Restated Declaration of Trust of Republic Capital Trust II, dated as of
December 27, 2006; and (iii) Guarantee Agreement dated as of December 27,
2006, between the Company and Wilmington Trust Company, as trustee, for
the benefit of the holders of the capital securities of Republic Capital
Trust II.
|
|
|
|
4.2
|
The
Company will furnish to the SEC upon request copies of the following
documents relating to the Company’s Floating Rate Junior Subordinated Debt
Securities due 2037: (i) Indenture dated as of June 28, 2007, between the
Company and Wilmington Trust Company, as trustee; (ii) Amended and
Restated Declaration of Trust of Republic Capital Trust III, dated as of
June 28, 2007; and (iii) Guarantee Agreement dated as of June 28, 2007,
between the Company and Wilmington Trust Company, as trustee, for the
benefit of the holders of the capital securities of Republic Capital Trust
III.
|
|
|
|
4.3
|
The
Company will furnish to the SEC upon request copies of the following
documents relating to the Company’s Fixed Rate Junior Subordinated
Convertible Debt Securities due 2038: (i) Indenture dated as of June 10,
2008, between the Company and Wilmington Trust Company, as trustee; (ii)
Amended and Restated Declaration of Trust of Republic First Bancorp
Capital Trust IV, dated as of June 10, 2008; and (iii) Guarantee Agreement
dated as of June 10, 2008, between the Company and Wilmington Trust
Company, as trustee, for the benefit of the holders of the capital
securities of Republic First Bancorp Capital Trust IV.
|
|
|
|
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* |
|
Incorporated
by reference to Form 10-K Filed March 10,
2008
|
69
|
10.3
|
Deferred
Compensation Plan*
|
Incorporated
by reference to Form 10-Q Filed November 15, 2004
|
|
10.4
|
Change
in Control Policy for Certain Executive Officers*
|
Incorporated
by reference to Form 10-K filed March 9, 2007
|
|
10.5
|
Amended
and Restated Supplemental Retirement Plan Agreements between Republic
First Bank and Certain Directors*
|
Incorporated
by reference to Form 10-Q Filed November 7, 2008
|
|
10.6
|
Purchase
Agreement among Republic First Bancorp, Inc., Republic First Bancorp
Capital Trust IV, and Purchasers of the Trust IV Capital
Securities
|
Incorporated
by reference to Form 10-Q Filed November 7, 2008
|
|
10.7
|
Registration
Rights Agreement among Republic First Bancorp, Inc. and the Holders the
Trust IV Capital Securities
|
Incorporated
by reference to Form 10-Q Filed November 7, 2008
|
|
10.8
|
Consulting
Agreement between Republic First Bancorp, Inc. and Vernon W. Hill,
II
|
Incorporated
by reference to Form 10-Q Filed November 7, 2008
|
|
|
Filed
Herewith
|
|
|
|
Filed
Herewith
|
|
|
|
Filed
Herewith
|
|
|
|
Filed
Herewith
|
|
|
|
Filed
Herewith
|
|
|
Filed
Herewith
|
||
* Constitutes
a management compensation agreement
or arrangement.
70
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.
|
|||
|
Date: March
12, 2009
|
By:
|
/s/
Harry D. Madonna
|
|
|
Harry
D. Madonna
|
|||
|
Chairman,
President and
|
|||
|
Chief
Executive Officer
|
|||
|
Date:
March 12, 2009
|
By:
|
/s/
Edward J. Ryan
|
|
|
Edward
J. Ryan,
|
|||
|
Acting
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
12, 2009
|
/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/
Theodore J. Flocco, Jr..
|
|||
|
Theodore
J. Flocco 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
|
71
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 Firm
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
|
|
Consolidated
Statements of Operations
|
|
|
for
the years ended December 31, 2008, 2007 and 2006
|
|
|
Consolidated
Statements of Changes in Shareholders’ Equity
|
|
|
for
the years ended December 31, 2008, 2007 and 2006
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
for
the years ended December 31, 2008, 2007 and 2006
|
|
|
Notes
to Consolidated Financial Statements
|
72
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 did not maintain 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, 2008, due to the identification and effect of the following
material weaknesses:
|
|
•
|
a
lack of adequate controls over accounting for other than temporarily
impaired investment securities in accordance with Statement of Financial
Accounting Standards No. 115, and
|
|
|
•
|
a
lack of effective controls over the financial statement reporting process,
including controls to ensure that footnote disclosures are complete and
accurate, and that the financial statements and related footnotes are
presented and reviewed in a timely
fashion.
|
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, 2008, and the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2008, as stated in their reports,
which are included herein.
|
Date: March
12, 2009
|
By:
|
/s/
Harry D. Madonna
|
|
Harry
D. Madonna
|
||
|
Chairman,
President and
|
||
|
Chief
Executive Officer
|
||
|
Date:
March 12, 2009
|
By:
|
/s/
Edward J. Ryan
|
|
Edward
J. Ryan,
|
||
|
Acting
Chief Financial Officer
|
||
73
To the
Board of Directors and Shareholders
Republic
First Bancorp, Inc.
We have
audited Republic First Bancorp, Inc.'s internal control over financial reporting
as of December 31, 2008, 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.
A
material weakness is a control deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the Company’s annual or interim
financial statements will not be prevented or detected on a timely basis. The
following material weaknesses have been identified and included in management’s
assessment: (1) the Company did not have adequate controls over accounting for
other than temporarily impaired investment securities as of December 31, 2008 in
accordance with Statement of Financial Accounting Standards No. 115 and (2) a
lack of effective controls over the financial statement reporting process,
including controls to ensure that footnote disclosures are complete and
accurate, and timely preparation and review of the financial statements and
related footnotes. These material weaknesses were considered in determining the
nature, timing, and extent of audit tests applied in our audit of the 2008
financial statements, and this report does not affect our report dated March 12,
2009 on those financial statements.
In our
opinion, because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, Republic First Bancorp,
Inc. has not maintained effective internal control over financial reporting as
of December 31, 2008, 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 sheets and the related
consolidated statements of operations, stockholders’ equity, and cash flows of
Republic First Bancorp, Inc. and subsidiary, and our report dated March 12, 2009
expressed an unqualified opinion.
Beard
Miller Company LLP
Malvern,
Pennsylvania
March 12,
2009
74
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, 2008 and 2007, and the
related consolidated statements of operations, changes in shareholders’ equity,
and cash flows for each of the years in the three-year period ended December 31,
2008. 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 audit 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, 2008 and 2007, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.
As
discussed in Note 15 to the consolidated financial statements, Republic First
Bancorp, Inc. changed its method of accounting for fair values in
2008.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Republic First Bancorp Inc.’s internal control
over financial reporting as of December 31, 2008, 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 12, 2009 expressed an
adverse opinion.
Beard
Miller Company LLP
Malvern,
Pennsylvania
March 12,
2009
75
CONSOLIDATED
BALANCE SHEETS
December
31, 2008 and 2007
(Dollars
in thousands, except share data)
|
2008
|
2007
|
|||||||
|
ASSETS:
|
||||||||
|
Cash
and due from
banks
|
$ | 12,925 | $ | 10,996 | ||||
|
Interest
bearing deposits with
banks
|
334 | 320 | ||||||
|
Federal
funds
sold
|
21,159 | 61,909 | ||||||
|
Total cash and cash
equivalents
|
34,418 | 73,225 | ||||||
|
Investment
securities available for sale, at fair
value
|
83,032 | 83,659 | ||||||
|
Investment
securities held to maturity, at amortized cost
|
||||||||
|
(fair value of $214 and
$285 respectively)
|
198 | 282 | ||||||
|
Restricted
stock, at
cost
|
6,836 | 6,358 | ||||||
|
Loans
receivable, (net of allowance for loan losses of $8,409 and
$8,508
|
||||||||
|
respectively)
|
774,673 | 813,041 | ||||||
|
Premises
and equipment,
net
|
14,209 | 11,288 | ||||||
|
Other
real estate owned,
net
|
8,580 | 3,681 | ||||||
|
Accrued
interest
receivable
|
3,939 | 5,058 | ||||||
|
Bank
owned life
insurance
|
12,118 | 11,718 | ||||||
|
Other
assets
|
13,977 | 7,998 | ||||||
|
Total
Assets
|
$ | 951,980 | $ | 1,016,308 | ||||
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY:
|
||||||||
|
Liabilities:
|
||||||||
|
Deposits:
|
||||||||
|
Demand
—
non-interest-bearing
|
$ | 70,814 | $ | 99,040 | ||||
|
Demand
—
interest-bearing
|
43,044 | 35,235 | ||||||
|
Money
market and
savings
|
231,643 | 223,645 | ||||||
|
Time
less than
$100,000
|
139,708 | 179,043 | ||||||
|
Time
over
$100,000
|
253,958 | 243,892 | ||||||
|
Total
Deposits
|
739,167 | 780,855 | ||||||
|
Short-term
borrowings
|
77,309 | 133,433 | ||||||
|
FHLB
Advances
|
25,000 | - | ||||||
|
Accrued
interest
payable
|
2,540 | 3,719 | ||||||
|
Other
liabilities
|
6,161 | 6,493 | ||||||
|
Subordinated
debt
|
22,476 | 11,341 | ||||||
|
Total
Liabilities
|
872,653 | 935,841 | ||||||
|
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, 2008 and 2007
|
- | - | ||||||
|
Common
stock, par value $0.01 per share; 20,000,000 shares
authorized;
|
||||||||
|
shares issued 11,047,651 as of
December 31, 2008 and
|
||||||||
|
10,737,211 as of December 31,
