PRE 14C 1 repfirst14c.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 SCHEDULE 14C INFORMATION Information Statement Pursuant to Section 14(c) of the Securities Exchange Act of 1934 Check the appropriate box: [x] Preliminary Information Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14(c)-5(d)(2)) [ ] Definitive Information Statement REPUBLIC FIRST BANCORP, INC. -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) Payment of Filing Fee (Check the appropriate box): [x] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14(c)-5(g) and 0-11. 1) Title of each class of securities to which transaction applies: -------------------------------------------------------------------------------- 2) Aggregate number of securities to which transaction applies: -------------------------------------------------------------------------------- 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): -------------------------------------------------------------------------------- 4) Proposed maximum aggregate value of transaction: -------------------------------------------------------------------------------- 5) Total fee paid: -------------------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: 1 INFORMATION STATEMENT REPUBLIC FIRST BANCORP, INC. 1608 Walnut Street Philadelphia, Pennsylvania 19103 (215) 735-4422 -------------------------------- WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY. This Information Statement is being furnished at the direction and on behalf of the Board of Directors of Republic First Bancorp, Inc., a Pennsylvania corporation ("Republic First"), to the holders of record at the close of business on December 1, 2004 ("Record Date") of Republic First's outstanding common stock, par value $0.01 per share ("Common Stock") pursuant to Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended. Republic First's Board of Directors has approved a pro rata distribution, commonly referred to as a "spin-off," to Republic First shareholders of all of the outstanding shares of First Bank of Delaware ("FBD") common stock, one of Republic First's wholly owned subsidiaries. Each Republic First shareholder as of the Record Date will receive one share of FBD common stock for every share of Republic First common stock held on that date. Following the distribution, FBD will be a separate independent public company. The issuance of the shares of FBD will take place after the Federal Deposit Insurance Corporation (the "FDIC") has formally approved the Form 10 that was filed with it and until a date that is at least twenty (20) days after the filing with the Securities and Exchange Commission of this Information Statement. This Information Statement will be mailed on or about December 16, 2004 to Republic First's shareholders on the Record Date. The cost of preparing, assembling and mailing this Information Statement is being borne by Republic First. 2 VOTING SECURITIES The record date of shareholders entitled to notice of this corporate action by Republic First is the close of business on December 1, 2004. On such date, Republic First had issued and outstanding 7,428,678 shares of $0.01 par value common stock. Each share is entitled to one vote per share on any matter that may properly come before the shareholders and there is no cumulative voting right on any shares. Republic First received the approval of its Board of Directors to consummate the spin-off. Pursuant to applicable Pennsylvania law, there are no dissenter's rights relating to this matter. OWNERSHIP OF COMMON STOCK The following table sets forth information concerning the shares of our common stock that are beneficially owned by each of our directors and executive officers, by all of our directors and executive officers as a group, and by each person who owns 5% or more of our outstanding common stock based on filings made by such persons with the SEC. Unless otherwise indicated, the amounts are based on the number of Republic First shares held by such persons as of September 30, 2004.
Amount and Nature of Beneficial Percentage of Name and Address of Beneficial Owner (1) Ownership (2) Class (2) --------------------------------------------------------------------------------------------------------- Harry D. Madonna 473,477 (3) 6.4% Kenneth J. Adelberg 331,026 (4) 4.6% William W. Batoff 86,433 (5) 1.2% Robert J. Coleman 110,000 1.5% Neal I. Rodin 124,628 (6) 1.7% Steven J. Shotz 278,356 (7) 3.8% Harris Wildstein, Esq. 565,816 (8) 7.8% Robert D. Davis 110,551 (9) 1.5% Louis J. DeCesare 22,550 (10) * Alonzo J. Primus 32,700 (13) * Paul A. Verdi 17,050 (14) * Paul Frenkiel 78,100 (11) * Lyle W. Hall, Jr. 11,000 * Barry L. Spevak 2,277 * Miller & Jacobs Capital, LLC 556,820 (12) ** P.O. Box 26039 Gallows Bay Station Christiansted, St. Croix, USVI 00824 All directors and executive officers as a group 2,243,964 28.1% (14 persons) ---------------------------------------------------------------------------------------------------------
* Represents less than 1% of the issued and outstanding shares. ** Not included in totals. (1) Unless otherwise indicated, the address of each beneficial owner is c/o Republic First Bancorp, Inc., 1608 Walnut Street, Philadelphia, Pennsylvania 19103. 3 (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. As of September 30, 2004 there were 7,435,681 shares outstanding. (3) Includes 224,038 shares of common stock subject to options which are currently exercisable. (4) Includes 65,252 shares of common stock issuable upon exercise of options which are currently exercisable. Does not include 103,820 shares of common stock owned by family members for which Mr. Adelberg disclaims beneficial ownership. (5) Includes 11,110 shares of common stock subject to options granted to Mr. Batoff which are currently exercisable. (6) Includes 10,010 shares of common stock issuable upon exercise of options which are currently exercisable. (7) Includes 135,146 shares of common stock issuable upon exercise of options which are currently exercisable. (8) Includes 62,150 shares of common stock issuable upon exercise of options which are currently exercisable. (9) Includes 108,901 shares of common stock issuable upon exercise of options which are currently exercisable. (10) Includes 22,550 shares of common stock issuable upon exercise of options which are currently exercisable. (11) Includes 33,000 shares of common stock issuable upon exercise of options which are currently exercisable. (12) According to a Schedule 13G/A filed with the SEC on February 13, 2004, Jeffrey A. Miller and Eric D. Jacobs share voting and investment power with respect to these shares of common stock. (13) Includes 29,700 shares of common stock issuable upon exercise of options of which 25,850 are currently exercisable. (14) Includes 17,050 shares of common stock issuable upon exercise of options of which 14,300 are currently exercisable. 