REPUBLIC FIRST BANCORP INC - Annual Report: 2011 (Form 10-K)

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[ X ]  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2011.

[     ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___ to ___.

Pennsylvania		23-2486815
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
50 South 16th Street, Philadelphia, Pennsylvania		19102
(Address of principal executive offices)		(Zip code)

Title of each class		Name of each exchange on which registered
Common Stock, $0.01 per share		Nasdaq Global Market

 

 

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months.   YES  [X]     NO  [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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     [   ]
Non-Accelerated filer   [   ] (Do not check if a smaller reporting company)	Smaller reporting company    [X]

 

Common Stock, $0.01 per share	25,972,897
Title of Class	Number of Shares Outstanding as of March 15, 2012

 

 

 

 

	REPUBLIC FIRST BANCORP, INC. AND SUBSIDIARY
	TABLE OF CONTENTS
		PAGE
PART I:
Item 1.	Business	1
Item 1A.	Risk Factors	13
Item 1B.	Unresolved Staff Comments	26
Item 2.	Properties	26
Item 3.	Legal Proceedings	26
Item 4.	Mine Safety Disclosures	26
PART II:
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27
Item 6.	Selected Financial Data	28
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	64
Item 8.	Financial Statements and Supplementary Data	64
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	114
Item 9A.	Controls and Procedures	114
Item 9B.	Other Information	117
PART III:
Item 10.	Directors, Executive Officers and Corporate Governance	118
Item 11.	Executive Compensation	118
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	118
Item 13.	Certain Relationships and Related Transactions, and Directors Independence	119
Item 14.	Principal Accounting Fees and Services	119
PART IV:
Item 15.	Exhibits, Financial Statement Schedules	119
Signatures		123

 

 

 

·	general economic conditions, including turmoil in the financial markets and related efforts of government agencies to stabilize the financial system;

·	the adequacy of our allowance for loan losses and our methodology for determining such allowance;

·	adverse changes in our loan portfolio and credit risk-related losses and expenses;

·	concentrations within our loan portfolio, including our exposure to commercial real estate loans, and to our primary service area;

·	changes in interest rates;

·	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;

·	deposit flows;

·	loan demand;

·	the regulatory environment, including evolving banking industry standards, changes in legislation or regulation;

 

 

 

 

·	impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

·	our securities portfolio and the valuation of our securities;

·	accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements;

·	rapidly changing technology;

·	litigation liabilities, including costs, expenses, settlements and judgments; and

·	other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

• Increased Capital Standards and Enhanced Supervision.  The federal banking agencies are required to establish minimum leverage and risk-based capital requirements for banks and bank holding companies.  These new standards will be no lower than current regulatory capital and leverage standards applicable to insured depository institutions and may, in fact, be higher when established by the agencies.  The Dodd-Frank Act requires capital requirements to be countercyclical such that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction consistent with safety and soundness.

 

• Corporate Governance.  The Dodd-Frank Act requires publicly traded companies to provide their shareholders with 1) a non-binding shareholder vote on executive compensation; 2) a non-binding shareholder vote on the frequency of such vote; 3) disclosure of “golden parachute” arrangements in connection with specified change in control transactions; and 4) a non-binding shareholder vote on golden parachute arrangements in connection with these change in control transactions.  Generally, the new rules applied to proxy statements relating to annual meetings of shareholders held after January 20, 2011, except with respect to “smaller reporting companies.”  “Smaller reporting companies,” those with a public float of less than $75 million, are required to include the non-binding shareholder votes on executive compensation and the frequency thereof in proxy statements relating to annual meetings occurring on or after January 21, 2013.  We qualify as a smaller reporting company.

 

 

 

 

 

• Deposit Insurance.  The Dodd-Frank Act permanently increases the maximum deposit insurance amount to $250,000 for insured deposits, as well as extends unlimited deposit insurance to non-interest bearing transaction accounts through December 31, 2012.  Amendments to the Federal Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance premiums paid to the Deposit Insurance Fund (“DIF”) will be calculated.  Under the amendments, the assessment base will no longer be the institution’s deposit base, but rather its average consolidated total assets less its average tangible equity during the assessment period.  Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from 1.15 percent to 1.35 percent of the estimated amount of total insured deposits by 2020 and eliminating the requirement that the FDIC pay dividends to depository institutions when the reserve ratio exceeds certain thresholds.  The Dodd- Frank Act also provides that, effective one year after the date of enactment, depository institutions may pay interest on demand deposits.

 

• Transactions with Affiliates.  Under federal law, we are subject to restrictions that limit certain types of transactions between Republic and its non-bank affiliates.  In general, we are subject to quantitative and qualitative limits on extensions of credit, purchases of assets and certain other transactions involving us and our non-bank affiliates.  Transactions between Republic and its nonbank affiliates are required to be on arms length terms.  The Dodd-Frank Act enhances the requirements for certain transactions with affiliates under Section 23A and 23B of the Federal Reserve Act, including an expansion of the definition of “covered transactions” and “affiliates,”  as well as an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

 

• Transactions with Insiders.  Under the Dodd-Frank Act, insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of the types of transactions subject to the various limits, including derivative transactions, repurchase agreements, reverse repurchase agreements and securities lending or borrowing transactions.  Restrictions are also placed on certain asset sales to and from an insider to an institution, including requirements that such sales be on market terms and, if representing more than 10% of capital, approved by the institution’s board of directors.