2007
|
110 | 107 | ||||||
|
Additional
paid in
capital
|
76,629 | 75,321 | ||||||
|
Retained
earnings
|
8,455 | 8,927 | ||||||
|
Treasury
stock at cost (416,303 shares and 416,303
respectively)
|
(3,099 | ) | (2,993 | ) | ||||
|
Stock
held by deferred compensation
plan
|
(1,377 | ) | (1,165 | ) | ||||
|
Accumulated
other comprehensive income
(loss)
|
(1,391 | ) | 270 | |||||
|
Total Shareholders’
Equity
|
79,327 | 80,467 | ||||||
|
Total Liabilities and
Shareholders’
Equity
|
$ | 951,980 | $ | 1,016,308 | ||||
(See
notes to consolidated financial statements)
76
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the years ended December 31, 2008, 2007 and 2006
(Dollars
in thousands, except per share data)
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income:
|
||||||||||||
|
Interest
and fees on
loans
|
$ | 48,846 | $ | 62,184 | $ | 58,254 | ||||||
|
Interest
and dividends on taxable investment securities
|
4,479 | 4,963 | 3,049 | |||||||||
|
Interest
and dividends on tax-exempt investment securities
|
433 | 513 | 151 | |||||||||
|
Interest
on federal funds sold and other interest-earning assets
|
218 | 686 | 1,291 | |||||||||
| 53,976 | 68,346 | 62,745 | ||||||||||
|
Interest
expense:
|
||||||||||||
|
Demand – interest
bearing
|
327 | 428 | 565 | |||||||||
|
Money market and
savings
|
6,150 | 11,936 | 9,109 | |||||||||
|
Time less than
$100,000
|
7,265 | 7,200 | 6,031 | |||||||||
|
Time over
$100,000
|
7,579 | 11,622 | 8,078 | |||||||||
|
Other
borrowings
|
3,760 | 7,121 | 4,896 | |||||||||
| 25,081 | 38,307 | 28,679 | ||||||||||
|
Net
interest
income
|
28,895 | 30,039 | 34,066 | |||||||||
|
Provision
for loan
losses
|
7,499 | 1,590 | 1,364 | |||||||||
|
Net
interest income after provision for loan losses
|
21,396 | 28,449 | 32,702 | |||||||||
|
Non-interest
income:
|
||||||||||||
|
Loan advisory and servicing
fees
|
362 | 1,177 | 1,234 | |||||||||
|
Service fees on deposit
accounts
|
1,184 | 1,187 | 1,479 | |||||||||
|
Gain on sale of investment
securities
|
5 | - | - | |||||||||
|
Impairment charge on investment
security
|
(1,438 | ) | - | - | ||||||||
|
Gain on sale of other real
estate
owned
|
- | 185 | 130 | |||||||||
|
Bank owned life insurance
income
|
400 | 424 | 368 | |||||||||
|
Other
income
|
729 | 100 | 429 | |||||||||
| 1,242 | 3,073 | 3,640 | ||||||||||
|
Non-interest
expenses:
|
||||||||||||
|
Salaries and employee
benefits
|
9,629 | 10,612 | 11,629 | |||||||||
|
Occupancy
|
2,447 | 2,420 | 1,887 | |||||||||
|
Depreciation and
amortization
|
1,343 | 1,360 | 1,008 | |||||||||
|
Legal
|
1,454 | 750 | 654 | |||||||||
|
Write down/loss on sale of
other real
estate
|
1,615 | - | - | |||||||||
|
Other real
estate
|
513 | 23 | 10 | |||||||||
|
Advertising
|
464 | 503 | 494 | |||||||||
|
Data
processing
|
845 | 693 | 496 | |||||||||
|
Insurance
|
561 | 398 | 353 | |||||||||
|
Professional
fees
|
973 | 542 | 562 | |||||||||
|
Regulatory
assessments and
cost
|
556 | 176 | 154 | |||||||||
|
Taxes,
other
|
728 | 820 | 741 | |||||||||
|
Other operating
expenses
|
2,759 | 3,067 | 3,029 | |||||||||
| 23,887 | 21,364 | 21,017 | ||||||||||
|
Income
(loss) before provision (benefit) for income taxes
|
(1,249 | ) | 10,158 | 15,325 | ||||||||
|
Provision
(benefit) for income taxes
|
(777 | ) | 3,273 | 5,207 | ||||||||
|
Net
Income (loss)
|
$ | (472 | ) | $ | 6,885 | $ | 10,118 | |||||
|
Net
income (loss) per share:
|
||||||||||||
|
Basic
|
$ | (0.04 | ) | $ | 0.66 | $ | 0.97 | |||||
|
Diluted
|
$ | (0.04 | ) | $ | 0.65 | $ | 0.95 | |||||
(See
notes to consolidated financial statements)
77
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS’ EQUITY
For the years ended December 31, 2008,
2007 and 2006
(Dollars in thousands, except share
data)
|
Comprehensive
Income
(Loss)
|
Common
Stock
|
Additional
Paid
in
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Stock
Held by Deferred Compensation Plan
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
Total
Shareholders’
Equity
|
|||||||||||||||||||||||||
|
Balance
January 1, 2006
|
$ | 88 | $ | 50,203 | $ | 15,566 | $ | (1,688 | ) | $ | (573 | ) | $ | 81 | $ | 63,677 | ||||||||||||||||
|
Total
other comprehensive income, net of taxes
|
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 taxes
|
(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 | |||||||||||||||||||||||
|
Total
other comprehensive loss, net of reclassification adjustments and
taxes
|
(1,661 | ) | - | - | - | - | - | (1,661 | ) | (1,661 | ) | |||||||||||||||||||||
|
Net
loss for the year
|
(472 | ) | - | - | (472 | ) | - | - | - | (472 | ) | |||||||||||||||||||||
|
Total
comprehensive loss
|
$ | (2,133 | ) | |||||||||||||||||||||||||||||
|
Stock
based compensation
|
- | 115 | - | - | - | - | 115 | |||||||||||||||||||||||||
|
Options
exercised (310,440 shares)
|
3 | 928 | - | - | - | 931 | ||||||||||||||||||||||||||
|
Deferred
Compensation plan – forfeited shares to treasury stock (35,554
shares)
|
- | - | - | (340 | ) | 340 | - | - | ||||||||||||||||||||||||
|
Deferred
Compensation plan – new shares from treasury stock (35,554
shares)
|
- | - | - | 234 | (234 | ) | - | - | ||||||||||||||||||||||||
|
Tax
benefit of stock option
exercises
|
- | 265 | - | - | - | - | 265 | |||||||||||||||||||||||||
|
Stock
purchases for deferred
compensation
plan (53,800 shares)
|
- | - | - | - | (318 | ) | - | (318 | ) | |||||||||||||||||||||||
|
Balance
December 31, 2008
|
$ | 110 | $ | 76,629 | $ | 8,455 | $ | (3,099 | ) | $ | (1,377 | ) | $ | (1,391 | ) | $ | 79,327 |
(See
notes to consolidated financial statements)
78
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the years ended December 31, 2008, 2007 and 2006
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | (472 | ) | $ | 6,885 | $ | 10,118 | |||||
|
Adjustments to reconcile net
income (loss) to net cash
|
||||||||||||
|
provided by operating
activities:
|
||||||||||||
|
Provision for
loan
losses
|
7,499 | 1,590 | 1,364 | |||||||||
|
Writedown
or loss on sale of other real estate owned
|
1,615 | - | - | |||||||||
|
Gain
on sale of other real estate
owned
|
- | (185 | ) | (130 | ) | |||||||
|
Depreciation
and
amortization
|
1,343 | 1,360 | 1,008 | |||||||||
|
Deferred
income
taxes
|
(472 | ) | (156 | ) | (222 | ) | ||||||
|
Stock
purchases for deferred compensation plan
|
(318 | ) | (355 | ) | (237 | ) | ||||||
|
Stock
based
compensation
|
115 | 125 | 15 | |||||||||
|
Gain
on sale of investment
securities
|
(5 | ) | - | - | ||||||||
|
Impairment
charge on investment
security
|
1,438 | - | - | |||||||||
|
Amortization
of (premiums) discounts on investment securities
|
(221 | ) | (194 | ) | 93 | |||||||
|
Increase
in value of bank owned life
insurance
|
(400 | ) | (424 | ) | (368 | ) | ||||||
|
(Increase)
decrease in accrued interest receivable and other assets
|
(3,470 | ) | 2,111 | (193 | ) | |||||||
|
(Decrease)
increase in accrued interest payable and other liabilities
|
(1,511 | ) | (3,196 | ) | 4,126 | |||||||
|
Net cash provided by operating
activities
|
5,141 | 7,561 | 15,574 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Purchase of investment
securities:
|
||||||||||||
|
Available for
sale
|
(16,366 | ) | (9,639 | ) | (67,118 | ) | ||||||
|
Proceeds from maturities and
calls of securities:
|
||||||||||||
|
Available for
sale
|
13,202 | 28,195 | 2,470 | |||||||||
|
Held to
maturity
|
84 | 51 | 83 | |||||||||
|
Purchase
of FHLB
stock
|
(478 | ) | - | (342 | ) | |||||||
|
Proceeds
from sale of FHLB
stock
|
- | 446 | - | |||||||||
|
Net decrease (increase) in
loans
|
9,485 | (34,268 | ) | (115,469 | ) | |||||||
|
Net proceeds from sale of other
real estate
owned
|
14,870 | 715 | 267 | |||||||||
|
Premises and equipment
expenditures
|
(4,264 | ) | (7,000 | ) | (3,058 | ) | ||||||
|
Net cash provided by (used) in
investing
activities
|
16,533 | (21,500 | ) | (183,167 | ) | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net proceeds from exercise of
stock
options
|
931 | 47 | 700 | |||||||||
|
Purchase
of treasury
shares
|
- | (1,305 | ) | - | ||||||||
|
Tax benefit of stock option
exercises
|
265 | 348 | 260 | |||||||||
|
Net (decrease) increase in
demand, money market and savings deposits
|
(12,419 | ) | (28,030 | ) | 4,019 | |||||||
|
Net (decrease) increase in time
deposits
|
(29,269 | ) | 54,112 | 102,911 | ||||||||
|
Net (decrease) increase in
short term
borrowings
|
(56,124 | ) | (26,290 | ) | 35,856 | |||||||
|
Increase in other
borrowings
|
25,000 | - | - | |||||||||
|
Call of subordinated
debt
|
- | - | (6,186 | ) | ||||||||
|
Re-issuance of subordinated
debt
|
- | - | 6,186 | |||||||||
|
Issuance
of subordinated debt
|
11,135 | 5,155 | - | |||||||||
|
Net cash (used in) provided by
financing
activities
|
(60,481 | ) | 4,037 | 143,746 | ||||||||
|
Decrease
in cash and cash
equivalents
|
(38,807 | ) | (9,902 | ) | (23,847 | ) | ||||||
|
Cash
and cash equivalents, beginning of
year
|
73,225 | 83,127 | 106,974 | |||||||||
|
Cash
and cash equivalents, end of
year
|
$ | 34,418 | $ | 73,225 | $ | 83,127 | ||||||
|
Supplemental
disclosures:
|
||||||||||||
|
Interest
paid
|
$ | 26,260 | $ | 39,812 | $ | 25,268 | ||||||
|
Income taxes
paid
|
400 | 3,425 | 4,700 | |||||||||
|
Non-cash transfers from loans
to other real estate owned
|
21,384 | 3,639 | 572 | |||||||||
|
Non-cash treasury stock
transaction
|
106 | - | - | |||||||||
(See
notes to consolidated financial statements)
79
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Definitive
Agreement of Merger:
On
November 7, 2008, the board of directors of the Company approved a merger
agreement under which Pennsylvania Commerce Bancorp, Inc. (“Pennsylvania
Commerce”) will acquire the Company, subject to the receipt of shareholder and
regulatory approvals and the satisfaction of other customary closing
conditions.