4 THE DISTRIBUTION Introduction Republic First's board of directors declared a pro rata distribution, payable to the holders of record of outstanding Republic First common stock at the close of business on December 1, 2004, the record date for the distribution, of one share of FBD common stock for every share of Republic First common stock outstanding on the record date. The distribution will be effected at 12:01 a.m., Eastern Time, on or about January 6, 2005 (the "distribution date"). FBD is currently a wholly owned subsidiary of Republic First. As a result of the distribution, all of the outstanding shares of FBD's common stock will be distributed to Republic First's shareholders. Immediately following the distribution, Republic First and its subsidiaries will not own any shares of FBD common stock and FBD will be an independent public company. Stock certificates reflecting ownership of FBD common stock will be mailed to record holders of Republic First common stock shortly after the distribution date. Shares of FBD common stock should be credited to accounts with stockbrokers, banks or nominees of Republic First shareholders that are not record holders on or about January 6, 2005. Reasons for the Distribution The board of directors and management of Republic First believe that the distribution is in the best interest of Republic First and its shareholders. The current holding company structure with two subsidiaries presents significant obstacles to both Republic First Bank, the Pennsylvania subsidiary of Republic First (the "PA Bank"), and FBD in their efforts to raise capital in the most cost-efficient manner because the various risk factors and market perception involved in each entity are different. The Board of Republic First was advised by the investment banking firm of Sandler O'Neill & Partners, L.P. that it would be beneficial for FBD to be separate from Republic First, and the Board determined to effectuate such separation through a spin-off of FBD. Republic First believes that the distribution will enhance value for Republic First shareholders by separating the geographic and business markets served by each of PA Bank and FBD. The lines of business of FBD are different from, and are not synergistic with, the lines of business of PA Bank. In addition to general banking products, FBD nationally offers short term consumer loans and tax refund anticipation loans to the under banked market while PA Bank focuses primarily on providing banking services to small and medium-sized businesses. There does not appear to be any benefit, and there may well be a distraction and inefficiency of management, by operating these very different business lines under the same corporate structure. In addition, the inherent value of FBD and PA Bank may be better realized subsequent to the spin off. It is often difficult to realize the full value of disparate lines of business when they are combined in the same corporate structure and represented by the same common stock. Once separated, each of the bank's common stocks can be valued by reference to the profitability, growth and risks of their respective businesses. The separation of these two businesses into separate corporate entities, each represented in the market by its own common stock, should facilitate efficient capital planning and capital raising by both entities. This should allow the investment community to better evaluate both FBD's and PA Bank's performance relative to their respective peers. In addition, the spin-off may help PA Bank reduce reputational and legal risk. For example, certain institutional consumer groups are opposed to the levels of fees on short-term loans such as those offered by FBD. Additionally, legal risk such as class action suits may be more likely in this area of lending than in other areas. 5 Manner of Effecting the Distribution The general terms and conditions relating to the distribution are set forth in a Separation and Distribution Agreement (the "Distribution Agreement") between FBD and Republic First. The distribution will be made on the basis of one share of FBD common stock for every share of Republic First common stock outstanding on the record date of December 1, 2004. Immediately after the distribution, we expect there to be approximately 1785 holders of record of FBD common stock and approximately 7,428,678 shares of FBD common stock outstanding based on the number of Republic First shareholders of record and shares outstanding on December 1, 2004. The shares to be distributed will constitute all of the outstanding shares of FBD common stock. Immediately following the distribution, Republic First will not own any shares of FBD common stock, and FBD will be an independent company. The shares of FBD common stock will be fully paid and nonassessable and FBD shareholders will not be entitled to preemptive rights. Republic First shareholders will not be required to pay any cash or other consideration for the shares of FBD common stock received in the distribution, or to surrender or exchange any Republic First shares in order to receive such shares. The distribution will not affect the number of, or the rights attaching to, outstanding Republic First shares. No vote of Republic First shareholders is required or sought in connection with the distribution, and Republic First shareholders will have no appraisal rights in connection with the distribution. The employee benefits arrangements which FBD and Republic First will enter into in connection with the distribution provide that at the time of the distribution, for each stock option held by Republic First's employees and directors, a stock option will be granted by FBD. The option prices will be adjusted to maintain the economic value of the options; otherwise, the terms of the new options are expected to be identical to those granted by Republic First. Services Agreement At about the time of the spin-off, FBD will form a wholly owned subsidiary which will employ all the staff service employees which service PA Bank and FBD. The subsidiary will enter into agreements with both PA Bank and FBD to provide all required services. All of the agreements are currently in place and will be assigned to the subsidiary. The terms of the agreements are based on an allocation of time to the appropriate entity. Results of the Distribution After the distribution, FBD will be a separate company. Immediately after the distribution, FBD expects there to be approximately 1785 holders of record of its common stock and approximately 7,428,678 shares of FBD common stock outstanding, based on the number of shareholders of record and outstanding Republic First shares on December 1, 2004 and the distribution ratio of one share of FBD common stock for every Republic First share. The actual number of shares to be distributed will be determined as of the record date. The distribution will not affect the number of outstanding Republic First shares or any rights of Republic First shareholders. Listing and Trading of Our Common Stock The shares of common stock of Republic First will remain listed on the Nasdaq National Market. Shares of common stock of FBD are expected to be quoted on the Over-The-Counter Bulletin Board or the Pink Sheets. 