 

• Compensation Practices.  The Dodd-Frank Act provides that the appropriate federal regulators must establish standards prohibiting as an unsafe and unsound practice any compensation plan of a bank holding company or other “covered financial institution” that provides an insider or other employee with “excessive compensation” or could lead to a material financial loss to such firm.  In June 2010, prior to the Dodd-Frank Act, the bank regulatory agencies promulgated the Interagency Guidance on Sound Incentive Compensation Policies, which requires that financial institutions establish metrics for measuring the impact of activities to achieve incentive compensation with the related risk to the financial institution of such behavior.  Together, the Dodd-Frank Act and the guidance on compensation may impact the current compensation policies at the Company.

 

 

 

 

 

 

(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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

•

increasing our credit risk, by increasing the likelihood that our major customers become insolvent and unable to satisfy their obligations to us;

 

•

impairing our ability to originate loans, by making our customers and prospective customers less willing to borrow, and making loans that meet our underwriting criteria difficult to find; and

 

•

limiting our interest income, by depressing the yields we are able to earn on our investment portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter		High				Low
2011:
4th		$	1.83			$	1.13
3rd		$	2.35			$	1.50
2nd		$	3.00			$	2.01
1st		$	3.27			$	2.55
2010:
4th		$	2.46			$	1.89
3rd		$	2.44			$	1.62
2nd		$	4.49			$	1.75
1st		$	5.30			$	2.98

 

 

 

 

 

		As of or for the Years Ended December 31,
(dollars in thousands, except per share data)		2011				2010				2009				2008				2007
INCOME STATEMENT DATA
Total interest income		$	38,273			$	40,309			$	43,470			$	53,976			$	68,346
Total interest expense			8,199				10,245				16,055				25,081				38,307
Net interest income			30,074				30,064				27,415				28,895				30,039
Provision for loan losses			15,966				16,600				14,200				7,499				1,590
Non-interest income			10,581				2,839				79				1,242				3,073
Non-interest expenses			41,200				33,067				30,959				23,887				21,364
Income (loss) before provision (benefit) for income taxes			(16,511	)			(16,764	)			(17,665	)			(1,249	)			10,158
Provision (benefit) for income taxes			8,191				(6,074	)			(6,223	)			(777	)			3,273
Net income (loss)		$	(24,702	)		$	(10,690	)		$	(11,442	)		$	(472	)		$	6,885
PER SHARE DATA
Basic earnings (loss) per share		$	(0.95	)		$	(0.57	)		$	(1.07	)		$	(0.04	)		$	0.66
Diluted earnings (loss) per share		$	(0.95	)		$	(0.57	)		$	(1.07	)		$	(0.04	)		$	0.65
Book value per share		$	2.50			$	3.39			$	6.64			$	7.46			$	7.80
BALANCE SHEET DATA
Total assets		$	1,047,353			$	876,097			$	1,008,642			$	951,980			$	1,016,308
Total loans, net			577,442				608,911				680,977				774,673				813,041
Total investment securities			179,784				150,087				192,395				90,066				90,299
Total deposits			952,611				757,730				882,894				739,167				780,855
FHLB & overnight advances			-				-				25,000				102,309				133,433
Subordinated debt			22,476				22,476				22,476				22,476				11,341
Total shareholders’ equity			64,851				88,146				70,264				79,327				80,467
PERFORMANCE RATIOS
Return on average assets			(2.68	)%			(1.14	)%			(1.22	)%			(0.05	)%			0.71	%
Return on average shareholders’ equity			(28.68	)%			(13.42	)%			(15.32	)%			(0.60	)%			8.86	%
Net interest margin			3.59	%			3.50	%			3.13	%			3.28	%			3.26	%
Total non-interest expenses as a percentage of average assets			4.47	%			3.52	%			3.29	%			2.54	%			2.20	%
ASSET QUALITY RATIOS
Allowance for loan losses as a percentage of loans			2.04	%			1.84	%			1.85	%			1.07	%			1.04	%
Allowance for loan losses as a percentage of non-performing loans			106.52	%			28.62	%			49.32	%			48.51	%			38.19	%
Non-performing loans as a percentage of total loans			1.92	%			6.45	%			3.75	%			2.21	%			2.71	%
Non-performing assets as a percentage of total assets			1.70	%			6.30	%			3.93	%			2.72	%			2.55	%
Net charge-offs as a percentage of average loans, net			2.44	%			2.73	%			1.33	%			0.96	%			0.14	%
LIQUIDITY AND CAPITAL RATIOS
Average equity to average assets			9.34	%			8.47	%			7.94	%			8.44	%			8.01	%
Leverage ratio			8.77	%			11.01	%			9.36	%			11.14	%			9.44	%
Tier 1 capital to risk-weighted assets			11.81	%			13.68	%			11.89	%			12.26	%			10.07	%
Total capital to risk-weighted assets			13.09	%			14.93	%			13.14	%			13.26	%			11.01	%

·	Completed the transformation of our balance sheet through the sale of $59.0 million of distressed and impaired loans and foreclosed properties to a single investor, which substantially reduced non-performing asset balances and immediately improved credit quality metrics.