2. 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 three unconsolidated
subsidiaries for three trust preferred issuances.
Republic
shared data processing, accounting, human resources and compliance services
through BSC Services Corp. (“BSC”), a subsidiary of First Bank of
Delaware. BSC allocated its costs, on the basis of usage to Republic
which classifies such costs to the appropriate non-interest expense
categories. In 2008, BSC discontinued its
operations. Staff members previously employed through BSC are now
employed directly by Republic.
The
Company and Republic encounter vigorous competition for market share in the
geographic areas they serve from bank holding companies, national, regional and
other community banks, thrift institutions, credit unions 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.
3. 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 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 of investment securities and restricted stock, and the realization of
deferred income tax assets. 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
80
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.
Significant Group Concentrations of
Credit Risk:
Most of
the Company’s activities are with customers located within the Greater
Philadelphia region. Note 4 discusses the types of investment
securities that the Company invests in. Note 5 discusses the types of
lending that the Company engages in as well as loan
concentrations. The Company does not have any significant
concentrations to any one customer.
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, 2008 and 2007 were approximately $700,000 and
$700,000, respectively. These requirements were satisfied through the
restriction of vault cash and a balance at the Federal Reserve Bank of
Philadelphia.
Investment
Securities:
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. 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 securities are reported in the consolidated
statements of income and determined using the adjusted cost of the specific
security sold.
Investment
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. An
impairment charge on a bank pooled trust preferred security of $1.4 million was
recognized during the year ended December 31, 2008. No impairment
charges were recognized during the years ended December 31, 2007 and
2006.
Management
determines the appropriate classification of debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet
date.
Restricted
Stock:
81
Restricted
stock, which represents required investment in the common stock of correspondent
banks, is carried at cost and as of December 31, 2008 and 2007, consists of the
common stock of FHLB of Pittsburgh and ACBB. In December 2008, the
FHLB of Pittsburgh notified member banks that it was suspending dividend
payments and the repurchase of capital stock.
Management
evaluates the restricted stock for impairment in accordance with Statement of
Positions (SOP) 01-6, Accounting by Certain Entities
(Including Entities With Trade Receivables) That Lend to or Finance the
Activities of Others. Management’s determination of whether
these investments are impaired is based on their assessment of the ultimate
recoverability of their cost rather than by recognizing temporary declines in
value. The determination of whether a decline affects the ultimate
recoverability of their cost is influenced by criteria such as (1) the
significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted,
(2) commitments by the FHLB to make payments required by law or regulation and
the level of such payments in relation to the operating performance of the FHLB,
and (3) the impact of legislative and regulatory changes on institutions and,
accordingly, on the customer base of the FHLB.
Management
believes no impairment charge is necessary related to the restricted stock as of
December 31, 2008.
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 ”internally classified”. 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
82
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, 2008 is $5.3 million and they expire as follows: $5.0 million in 2009,
$195,000 in 2010, $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 for financial reporting
purposes, and accelerated methods for income tax purposes. 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, 2008, the Company
had assets classified as other real estate owned with a carrying value of $8.6
million comprised of 20 plus acres of vacant, unimproved ground with
a value of $5.2 million, a vacant 24 unit motel/condominium building with
a value of $2.3 million, a vacant, improved lot zoned for the
construction of four townhouses with a value of $1.0
million and a commercial building with a value of $109,000. At
December 31, 2007, the Company had 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.
Bank
Owned Life Insurance:
83
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, 2008 and 2007, the Company owned $12.1 million and $11.7 million,
respectively, in BOLI. In 2008, 2007, and 2006 the Company recognized
$400,000, $424,000, and $368,000, 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 June
13, 2007, the Company implemented a stock repurchase program. The
repurchase program was in effect 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 was determined by market conditions not to
exceed 5%, or approximately 500,000 shares, of the Company’s issued and
outstanding stock. The Company executed the program through open
market purchases. Stock repurchased under the repurchase program was
retired. Through December 31, 2007, 140,700 shares were
repurchased. No shares were repurchased in 2008.
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 and
convertible securities related to the trust preferred securities issuance in
2008. In the diluted EPS computation, the after tax interest expense
on that trust preferred securities issuance is added back to net
income. In 2008, the effect of CSEs and the related add back of after
tax interest expense was anti-dilutive. 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. At December 31, 2008, the Company included no stock
options in calculating diluted EPS due to a net loss from
operations. The following table is a comparison of EPS for the years
ended December 31, 2008, 2007 and 2006.
|
(In
thousands, except per share data)
|
2008
|
2007
|
2006
|
|||||||||
|
Net
income (loss) (numerator for basic and diluted earnings per
share)
|
$ | (472 | ) | $ | 6,885 | $ | 10,118 | |||||
84
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Shares
|
Per
Share
|
Shares
|
Per
Share
|
Shares
|
Per
Share
|
|||||||||||||||||||
|
Weighted
average shares outstanding for the period
|
||||||||||||||||||||||||
|
(denominator
for basic earnings per share)
|
10,503,241 | 10,389,886 | 10,418,266 | |||||||||||||||||||||
|
Earnings
per share — basic
|
$ | (0.04 | ) | $ | 0.66 | $ | 0.97 | |||||||||||||||||
|
Add
common stock equivalents representing dilutive stock
options
|
- | 271,854 | 279,571 | |||||||||||||||||||||
|
Effect
on basic earnings per share of CSE
|
- | (0.01 | ) | (0.02 | ) | |||||||||||||||||||
|
Weighted
average shares outstanding- diluted
|
10,503,241 | 10,661,740 | 10,697,837 | |||||||||||||||||||||
|
Earnings
(loss) per share — diluted
|
$ | (0.04 | ) | $ | 0.65 | $ | 0.95 | |||||||||||||||||
Stock Based
Compensation:
Effective
January 1, 2006, the Company adopted Financial Accounting Standards Board (FASB)
Statement No. 123(R), “Share-Based Payment,” (“FAS 123(R)”) using the modified
prospective method. FAS 123 (R) requires compensation costs related
to share-based payment transactions to be recognized in the income statement
(with limited exceptions) based on the grant-date fair value of the stock-based
compensation issued. Compensation costs are recognized over the
period that an employee provides service in exchange for the
award. The adoptions of Statement of Financial Accounting Standards
(“SFAS”) 123 (R) has an unfavorable impact on our net income and net income per
share and will continue to do so in future periods as we recognize compensation
expense for stock option awards.
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. 123(R).
At
December 31, 2008, the Company maintained 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. Upon a change
in control such as the proposed merger, all unvested options, with the exception
of 132,000 options granted in 2008, immediately vest. Expense is
estimated at $187,000.
Comprehensive Income:
The
Company presents as a component of comprehensive income (loss) the amounts from
transactions and other events which currently are excluded from the consolidated
statements of operation and are recorded directly to shareholders’ equity. These
amounts consist of unrealized holding gains (losses) on available for sale
securities.
The
components of comprehensive income (loss), net of related tax, are as follows
(in thousands):
|
Year
Ended December 31
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Net
income (loss)
|
$ | (472 | ) | $ | 6,885 | $ | 10,118 | |||||
|
Other
comprehensive income (loss):
|
||||||||||||
|
Unrealized
gains (losses) on investment securities: arising during
the
|
||||||||||||
|
arising
during the period, net of tax expense (benefit) of $(1,432),
$(6),
|
||||||||||||
|
and
$103
|
(2,580 | ) | (12 | ) | 201 | |||||||
|
Add:
reclassification adjustment for impairment charge included in net income
(loss), net of tax benefit of $514, $ - and $ -
|
919 | - | - | |||||||||
|
Other
comprehensive income (loss)
|
(1,661 | ) | (12 | ) | 201 | |||||||
|
Comprehensive
income (loss)
|
$ | (2,133 | ) | $ | 6,873 | $ | 10,319 | |||||
85
Trust
Preferred Securities:
The
Company has sponsored three outstanding issues of corporation-obligated
mandatorily redeemable capital securities of a subsidiary trust holding solely
junior subordinated debentures of the corporation, more commonly known as trust
preferred securities. The subsidiary trusts are not consolidated with the
Company for financial reporting purposes. The purpose of the
issuances of these securities was to increase capital. The trust
preferred securities qualify as Tier 1 capital for regulatory purposes in
amounts up to 25% of total Tier 1 capital.
In
December 2006, Republic Capital Trust II (“Trust II”) issued $6.0 million of
trust preferred securities to investors and $0.2 million of common securities to
the Company. Trust II purchased $6.2 million of junior subordinated
debentures of the Company due 2037, and the Company used the proceeds
to call the securities of Republic Capital Trust I (“Trust I”). The
debentures supporting Trust II have 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 caused Republic Capital Trust III (“Trust III”), through a
pooled offering, to issue $5.0 million of trust preferred securities to
investors and $0.2 million common securities to the Company. Trust
III purchased $5.2 million of junior subordinated debentures of the Company due
2037, which have a variable interest rate, adjustable quarterly, at 1.55% over
the 3 month Libor. 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.
On June
10, 2008, the Company caused Republic First Bancorp Capital Trust IV (“Trust
IV”) to issue $10.8 million of convertible trust preferred securities in June
2008 as part of the Company’s strategic capital plan. The securities
were purchased by various investors, including Vernon W. Hill, II, founder and
chairman (retired) of Commerce Bancorp, former director of Pennsylvania Commerce
and, since the investment, a consultant to the Company, a family trust of Harry
D. Madonna, chairman, president and chief executive officer of the Company, and
Theodore J. Flocco, Jr., who, since the investment, has been a director of the
Company. Trust IV also issued $0.4 million of common securities to
the Company. Trust IV purchased $11.1 million of junior subordinated
debentures due 2038, which pay interest at an annual rate of 8.0% and are
callable after the fifth year. The trust preferred securities of
Trust IV are convertible into approximately 1.7 million shares of common stock
of the Company, based on a conversion price of $6.50 per share of Company common
stock and at December 31, 2008 were fully convertible.
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 each of the Company’s current and former subsidiary
trusts, Trust I, Trust II, Trust III and Trust IV, qualifies as a variable
interest entity under FIN 46. Trust I originally issued mandatorily
redeemable preferred stock to investors and loaned the proceeds to the
Company. The securities were subsequently refinanced via a call
during 2006 from proceeds of an issuance by Trust II. Trust II holds,
as its sole asset, subordinated debentures issued by the Company in
2006. The Company issued an additional $5.0 million of pooled
trust preferred securities in June 2007. Trust III holds, as its sole
asset, subordinated debentures issued by the Company in 2007. In June
2008, the Company issued an additional $10.8 million of convertible trust
preferred securities. Trust IV holds as its sole asset, subordinated
debentures issued by the Company in 2008.
The
Company does not consolidate its subsidiary trusts. 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 trusts’ expected
residual returns. The non-consolidation results in the investment in the common
securities of the trusts to be included in other assets with a corresponding
increase in outstanding debt of $676,000. In addition, the income received on
the Company’s investment in the common securities of the trusts 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
86
the
trust-preferred securities issued by the capital trusts 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
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 assets and
liabilities measured at fair value. FASB Statement No. 157 does not
change existing guidance as to whether or not an asset or liability is
carried at fair value. The new standard provides a consistent definition of
fair value which focuses on exit price and prioritizes, within a measurement of
fair value, the use of market-based inputs over entity-specific inputs. The
standard also establishes a three-level hierarchy for fair value
measurements based upon the transparency of inputs to the valuation of an
asset or liability as of the measurement date. The standard eliminates large
position discounts for financial instruments quoted in active markets,
requires costs related to acquiring financial instruments carried at fair
value to be included in earnings as incurred and requires that an
issuer’s credit standing be considered when measuring liabilities at fair
value. The new guidance is effective for financial statements issued for
fiscal years beginning after November 15, 2007, with early
adoption permitted. The implementation of this standard did not
have a material impact on our consolidated financial statements or 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 after 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 implementation of this standard will not have a material
impact on the Company’s consolidated financial position and results of
operations.
In May
2008, the FASB issued FASB Staff Position (FSP) APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" which clarifies the accounting for
convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. The FSP requires issuers to account
separately for the liability and equity components of certain convertible debt
instruments in a manner that reflects the issuer's nonconvertible debt borrowing
rate when interest cost is recognized. The FSP requires bifurcation
of a component of the debt, classification of that component in equity and the
accretion of the resulting discount on the debt to be recognized as part of
interest expense. The FSP requires retrospective application to the
terms of instruments as they existed for all periods presented. The
FSP is effective for fiscal years beginning after December 15, 2008, and interim
periods within those years. Early adoption is not
permitted. The Company is currently evaluating the potential impact
the new pronouncement will have on its consolidated financial
statements.
In June
2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, “Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” This FSP clarifies that all outstanding
unvested share-based payment awards that contain rights to nonforfeitable
dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied. This FSP is effective for fiscal years
beginning after December 15, 2008. The implementation of this
standard will not have a material impact on the Company’s consolidated financial
position and results of operations.
In
September 2008, the FASB issued FSP 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161” (FSP 133-1 and FIN 45-4). FSP 133-1 and FIN
45-4 amends and enhances disclosure requirements for sellers of credit
derivatives and financial guarantees. It also clarifies that the
disclosure requirements of SFAS
87
No. 161
are effective for quarterly periods beginning after November 15, 2008, and
fiscal years that include those periods. FSP 133-1 and FIN 45-4 is
effective for reporting periods (annual or interim) ending after November 15,
2008. The implementation of this standard did not have a material
impact on our consolidated financial position and results of
operations.
In
December 2008, the FASB issued FSP SFAS 140-4 and FASB Interpretation (FIN)
46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities” (FSP SFAS 140-4
and FIN 46(R)-8). FSP SFAS 140-4 and FIN 46(R)-8 amends FASB SFAS 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities”, to require public entities to provide additional disclosures
about transfers of financial assets. It also amends FIN 46(R), “Consolidation of
Variable Interest Entities”, to require public enterprises, including sponsors
that have a variable interest in a variable interest entity, to provide
additional disclosures about their involvement with variable interest entities.
Additionally, this FSP requires certain disclosures to be provided by a public
enterprise that is (a) a sponsor of a qualifying special purpose entity (SPE)
that holds a variable interest in the qualifying SPE but was not the transferor
of financial assets to the qualifying SPE and (b) a servicer of a qualifying SPE
that holds a significant variable interest in the qualifying SPE but was not the
transferor of financial assets to the qualifying SPE. The disclosures required
by FSP SFAS 140-4 and FIN 46(R)-8 are intended to provide greater transparency
to financial statement users about a transferor’s continuing involvement with
transferred financial assets and an enterprise’s involvement with variable
interest entities and qualifying SPEs. FSP SFAS 140-4 and FIN 46(R) is effective
for reporting periods (annual or interim) ending after December 15, 2008. The
implementation of this standard did not have an impact on the Company’s
consolidated financial position and results of operations.
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets”. This FSP amends SFAS 132(R),
“Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to
provide guidance on an employer’s disclosures about plan assets of a defined
benefit pension or other postretirement plan. The disclosures about
plan assets required by this FSP shall be provided for fiscal years ending after
December 15, 2009. The Company is currently reviewing the effect this
new pronouncement will have on its consolidated financial
statements.
Reclassifications:
Certain
reclassifications have been made to the 2007 and 2006 information to conform to
the 2008 presentation. The reclassifications had no effect on net
income.
88
4. Investment
Securities:
Investment
securities available for sale as of December 31, 2008 are as
follows:
|
(Dollars
in thousands)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Mortgage
Backed
Securities
|
$ | 60,859 | $ | 1,821 | $ | (4 | ) | $ | 62,676 | |||||||
|
Municipal
Securities
|
10,073 | 15 | (963 | ) | 9,125 | |||||||||||
|
Corporate
Bonds
|
5,988 | 59 | (4 | ) | 6,043 | |||||||||||
|
Trust
Preferred
Securities
|
8,003 | - | (3,071 | ) | 4,932 | |||||||||||
|
Other Securities
|
279 | 7 | (30 | ) | 256 | |||||||||||
|
Total
|
$ | 85,202 | $ | 1,902 | $ | (4,072 | ) | $ | 83,032 | |||||||
|
Investment securities held to
maturity as of December 31, 2008 are as follows:
|
||||||||||||||||
|
(Dollars
in thousands)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
U.S.
Government
Agencies
|
$ | 3 | $ | - | $ | - | $ | 3 | ||||||||
|
Mortgage
Backed
Securities
|
15 | 1 | - | 16 | ||||||||||||
|
Municipal
Securities
|
30 | - | - | 30 | ||||||||||||
|
Other
Securities
|
150 | 15 | - | 165 | ||||||||||||
|
Total
|
$ | 198 | $ | 16 | $ | - | $ | 214 | ||||||||
|
Investment securities available
for sale as of December 31, 2007 are as follows:
|
||||||||||||||||
|
(Dollars
in thousands)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
Mortgage
Backed
Securities
|
$ | 55,579 | $ | 883 | $ | (3 | ) | $ | 56,459 | |||||||
|
Municipal
Securities
|
12,338 | - | (376 | ) | 11,962 | |||||||||||
|
Corporate
Bonds
|
4,995 | - | (22 | ) | 4,973 | |||||||||||
|
Trust
Preferred
Securities
|
10,058 | 36 | (108 | ) | 9,986 | |||||||||||
|
Other
Securities
|
280 | - | (1 | ) | 279 | |||||||||||
|
Total
|
$ | 83,250 | $ | 919 | $ | (510 | ) | $ | 83,659 | |||||||
|
Investment securities held to
maturity as of December 31, 2007 are as follows:
|
||||||||||||||||
|
(Dollars
in thousands)
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
||||||||||||
|
U.S.
Government
Agencies
|
$ | 3 | $ | - | $ | - | $ | 3 | ||||||||
|
Mortgage
Backed
Securities
|
15 | 1 | - | 16 | ||||||||||||
|
Municipal
Securities
|
90 | 1 | - | 91 | ||||||||||||
|
Other
Securities
|
174 | 1 | - | 175 | ||||||||||||
|
Total
|
$ | 282 | $ | 3 | $ | - | $ | 285 | ||||||||
89
The
maturity distribution of the amortized cost and estimated market value of
investment securities by contractual maturity at December 31, 2008 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
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
After
1 year to 5
years
|
252 | 260 | 111 | 127 | ||||||||||||
|
After
5 years to 10
years
|
3,119 | 3,146 | 3 | 3 | ||||||||||||
|
After
10
years
|
81,831 | 79,626 | 44 | 44 | ||||||||||||
|
No
stated
maturity
|
– | – | 40 | 40 | ||||||||||||
|
Total
|
$ | 85,202 | $ | 83,032 | $ | 198 | $ | 214 | ||||||||
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 a gross loss due to an impairment charge on a security of $1.4
million in 2008. The tax benefit applicable to the gross loss in 2008 amounted
to approximately $516,000. The Company realized gross gains on the sale of
securities of $5,000 in 2008. The tax provision applicable to gross
gains in 2008 amounted to approximately $2,000. No securities were sold in 2007
or 2006.
At
December 31, 2008 and 2007, investment securities in the amount of approximately
$14.1 million and $1.5 million respectively, were pledged as
collateral for public deposits and certain other deposits as required by
law.