·	Asset quality trends improved for a sixth consecutive quarter.  Non-performing asset balances decreased significantly by $37.4 million, or 68%, to $17.8 million as of December 31, 2011 compared to $55.2 million as of December 31, 2010.

·	Non-performing asset and loan ratios improved significantly year over year.

		December 31, 2011				December 31, 2010
Non-Performing Loans/Total Loans			1.92	%			6.45	%
Non-Performing Assets/Total Assets			1.70	%			6.30	%
Loan Loss Reserve/Total Loans			2.04	%			1.84	%
Loan Loss Reserve/Non-Performing Loans			106.52	%			28.62	%
Non-Performing Assets/Capital and Reserves			23.13	%			55.46	%

·	Total assets increased to $1.0 billion as of December 31, 2011 compared to $876.1 million as of December 31, 2010, which represents growth of $171.3 million, or 20%.

·	Total deposits increased by $194.9 million, or 26%, to $952.6 million as of December 31, 2011 compared to $757.7 million as of December 31, 2010.  Core deposits grew by $83.5 million, or 12%, to a total of $785.2 million during the year ended December 31, 2011.

·	Capital levels remain strong with a Total Risk-Based Capital ratio of 13.09% and a Tier 1 Leverage Ratio of 8.77% at December 31, 2011.

·	The net interest margin increased to 3.59% for the year ended December 31, 2011 compared to 3.50% for the year ended December 31, 2010.

·

The SBA Lending Team hired in the beginning of the year established itself as a strong component of the Company’s operating results with the origination of $52 million in new loans during 2011.  The SBA department generated a net profit before tax of approximately $3.2 million in the current year.  This team is now ranked as the #1 SBA lender in New Jersey and the #39 lender in the nation based on the dollar volume of loan originations.

 

 

 

 

·	Non-interest income grew to $10.6 million for the year ended December 31, 2011 compared to $2.8 million for the year ended December 31, 2010.  This represents a year over year increase of $7.7 million, or 273%, primarily due to the gains recognized on the sale of SBA loans.

·	The Haddonfield store, which has been open for just over one year, increased its core deposits to $40 million as of December 31, 2011.

 

 

 

 

 

		For the Year Ended December 31, 2011												For the Year Ended December 31, 2010												For the Year Ended December 31, 2009
(dollars in thousands)		Average Balance				Interest Income/ Expense				Yield/ Rate(1)				Average Balance				Interest Income/ Expense				Yield/ Rate(1)				Average Balance				Interest Income/ Expense				Yield/ Rate(1)
Interest-earning assets:
Federal funds sold and   other interest   earning assets		$	62,082			$	145				0.23	%		$	31,313			$	80				0.26	%		$	48,580			$	118				0.24	%
Investment securities   and restricted stock			156,367				5,119				3.27	%			175,074				6,176				3.53	%			96,787				4,633				4.79	%
Loans receivable			630,309				33,417				5.30	%			659,882				34,293				5.20	%			736,647				38,943				5.29	%
Total interest-earning assets			848,758				38,681				4.56	%			866,269				40,549				4.68	%			882,014				43,694				4.95	%
Other assets			73,053												73,961												58,106
Total assets		$	921,811											$	940,230											$	940,120
Interest bearing liabilities:
Demand – non-interest bearing		$	119,189											$	116,895											$	86,621
Demand – interest bearing			91,577			$	590				0.64	%			58,467			$	427				0.73	%			47,174			$	310				0.66	%
Money market & savings			345,885				3,457				1.00	%			320,296				3,689				1.15	%			281,621				5,258				1.87	%
Time deposits			244,741				3,017				1.23	%			320,194				4,621				1.44	%			383,535				8,374				2.18	%
Total deposits			801,392				7,064				0.88	%			815,852				8,737				1.07	%			798,951				13,942				1.75	%
Total interest bearing deposits			682,203				7,064				1.04	%			698,957				8,737				1.25	%			712,330				13,942				1.96	%
Other borrowings			24,831				1,135				4.57	%			35,930				1,508				4.20	%			57,454				2,113				3.68	%
Total interest-bearing liabilities			707,034				8,199				1.16	%			734,887				10,245				1.39	%			769,784				16,055				2.09	%
Total deposits and other borrowings			826,223				8,199				0.99	%			851,782				10,245				1.20	%			856,405				16,055				1.87	%
Non-interest bearing other liabilities			9,472												8,781												9,031
Shareholders’ equity			86,116												79,667												74,684
Total liabilities and shareholder’s equity		$	921,811											$	940,230											$	940,120
Net interest income(2)						$	30,482											$	30,304											$	27,639
Net interest spread											3.40	%											3.29	%											2.86	%
Net interest margin(2)											3.59	%											3.50	%											3.13	%