Temporarily
impaired securities as of December 31, 2008 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
|
- | - | 114 | 4 | 114 | 4 | ||||||||||||||||||
|
Municipal
Securities
|
- | - | 6,908 | 965 | 6,908 | 965 | ||||||||||||||||||
|
Corporate
Bonds
|
- | - | 1,991 | 4 | 1,991 | 4 | ||||||||||||||||||
|
Trust
Preferred Securities
|
- | - | 3,371 | 3,071 | 3,371 | 3,071 | ||||||||||||||||||
|
Other
Securities
|
- | - | 60 | 28 | 60 | 28 | ||||||||||||||||||
|
Total
Temporarily Impaired Securities
|
$ | - | $ | - | $ | 12,444 | $ | 4,072 | $ | 12,444 | $ | 4,072 | ||||||||||||
The
impairment of the investment portfolio at December 31, 2008 totaled $4.1 million
on 36 securities (4 mortgage backed securities, 21 municipal securities, one
corporate bond, 8 trust preferred securities and two other securities) with a
total fair value of $12.4 million at December 31, 2008. The
unrealized loss for the trust preferred securities is due to the secondary
market for such securities becoming inactive and is considered temporary. The
unrealized loss on the remaining securities 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, 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 | ||||||||||||||||||
|
Municipal
Securities
|
- | - | 11,962 | 376 | 11,962 | 376 | ||||||||||||||||||
|
Corporate
Bonds
|
- | - | 1,973 | 22 | 1,973 | 22 | ||||||||||||||||||
|
Trust
Preferred Securities
|
- | - | 6,328 | 108 | 6,328 | 108 | ||||||||||||||||||
|
Other
Securities
|
- | - | 189 | 1 | 189 | 1 | ||||||||||||||||||
|
Total
Temporarily Impaired Securities
|
$ | - | $ | - | $ | 20,589 | $ | 510 | $ | 20,589 | $ | 510 | ||||||||||||
90
5. Loans
Receivable:
Loans
receivable consist of the following at December 31,
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Commercial
|
||||||||
|
Real
estate
secured
|
$ | 456,273 | $ | 477,678 | ||||
|
Construction
and land
development
|
216,060 | 228,616 | ||||||
|
Non
real estate
secured
|
60,203 | 77,347 | ||||||
|
Non
real estate
unsecured
|
21,531 | 8,451 | ||||||
|
Total
commercial
|
754,067 | 792,092 | ||||||
|
Residential
real estate
(1)
|
5,347 | 5,960 | ||||||
|
Consumer
and
other
|
24,165 | 24,302 | ||||||
|
Loans
receivable
|
783,579 | 822,354 | ||||||
|
Less
deferred loan
fees
|
(497 | ) | (805 | ) | ||||
|
Less
allowance for loan
losses
|
(8,409 | ) | (8,508 | ) | ||||
|
Total
loans receivable,
net
|
$ | 774,673 | $ | 813,041 | ||||
(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 $18.3 million and $22.3 million at December 31, 2008 and 2007
respectively. The amounts of related valuation allowances were $2.4 million and
$1.6 million respectively at those dates. There were no impaired
loans at December 31, 2008 or 2007, for which no specific reserve was
recorded. For the years ended December 31, 2008, 2007 and 2006, the
average recorded investment in impaired loans was approximately $10.6 million,
$16.1 million and $5.3 million respectively. Republic earned $70,000
of interest income on impaired loans (internally classified accruing loans) in
2008. Republic did not realize any interest on impaired loans during 2007 or
2006. 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, 2008 and 2007, there were loans of approximately $17.3 million and
$22.3 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 $553,000, $1.4 million and $479, 000
for 2008, 2007 and 2006 respectively. There were no loans past due 90
days and accruing at December 31, 2008 and December 31, 2007.
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, 2008,
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 $288.4 million, which represented 36.8% of gross loans
receivable at December 31, 2008. 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 to real estate agents and managers in the amount of $99.8 million,
which represented 12.7% of gross loans receivable at December 31,
2008. 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.
91
Included
in loans are loans due from directors and other related parties of $51.0 million
and $13.9 million at December 31, 2008 and 2007, 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, 2008 and 2007.
|
(Dollars
in thousands)
|
2008
|
2007
|
||||||
|
Balance
at beginning of
year
|
$ | 13,874 | $ | 18,033 | ||||
|
Additions
|
42,919 | 4,807 | ||||||
|
Repayments
|
(5,843 | ) | (8,966 | ) | ||||
|
Balance
at end of
year
|
$ | 50,950 | $ | 13,874 | ||||
6. Allowance
for Loan Losses:
Changes
in the allowance for loan losses for the years ended December 31, are as
follows:
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Balance
at beginning of
year
|
$ | 8,508 | $ | 8,058 | $ | 7,617 | ||||||
|
Charge-offs
|
(7,797 | ) | (1,506 | ) | (1,887 | ) | ||||||
|
Recoveries
|
199 | 366 | 964 | |||||||||
|
Provision
for loan
losses
|
7,499 | 1,590 | 1,364 | |||||||||
|
Balance
at end of
year
|
$ | 8,409 | $ | 8,508 | $ | 8,058 | ||||||
7. Premises
and Equipment:
A summary
of premises and equipment is as follows:
|
(Dollars
in thousands)
|
Useful lives
|
2008
|
2007
|
||||||
|
Land
|
Indefinite
|
$ | 2,510 | $ | 200 | ||||
|
Furniture
and
equipment
|
3
to 13 years
|
11,607 | 11,247 | ||||||
|
Bank
building
|
40
years
|
908 | 845 | ||||||
|
Leasehold
improvements
|
1
to 30 years
|
10,248 | 8,760 | ||||||
| 25,273 | 21,052 | ||||||||
|
Less
accumulated
depreciation
|
(11,064 | ) | (9,764 | ) | |||||
|
Net
premises and
equipment
|
$ | 14,209 | $ | 11,288 | |||||
Depreciation
expense on premises, equipment and leasehold improvements amounted to
approximately $1.3 million, $1.4 million and $1.0 million in 2008, 2007 and 2006
respectively.
8. 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, 2008 and 2007, Republic had $0
outstanding on this line. The maximum amount of overnight advances at
any month end was $15.0 million in 2008 and $0 in 2007.
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
$205.7 million as of December 31, 2008. This maximum borrowing capacity is
subject to change on a monthly basis. As of December 31, 2008 and 2007, there
were $25.0 million and $0, respectively, of term advances against this line of
credit. The interest rates on the term advances at December 31, 2008
and 2007 were 3.36% and 0%, respectively. As of December 31, 2008 and
2007, there were $67.3 million and $113.4 million of overnight advances
outstanding against these lines. The interest rates on overnight
advances at December 31, 2008 and 2007 were 0.59% and 3.81%,
respectively. The maximum amount of term advances outstanding at any
month-end was $25.0 million in 2008 and $0 in 2007. The maximum
amount of overnight borrowings outstanding at any month-end was $148.7 million
in 2008 and $186.7 million in 2007. Average amounts outstanding of
term advances for 2008, 2007 and 2006 were $14.3 million, $0 and $0 million,
respectively; and the related weighted average interest rates for 2008, 2007 and
2006 were 3.36%, 0% and 0%, respectively. Average amounts outstanding
of overnight borrowings for 2008, 2007 and 2006 were $71.3 million, $110.3
92
million
and $72.1 million, respectively; and the related weighted average interest rates
for 2008, 2007 and 2006 were 2.48%, 5.22% and 5.28%, respectively.
Republic
had uncollateralized overnight advances with a depository institution
respectively at December 31, 2008 and 2007, of $10.0 million and $20.0
million. The respective interest rates on overnight advances at
December 31, 2008 and 2007 were 0.70% and 3.50%. The maximum amount
of such overnight advances outstanding at any month-end was $20.0 million in
2008 and $20.0 million in 2007. Average amounts outstanding of
overnight advances for 2008, 2007, and 2006 were $17.9 million, $14.0 million,
and $10.7 million, respectively; and the related weighted average interest rates
for 2008, 2007, and 2006 were 2.53%, 5.25%, and 5.27%,
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, 2008 and
2007 were 3.91% and 6.85%, 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 rates at December 31,
2008 and 2007 were 3.73% and 6.67%, respectively.
On June
10, 2008 the Company caused the issuance of $10.8 million of convertible trust
preferred securities in June 2008 as part of the Company’s strategic capital
plan. The securities were purchased by various investors, including
Vernon W. Hill, II ($7.8 million) and Harry D. Madonna ($3.0 million), Chairman,
President and Chief Executive Officer of the Company.
The trust
preferred securities and related subordinated debentures pay interest at an
annual rate of 8.0%, have a conversion price of $6.50, and are convertible into
1.7 million shares of common stock. The trust preferred securities
have a term of 30 years and will be callable after the fifth
year. The Company has determined that the securities are now
convertible at the option of the holders. The issuer will also retain
certain option conversion triggers after the fifth year.
9. Deposits:
The
following is a breakdown, by contractual maturities of the Company’s time
certificate of deposits for the years 2009 through 2013, which includes brokered
certificates of deposit of approximately $136.8 million with original terms of
one to two months.
|
(Dollars
in thousands)
|
2009
|
2010
|
2011
|
2012
|
2013
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Time
Certificates of Deposit
|
$ | 370,442 | $ | 21,528 | $ | 746 | $ | 471 | $ | 479 | $ | - | $ | 393,666 | ||||||||||||||
Deposits
of related parties totaled $45.1 million and $49.2 million at December 31, 2008
and 2007, respectively.
93
10. Income Taxes:
The
following represents the components of income tax (benefit) expense for the
years ended December 31, 2008, 2007 and 2006, respectively.
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Current
(benefit) provision
|
||||||||||||
|
Federal
|
$ | (587 | ) | $ | 3,429 | $ | 5,429 | |||||
|
State
|
282 | - | - | |||||||||
|
Total
Current
|
(305 | ) | 3,429 | 5,429 | ||||||||
|
Deferred
|
(472 | ) | (156 | ) | (222 | ) | ||||||
|
Total
(benefit) provision for income
taxes
|
$ | (777 | ) | $ | 3,273 | $ | 5,207 | |||||
The
following table accounts for the difference between the actual tax provision and
the amount obtained by applying the statutory federal income tax rate of 34.0%
for the year ended December 31, 2008 and 35.0% for the years ended 2007 and
2006.
|
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
|||||||||
|
Tax
provision computed at statutory
rate
|
$ | (425 | ) | $ | 3,556 | $ | 5,364 | |||||
|
State
taxes, net of federal benefit
|
1 | - | - | |||||||||
|
Tax
exempt interest
|
(144 | ) | (189 | ) | - | |||||||
|
Bank
owned life insurance
|
(136 | ) | (144 | ) | - | |||||||
|
Transaction
costs related to merger
|
84 | - | - | |||||||||
|
Effect
of 35% rate
bracket
|
- | - | (75 | ) | ||||||||
|
Other
|
(157 | ) | 50 | (82 | ) | |||||||
|
Total (benefit) provision for
income
taxes
|
$ | (777 | ) | $ | 3,273 | $ | 5,207 | |||||
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, 2008 and 2007 are as
follows:
|
2008
|
2007
|
|||||||
|
Allowance
for loan
losses
|
$ | 2,992 | $ | 2,866 | ||||
|
Deferred
compensation
|
654 | 664 | ||||||
|
Unrealized
(gain) loss on securities available for sale
|
779 | (139 | ) | |||||
|
Realized
loss in other than temporary impairment charge
|
517 | - | ||||||
|
Deferred
loan
costs
|
(537 | ) | (543 | ) | ||||
|
Other
|
(176 | ) | (9 | ) | ||||
|
Net
deferred tax
asset
|
$ | 4,229 | $ | 2,839 | ||||
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 Interpretations 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 $168,000 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, 2008, $68,000 is accrued for interest and
penalties.
11. 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.
94
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 $83.1 million and $160.2 million
and standby letters of credit of approximately $5.3 million and $4.6 million at
December 31, 2008 and 2007, respectively. Commitments often
expire without being drawn upon. Of the $83.1 million of commitments to extend
credit at December 31, 2008, 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, 2008
and 2007 for guarantees under standby letters of credit issued is not
material.
12.
Commitments and Contingencies:
Lease
Arrangements:
As of
December 31, 2008, 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
|
|||
|
2009
|
$ | 1,666 | ||
|
2010
|
2,028 | |||
|
2011
|
2,087 | |||
|
2012
|
2,140 | |||
|
2013
|
2,193 | |||
|
Thereafter
|
37,618 | |||
|
Total
|
$ | 47,732 | ||
The
Company incurred rent expense of $1.6 million, $1.4 million and $1.1 million for
the years ended December 31, 2008, 2007 and 2006, respectively.
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, 2008 is approximately
$530,000.
95
New Employment Agreement with Harry
D Madonna. Pursuant to the merger agreement, prior to the
effective time of the merger, Pennsylvania Commerce Bancorp, Inc. and Harry D.
Madonna will enter into a five-year employment agreement that is conditioned
upon and is to be effective upon completion of the merger. This
employment agreement will supersede and replace the Company agreement under
which Mr. Madonna currently serves as chairman, president and chief executive
officer of the Company and Republic. Under the employment agreement
with Pennsylvania Commerce Bancorp, Inc., Mr. Madonna will serve as vice
chairman of Pennsylvania Commerce Bancorp, Inc. and continue as president and
chief executive officer of Republic.
Other:
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.
13. 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 $56.3 million of dividends plus an additional amount equal to its net
profit for 2009, 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 2009.
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, 2008, all capital adequacy
requirements to which it is subject. As of December 31, 2008, 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.
96
The
following table presents the Company’s and Republic’s capital regulatory ratios
at December 31, 2008 and 2007:
|
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, 2008
|
||||||||||||||||||||||||
|
Total
risk based capital
|
||||||||||||||||||||||||
|
Republic
|
$ | 99,329 | 11.90 | % | $ | 66,750 | 8.00 | % | $ | 83,437 | 10.00 | % | ||||||||||||
|
Company.
|
110,927 | 13.26 | % | 66,915 | 8.00 | % | - | - | ||||||||||||||||
|
Tier
one risk based capital
|
||||||||||||||||||||||||
|
Republic
|
90,921 | 10.90 | % | 33,375 | 4.00 | % | 50,062 | 6.00 | % | |||||||||||||||
|
Company.
|
102,518 | 12.26 | % | 33,458 | 4.00 | % | - | - | ||||||||||||||||
|
Tier
one leverage capital
|
||||||||||||||||||||||||
|
Republic
|
90,921 | 9.91 | % | 45,890 | 5.00 | % | 45,890 | 5.00 | % | |||||||||||||||
|
Company.
|
102,518 | 11.14 | % | 46,001 | 5.00 | % | - | - | ||||||||||||||||
|
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 | % | - | - | ||||||||||||||||
14. 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 per year. At
December 31, 2008, approximately $40,000 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 $251,000 in 2008, $249,000 in 2007 and
$255,000 in 2006.
97
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, 2008, 2007 and 2006 totaled $1.4 million, $1.5 million, and $1.6
million, respectively. The expense for the years ended December 31, 2008, 2007
and 2006, totaled $68,000, $71,000, and $108,000, 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 $2.2
million and $2.1 million at December 31, 2008 and 2007, respectively,
which is included in other assets. Upon consummation of the merger,
benefits under the plan immediately vest. Expense is estimated at
$401,000.
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,
2008 $368,000 was vested. Expense for 2008, 2007, and 2006 was
$36,000, $194,000 and $95,000, 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 53,800, 38,000 and 21,062
respective shares of the Company’s common stock were purchased for $318,000,
$355,000 and $237,000 by this trust in 2008, 2007 and 2006, respectively, for
the benefit of certain officers and directors that acquired shares through our
deferred compensation plan. Approximately 35,554 shares were
forfeited to treasury stock at an original value of $340,000 in
2008. Approximately 35,554 shares were repurchased from treasury
stock for $234,000 in 2008. As of December 31, 2008, the trust holds
approximately 158,503 shares of the Company’s common stock as well as an
additional $35,000 in cash. The assets of the trust and BNP Parabas
contracts are sufficient to cover the liabilities of the Company’s deferred
compensation plan. Upon consummation of the merger, benefits under
the plan immediately vest. Expense is estimated at
$430,000.
15. Fair
Value Measurements and Fair Values of Financial Instruments:
Management
uses its best judgment in estimating the fair value of the Company’s financial
instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates
indicated. The estimated fair value amounts have been measured as of
their respective year-ends and have not been re-evaluated or updated for
purposes of these financial statements subsequent to those respective
dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year-end.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 157, Fair
Value Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements. SFAS 157 applies to other accounting
pronouncements that require or permit fair value measurements. The
Company adopted SFAS 157 effective for its fiscal year beginning January 1,
2008.
In
December 2007, the FASB issued FASB Staff Position 157-2, Effective Date of FASB Statement No.
157 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS
157 for all non-financial assets and liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years. As such, the Company only partially
adopted the provisions of SFAS 157, and will begin to account and report for
non-financial assets and liabilities in 2009. In October 2008, the
FASB issued FASB Staff Position 157-3, Determining the Fair Value of a
Financial Asset When the Market for that Asset is Not Active
(“FSP 157-3”), to clarify the application of the provisions of
SFAS 157 in an inactive market and how an entity would determine fair value
in an inactive market. FSP 157-3 is effective immediately and
applies to the Company’s December 31, 2008 consolidated financial
statements. The adoption of FSP 157-3 had a
significant impact on the amounts reported in the consolidated financial
statements as an impairment charge on a bank pooled trust preferred security of
$1.4 million was recognized during the year ended December 31,
2008.
SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
methods used to measure fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value
hierarchy under SFAS 157 are as follows:
98
Level 1: Unadjusted quoted
prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2: Quoted prices in
markets that are not active, or inputs that are observable either directly or
indirectly, for substantially the full term of the asset or
liability.
Level 3: Prices or valuation techniques that
require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported with little or no market
activity).
An
asset’s or liability’s level within the fair value hierarchy is based on the
lowest level of input that is significant to the fair value
measurement.
For
financial assets measured at fair value on a recurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:
|
Description
|
December 31,
2008
|
(Level
1)
Quoted
Prices in Active Markets for Identical Assets
|
(Level
2)
Significant
Other
Observable
Inputs
|
(Level
3)
Significant
Unobservable
Inputs
|
||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||
|
Securities
available for sale
|
$ | 83,032 | $ | - | $ | 78,100 | $ | 4,932 | ||||||||||||
The
following table presents a reconciliation of the securities available for sale
measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) for the year ended December 31:
|
2008
|
|||||
|
(In
Thousands)
|
|||||
|
Beginning
balance, January 1,
|
$ | - | |||
|
Securities
transferred to Level 3 measurement during 2008
|
9,986 | ||||
|
Unrealized
losses arising during 2008
|
(2,999 | ) | |||
|
Impairment
charge on Level 3 security
|
(1,438 | ) | |||
|
Other,
including proceeds from calls of investment securities
|
(617 | ) | |||
| Ending balance, December 31, |
$ 4,932
|
||||
99
For
financial assets measured at fair value on a nonrecurring basis, the fair value
measurements by level within the fair value hierarchy used at December 31, 2008
are as follows:
|
Description
|
December 31,
2008
|
(Level
1) Quoted Prices in Active Markets for Identical
Assets
|
(Level
2) Significant Other
Observable
Inputs
|
(Level
3)
Significant
Unobservable
Inputs
|
||||||||||||||||
|
(In
Thousands)
|
||||||||||||||||||||
|
Impaired
loans
|
$ | 15,934 | $ | - | $ | - | $ | 15,934 | ||||||||||||
The
following information should not be interpreted as an estimate of the fair value
of the entire Company since a fair value calculation is only provided for a
limited portion of the Company’s assets and liabilities. Due to a
wide range of valuation techniques and the degree of subjectivity used in making
the estimates, comparisons between the Company’s disclosures and those of other
companies may not be meaningful. The following methods and
assumptions were used to estimate the fair values of the Company’s financial
instruments at December 31, 2008 and 2007:
Cash and Cash Equivalents (Carried at
Cost)
The
carrying amounts reported in the balance sheet for cash and cash equivalents
approximate those assets’ fair values.
Investment
Securities
The fair
value of securities available for sale (carried at fair value) and held to
maturity (carried at amortized cost) are determined by obtaining quoted market
prices on nationally recognized securities exchanges (Level 1), or matrix
pricing (Level 2), which is a mathematical technique used widely in the industry
to value debt securities without relying exclusively on quoted market prices for
the specific securities but rather by relying on the securities’ relationship to
other benchmark quoted prices. For certain securities which are not
traded in active markets or are subject to transfer restrictions, valuations are
adjusted to reflect illiquidity and/or non-transferability, and such adjustments
are generally based on available market evidence (Level 3). In the
absence of such evidence, management’s best estimate is
used. Management’s best estimate consists of both internal and
external support on certain Level 3 investments. Internal cash flow
models using a present value formula that includes assumptions market
participants would use along with indicative exit pricing obtained from
broker/dealers (where available) were used to support fair values of certain
Level 3 investments.
The types
of instruments valued based on quoted market prices in active markets include
all of the Company’s U.S. government and agency securities,
municipal obligations and corporate bonds. Such instruments are generally
classified within level 2 of the fair value hierarchy. As required by SFAS No.
157, the Company does not adjust the quoted price for such
instruments.
Level
3 is for positions that are not traded in active markets or are subject to
transfer restrictions, and may be adjusted to reflect illiquidity and/or
non-transferability, with such adjustment generally based on available market
evidence. In the absence of such evidence, management’s best estimate is used.
Subsequent to inception, management only changes level 3 inputs and assumptions
when corroborated by evidence such as transactions in similar instruments,
completed or pending third-party transactions in the underlying investment or
comparable entities, subsequent rounds of financing, recapitalizations and other
transactions across the capital structure, offerings in the equity or debt
markets, and changes in financial ratios or cash flows.
The
Level 3 investment securities classified as available for sale are comprised of
various issues of bank pooled trust preferred securities. Bank pooled trust
preferred consists of the debt instruments of various banks, diversified by the
number of participants in the security as well as geographically. The securities
are performing according to terms, however the secondary market for such
securities has become inactive, and such securities are therefore classified as
Level 3 securities. The fair value analysis does not reflect or represent the
actual terms or prices at which any party could purchase the securities. There
is currently no secondary market for the securities and there can be no
assurance that any secondary market for the securities will
develop.
100
A
third party pricing service was used in the development of the fair market
valuation. The calculations used to determine fair value are based on the
attributes of the trust preferred securities, the financial condition of the
issuers of the trust preferred securities, and market based assumptions. The
INTEX CDO Deal Model Library was utilized to obtain information regarding the
attributes of each security and its specific collateral as of December 31, 2008.
Financial information on the issuers was also obtained from Bloomberg, the FDIC
and the Office of Thrift Supervision. Both published and unpublished industry
sources were utilized in estimating fair value. Such information includes loan
prepayment speed assumptions, discount rates, default rates, and loss severity
percentages. Due to the current state of the global capital and financial
markets, the fair market valuation is subject to greater uncertainty that would
otherwise exist.
Fair
market valuation for each security was determined based on discounted cash flow
analyses. The cash flows are primarily dependent on the estimated speeds at
which the trust preferred securities are expected to prepay, the estimated rates
at which the trust preferred securities are expected to defer payments, the
estimated rates at which the trust preferred securities are expected to default,
and the severity of the losses on securities which default.
Prepayment Assumptions. Due
to the lack of new trust preferred issuances and the relativity poor conditions
of the financial institution industry, the rate of voluntary prepayments are
estimated at 0%.
Prepayments
affect the securities in three ways. First, prepayments lower the absolute
amount of excess spread, an important credit enhancement. Second, the
prepayments are directed to the senior tranches, the effect of which is to
increase the overcollateralization of the mezzanine layer, the layer at which
the Company is located in each of the securities. However, the prepayments can
lead to adverse selection in which the strongest institutions have prepaid,
leaving the weaker institutions in the pool, thus mitigating the effect of the
increased overcollateralization. Third, prepayments can limit the numeric and
geographic diversity of the pool, leading to concentration risks.
Deferral and Default Rates.
Trust preferred securities include a provision that allows the issuing bank to
defer interest payments for up to five years. The estimates for the rates of
deferral are based on the financial condition of the trust preferred issuers in
the pool. Estimates for the conditional default rates are based on the trust
preferred securities themselves as well as the financial condition of the trust
preferred issuers in the pool.
Estimates
for the near-term rates of deferral and conditional default are based on key
financial ratios relating to the financial institutions’ capitalization, asset
quality, profitability and liquidity. Each bank in each security is evaluated
based on ratings from outside services including Standard & Poors, Moodys,
Fitch, Bankrate.com and The Street.com. Recent stock price information is also
considered, as well as the 52 week high and low, for each bank in each security.
Finally, the receipt of TARP funding is considered, and if so, the
amount.
Estimates
for longer term rates of deferral and defaults are based on historical averages
based on a research report issued by Salomon Smith Barney in 2002. Default is
defined as any instance when a regulator takes an active role in a bank’s
operations under a supervisory action. This definition of default is distinct
from failure. A bank is considered to have defaulted if it falls below minimum
capital requirements or becomes subject to regulatory actions including a
written agreement, or a cease and desist order.
The rates
of deferral and conditional default are estimated at 0.36%.
Loss Severity. The fact that
an issuer defaults on a loan, does not necessarily mean that the investor will
lose all of their investment. Thus, it is important to understand not only the
default assumption, but also the expected loss given a default, or the loss
severity assumption.
Both
Standard & Poors and Moody’s Analytics have performed and published
research that indicate that recoveries on trust preferred securities
are low (less than 20%). The loss severity estimates are estimated at a range of
80% to 100%.
Ratings Agencies. The major
ratings agencies have recently been cutting the ratings on various trust
preferred securities
Bond Waterfall. The trust
preferred securities have several tranches: Senior tranches, Mezzanine tranches
and the Residual or income tranches. The Company invested in the mezzanine
tranches for all of its trust preferred securities. The Senior and Mezzanine
tranches were over collateralized at issuance, meaning
that the par value of the underlying collateral was more than the balance issued
on the tranches. The terms generally provide that if the performing collateral
balances fall below certain triggers, then income is diverted from the residual
tranches to pay the Senior and Mezzanine tranches. However, if significant
deferrals occur, income could also be diverted from the Mezzanine tranches to
pay the Senior tranches.
Internal Rate of Return.
Internal rates of return are the pre-tax yield rates used to discount the future
cash flow stream expected from the collateral cash flow. The marketplace for the
trust preferred securities at December 31, 2008 was not active. This is
evidenced by a significant widening of the bid/ask spreads the markets in which
the trust preferred securities trade and then by a significant decrease in the
volume of trades relative to historical levels. The new issue market is also
inactive.
101
SFAS No. 157-3 provides guidance on the
discount rates to be used when a market is not active. The discount rate should
take into account the time value of money, price for bearing the uncertainty in
the cash flows and other case specific factors that would be considered by
market participants, including a liquidity adjustment. The discount rate used is
a LIBOR 3-month forward looking curve plus 700 basis points.
Loans
Receivable (Carried at Cost)
The fair
values of loans are estimated using discounted cash flow analyses, using market
rates at the balance sheet date that reflect the credit and interest rate-risk
inherent in the loans. Projected future cash flows are calculated
based upon contractual maturity or call dates, projected repayments and
prepayments of principal. Generally, for variable rate loans that
reprice frequently and with no significant change in credit risk, fair values
are based on carrying values.
Other
Real Estate Owned (Generally Carried at Cost)
These
assets are carried at the lower cost or market. At December 31, 2008
these assets are carried at cost.
Restricted
Stock (Carried at Cost)
The
carrying amount of restricted stock approximates fair value, and considers the
limited marketability of such securities.
Accrued
Interest Receivable and Payable (Carried at Cost)
The
carrying amount of accrued interest receivable and accrued interest payable
approximates its fair value.
Deposit
Liabilities (Carried at Cost)
The fair
values disclosed for demand deposits (e.g., interest and noninterest checking,
passbook savings and money market accounts) are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
Short-Term
Borrowings (Carried at Cost)
The
carrying amounts of short-term borrowings approximate their fair
values.
FHLB
Advances (Carried at Cost)
Fair
values of FHLB advances are estimated using discounted cash flow analysis, based
on quoted prices for new FHLB advances with similar credit risk characteristics,
terms and remaining maturity. These prices obtained from this active
market represent a market value that is deemed to represent the transfer price
if the liability were assumed by a third party.
Subordinated
Debt (Carried at Cost)
Fair
values of subordinated debt are estimated using discounted cash flow analysis,
based on market rates currently offered on such debt with similar credit risk
characteristics, terms and remaining maturity.
Off-Balance
Sheet Financial Instruments (Disclosed at Cost)
Fair
values for the Company’s off-balance sheet financial instruments (lending
commitments and letters of credit) are based on fees currently charged in the
market to enter into similar agreements, taking into account, the remaining
terms of the agreements and the counterparties’ credit standing.
102
The
estimated fair values of the Company’s financial instruments were as follows at
December 31, 2008 and 2007.
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash and cash
equivalents
|
$ | 34,418 | $ | 34,418 | $ | 73,225 | $ | 73,225 | ||||||||
|
Investment securities available
for sale
|
83,032 | 83,032 | 83,659 | 83,659 | ||||||||||||
|
Investment securities held to
maturity
|
198 | 214 | 282 | 285 | ||||||||||||
|
Restricted
stock
|
6,836 | 6,836 | 6,358 | 6,358 | ||||||||||||
|
Loans receivable,
net
|
774,673 | 774,477 | 813,041 | 814,037 | ||||||||||||
|
Bank owned life
insurance
|
12,118 | 12,118 | 11,718 | 11,718 | ||||||||||||
|
Accrued interest
receivable
|
3,939 | 3,939 | 5,058 | 5,058 | ||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Deposits:
|
||||||||||||||||
|
Demand, savings and money
market
|
$ | 345,501 | $ | 345,501 | $ | 357,920 | $ | 357,920 | ||||||||
|
Time
|
393,666 | 395,570 | 422,935 | 422,704 | ||||||||||||
|
Subordinated
debt
|
22,476 | 22,476 | 11,341 | 11,341 | ||||||||||||
|
Short-term
borrowings
|
77,309 | 77,309 | 133,433 | 133,433 | ||||||||||||
|
FHLB
advances
|
25,000 | 26,031 | - | - | ||||||||||||
|
Accrued interest
payable
|
2,540 | 2,540 | 3,719 | 3,719 | ||||||||||||
|
December
31, 2008
|
December
31, 2007
|
|||||||||||||||
|
(Dollars
in Thousands)
|
Carrying
Amount
|
Fair
Value
|
Carrying
Amount
|
Fair
Value
|
||||||||||||
|
Off
Balance Sheet financial instruments:
|
||||||||||||||||
|
Commitments
to extend credit
|
- | - | - | - | ||||||||||||
|
Standby
letters-of-credit
|
- | - | - | - | ||||||||||||
16. Stock
Based Compensation:
The
Company maintains a Stock Option Plan (the “Plan”) under which the Company
grants options to its employees and directors. Under the terms of the plan, 1.5
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 2008 the following assumptions were utilized: a dividend yield of 0%;
expected volatility of 24.98% to 34.52%; risk-free interest rate of 2.49% to
3.37% and an expected life of 7.0 years. 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. 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. 12,000 shares vested in 2008. Expense
is recognized ratably over the period required to vest. At January 1,
2008, 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
December 31, 2008 there were 236,350 invested options with a fair value of
$827,755 with $599,551 of that amount remaining to be
expensed. At that date, the intrinsic value of the 467,988
options outstanding was $551,369, while the intrinsic value of the 231,638
exercisable (vested) was $422,881. During 2008, 45,700 options were forfeited
with a weighted average grant fair value of $198,338.
103
A summary
of the status of the Company’s stock options under the Plan as of December 31,
2008, 2007 and 2006 and changes during the years ended December 31, 2008, 2007
and 2006 are presented below:
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
|
Outstanding,
beginning of year
|
737,841 | $ | 6.39 | 661,449 | $ | 5.55 | 780,309 | $ | 5.43 | |||||||||||||||
|
Granted
|
189,000 | 7.84 | 99,000 | 11.77 | 12,100 | 12.14 | ||||||||||||||||||
|
Exercised
|
(310,440 | ) | 3.00 | (16,558 | ) | 2.81 | (128,973 | ) | 5.44 | |||||||||||||||
|
Forfeited
|
(148,413 | ) | 9.20 | (6,050 | ) | 12.14 | (1,987 | ) | 6.74 | |||||||||||||||
|
Outstanding,
end of year
|
467,988 | 8.33 | 737,841 | 6.39 | 661,449 | 5.55 | ||||||||||||||||||
|
Options
exercisable at year-end
|
231,638 | 7.61 | 632,791 | 5.49 | 649,349 | 5.43 | ||||||||||||||||||
|
Weighted
average fair value of options granted during the year
|
$ | 3.20 | $ | 4.61 | $ | 5.10 | ||||||||||||||||||
|
For
the Years Ended December 31,
|
||||||||
|
2008
|
2007
|
|||||||
|
Number
of Options exercised
|
310,440 | 16,558 | ||||||
|
Cash
received
|
$ | 930,321 | $ | 46,463 | ||||
|
Intrinsic
value
|
963,561 | 117,766 | ||||||
|
Tax
benefit
|
337,246 | 41,218 | ||||||
104
The
following table summarizes information about options outstanding at December 31,
2008.
|
Options
outstanding
|
Options
exercisable
|
|||||||||||||||||||||
|
Range
of exercise Prices
|
Number
outstanding
at
December
31,
2008
|
Weighted
Average
remaining
contractual
life
(years)
|
Weighted
Average
exercise
price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||
|
$1.81
|
14,907 | 2.0 | $ | 1.81 | 14,907 | $ | 1.81 | |||||||||||||||
|
$2.77
to $3.88
|
5,359 | 3.1 | 2.80 | 5,359 | 2.80 | |||||||||||||||||
|
$5.99
to $8.72
|
282,313 | 7.9 | 7.33 | 110,313 | 6.25 | |||||||||||||||||
|
$9.93
to $12.13
|
165,409 | 7.0 | 10.82 | 101,059 | 10.20 | |||||||||||||||||
| 467,988 | $ | 8.33 | 231,638 | $ | 7.61 | |||||||||||||||||
|
For
the Year Ended December 31, 2008
|
||||||||
|
Number
of Shares
|
Weighted
average
grant
date
fair value
|
|||||||
|
Nonvested
at beginning of year
|
105,050 | $ | 4.64 | |||||
|
Granted
|
189,000 | 3.20 | ||||||
|
Vested
|
(12,000 | ) | 2.04 | |||||
|
Forfeited
|
(45,700 | ) | 4.34 | |||||
|
Nonvested
at end of year
|
236,350 | $ | 3.50 | |||||
During
the year ended December 31, 2008, $115,000 was recognized in compensation
expense, with a 35% assumed tax benefit, for the Plan. During the
year ended December 31, 2007, $125,000 was recognized in compensation expense
for the Plan. During the year ended December 31, 2006, $15,000 was
recognized in compensation expense for the Plan.
105
17. 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.
18.
Transactions with Affiliate:
At
December 31, 2008 and 2007, Republic had outstanding balances of $21.6 million
and $24.1 million, respectively, of commercial loans, which had been
participated to FBD, a wholly owned subsidiary prior to January 1,
2005. As of December 31, 2008 and 2007 Republic had outstanding
balances of $37.2 million and $42.0 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.
19.
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, 2008 and 2007
(Dollars
in thousands)
|
2008
|
2007
|
|||||||
|
ASSETS:
|
||||||||
|
Cash
|
$ | 11,579 | $ | 296 | ||||
|
Corporation-obligated
mandatorily redeemable
capital
securities of subsidiary trust holding junior
obligations
of the
corporation
|
676 | 341 | ||||||
|
Investment in
subsidiaries
|
89,530 | 91,397 | ||||||
|
Other
assets
|
1,395 | 962 | ||||||
|
Total
Assets
|
$ | 103,180 | $ | 92,996 | ||||
|
LIABILITIES AND SHAREHOLDERS’
EQUITY:
|
||||||||
|
Liabilities:
|
||||||||
|
Accrued
expenses
|
$ | 1,377 | $ | 1,188 | ||||
|
Corporation-obligated
mandatorily redeemable
|
||||||||
|
securities of
subsidiary trust holding solely junior
|
||||||||
|
subordinated
debentures of the
corporation
|
22,476 | 11,341 | ||||||
|
Total
Liabilities
|
23,853 | 12,529 | ||||||
|
Shareholders’
Equity:
|
||||||||
|
Total Shareholders’
Equity
|
79,327 | 80,467 | ||||||
|
Total Liabilities and
Shareholders’
Equity
|
$ | 103,180 | $ | 92,996 | ||||
106
STATEMENTS
OF OPERATIONS AND CHANGES IN SHAREHOLDERS’ EQUITY
For
the years ended December 31, 2008, 2007 and 2006
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Interest
income
|
$ | 32 | $ | 19 | $ | 16 | ||||||
|
Dividend
income from
subsidiaries
|
1,112 | 2,006 | 539 | |||||||||
|
Total
income
|
1,144 | 2,025 | 555 | |||||||||
|
Trust
preferred interest
expense
|
1,054 | 631 | 525 | |||||||||
|
Expenses
|
90 | 89 | 30 | |||||||||
|
Total
expenses
|
1,144 | 720 | 555 | |||||||||
|
Net
income before
taxes
|
- | 1,305 | - | |||||||||
|
Federal
income
tax
|
- | - | - | |||||||||
|
Income
before undistributed income of
subsidiaries
|
- | 1,305 | - | |||||||||
|
Total
equity in undistributed income (loss) of subsidiaries
|
(472 | ) | 5,580 | 10,118 | ||||||||
|
Net
income
(loss)
|
$ | (472 | ) | $ | 6,885 | $ | 10,118 | |||||
|
Shareholders’
equity, beginning of
year
|
$ | 80,467 | $ | 74,734 | $ | 63,677 | ||||||
| Stock based compensation |
115
|
125
|
15
|
|||||||||
| Exercise of stock options |
931
|
47
|
700
|
|||||||||
| Purchase of treasury shares |
-
|
(1,305
|
) |
-
|
||||||||
| Tax benefit of stock options exercises |
265
|
348
|
260
|
|||||||||
| Stock purchase for deferred compensation plan |
(318
|
) |
(355
|
) |
(237
|
) | ||||||
| Net income (loss) |
(472
|
) |
6,885
|
10,118
|
||||||||
| Change in unrealized (loss) gain on securities available for sale |
(1,661
|
) |
(12
|
) |
201
|
|||||||
| Shareholders’ equity, end of year | $ |
79,327
|
$ |
80,467
|
$ |
74,734
|
||||||
107
STATEMENTS
OF CASH FLOWS
For
the years ended December 31, 2008, 2007 and 2006
(Dollars
in thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net income
(loss)
|
$ | (472 | ) | $ | 6,885 | $ | 10,118 | |||||
|
Adjustments to reconcile net
income to net cash
|
||||||||||||
|
provided by (used in) operating
activities:
|
||||||||||||
|
Tax
benefit of stock option
exercises
|
- | - | - | |||||||||
|
Stock
purchases for deferred compensation plan
|
(318 | ) | (355 | ) | (237 | ) | ||||||
|
Stock
based
compensation
|
115 | 125 | 15 | |||||||||
|
Increase in other
assets
|
(699 | ) | (391 | ) | (74 | ) | ||||||
|
(Decrease) increase in other
liabilities
|
189 | 409 | (89 | ) | ||||||||
|
Equity in undistributed losses
(income) of subsidiaries
|
472 | (5,580 | ) | (10,118 | ) | |||||||
|
Net cash (used in) provided by
operating activities
|
(713 | ) | 1,093 | (385 | ) | |||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Investment in
subsidiary
|
- | (5,000 | ) | (900 | ) | |||||||
|
Purchase
of corporation- obligated
|
||||||||||||
|
mandatorily
redeemable capital
|
||||||||||||
|
securities
of subsidiary trust holding
|
||||||||||||
|
junior
obligations of the
corporation
|
(335 | ) | (155 | ) | - | |||||||
|
Net cash used in investing
activities
|
(335 | ) | (5,155 | ) | (900 | ) | ||||||
|
Cash
from Financing Activities:
|
||||||||||||
|
Exercise of stock
options
|
931 | 47 | 700 | |||||||||
|
Issuance
of corporation- obligated
|
||||||||||||
|
mandatorily
redeemable securities
|
||||||||||||
|
of
subsidiary trust holding solely
|
||||||||||||
|
junior
subordinated debentures
|
||||||||||||
|
of
the
corporation
|
11,135 | 5,155 | - | |||||||||
|
Purchase
of treasury
shares
|
- | (1,305 | ) | - | ||||||||
|
Tax
benefit of stock option
exercises
|
265 | 348 | 260 | |||||||||
|
Net cash provided by financing
activities
|
12,331 | 4,245 | 960 | |||||||||
|
(Decrease)
increase in
cash
|
11,283 | 183 | (325 | ) | ||||||||
|
Cash,
beginning of
period
|
296 | 113 | 438 | |||||||||
|
Cash,
end of
period
|
$ | 11,579 | $ | 296 | $ | 113 | ||||||
108
20. Related
Party Transactions:
The Company has engaged in certain
transactions with individuals, which would be considered related
parties. Payments for goods and services to these related parties
totaled $178,000 in 2008. Management believes disbursements made to
related parties were substantially equivalent to those that would have been paid
to unaffiliated companies for similar goods and services.
21. Quarterly
Financial Data (Unaudited):
The following tables are summary
unaudited statements of operation information for each of the quarters ended
during 2008 and 2007.
Summary
of Selected Quarterly Consolidated Financial Data
|
For
the Quarter Ended, 2008
|
||||||||||||||||
|
(Dollars
in thousands, except per share data)
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||
|
Income
Statement Data:
|
||||||||||||||||
|
Total
interest
income
|
$ | 12,315 | $ | 13,532 | $ | 13,328 | $ | 14,801 | ||||||||
|
Total
interest
expense
|
5,264 | 5,914 | 6,324 | 7,579 | ||||||||||||
|
Net
interest
income
|
7,051 | 7,618 | 7,004 | 7,222 | ||||||||||||
|
Provision
for loan
losses
|
1,601 | 43 | 43 | 5,812 | ||||||||||||
|
Non-interest
income
(loss)
|
(931 | ) | 672 | 836 | 665 | |||||||||||
|
Non-interest
expense
|
5,370 | 6,008 | 6,061 | 6,448 | ||||||||||||
|
Provision
(benefit) for income
taxes
|
(435 | ) | 706 | 547 | (1,595 | ) | ||||||||||
|
Net
income
(loss)
|
$ | (416 | ) | $ | 1,533 | $ | 1,189 | $ | (2,778 | ) | ||||||
|
Per
Share Data: (1)
|
||||||||||||||||
|
Basic:
|
||||||||||||||||
|
Net income
(loss)
|
$ | (0.04 | ) | $ | 0.14 | $ | 0.11 | $ | (0.27 | ) | ||||||
|
Diluted:
|
||||||||||||||||
|
Net income
(loss)
|
$ | (0.04 | ) | $ | 0.14 | $ | 0.11 | $ | (0.27 | ) | ||||||
|
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 | ||||||||
|
(1)
Quarters do not add to full year EPS due to rounding
|
||||||||||||||||
109