6 Republic First makes no recommendations as to the purchase, retention or sale of shares of Republic First common stock or FBD common stock. You should consult with your own financial advisors, such as your stockbroker, bank or tax advisor. If you do decide to sell any shares, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your Republic First common stock or your FBD common stock, or both. There is not currently a public market for the FBD common stock. Republic First's common stock may trade on a when-issued basis on the Nasdaq Stock Market, reflecting an assumed post-distribution value for Republic First common stock. When-issued trading in Republic First common stock, if available, could last from on or about the record date through the effective date of the distribution. If when-issued trading in Republic First common stock is available, Republic First shareholders may trade their existing Republic First common stock prior to the effective date of the distribution in either the when-issued market or in the regular market for Republic First common stock. If a shareholder trades in the when-issued market, he will have no obligation to transfer to a purchaser of Republic First common stock the FBD common stock that he receives in the distribution. If a shareholder trades in the regular market, the shares of Republic First common stock traded will be accompanied by due bills representing the FBD common stock to be distributed in the distribution. If when-issued trading in Republic First common stock is not available, neither the Republic First common stock nor the due bills may be purchased or sold separately during the period from the record date through the effective date of the distribution. If a when-issued market for Republic First common stock develops, an additional listing for Republic First common stock will appear on the Nasdaq Stock Market. Differences will likely exist between the combined value of when-issued FBD common stock plus when-issued Republic First common stock and the price of Republic First common stock during this period. Sales of Republic First common stock with the right to receive shares of FBD common stock should generally settle in the customary three business day settlement period. When-issued sales of Republic First common stock without the right to receive shares of the FBD common stock and when-issued sales of FBD common stock are expected to settle four business days following the date stock certificates for the FBD common stock are mailed. You should check with your stockbroker, bank or other nominee for details. The shares of FBD common stock distributed to Republic First shareholders will be freely transferable, except for shares received by persons who may be deemed to be "affiliates" under the Securities Act of 1933, as amended (the "Securities Act"). Persons who may be deemed to be affiliates after the distribution generally include individuals or entities that control, are controlled by, or are under common control with FBD and includes its directors, certain of our officers and significant stockholders. FBD affiliates will be permitted to sell their shares of FBD common stock only pursuant to an effective registration statement under the Securities Act or an exemption from the registration requirements of the Securities Act, such as the exemptions afforded by Section 4(1) of the Securities Act and the provisions of Rule 144 thereunder. Based on ownership of Republic First's common stock reflected in this Information Statement under "Ownership of Common Stock," persons who may be deemed to be FBD affiliates after the distribution will beneficially own approximately 2,243,964 shares of its common stock, or 28.1% of the outstanding shares of its common stock, based on numbers as of September 30, 2004. FBD does not intend to list its shares of common stock for trading on the Nasdaq National Market and expects its shares to be quoted on the Over-The-Counter Bulletin Board or the Pink Sheets. There can be no assurance that FBD common stock will be actively traded and the prices at which the shares 7 will trade cannot be predicted. Some of our shareholders who receive shares of FBD common stock may decide that they do not want to own FBD or our stock and may sell their shares of our common stock or that of FBD following the distribution. Such sales may delay the development of an orderly trading market in our shares for a period of time following the distribution. Until an orderly market develops, the prices at which Republic First and FBD shares trade may fluctuate significantly and may be lower than the price that would be expected for a fully distributed issue. Prices for FBD common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the shares, results of operations, the amount of dividends that FBD pays, changes in economic conditions in the banking industry and general economic and market conditions. Following the distribution, Republic First's common stock will continue to be listed and traded on the Nasdaq Stock Market under the symbol "FRBK." Following the distribution, Republic First's operations will consist primarily of its Pennsylvania subsidiary, Republic First Bank. Even though Republic First is currently a publicly held company, there can be no assurance that an active trading market for Republic First common stock will be maintained after the distribution and no prediction can be made respecting the prices at which Republic First common stock will trade. Some Republic First shareholders may decide that they do not want to own stock in a holding company whose assets consist solely of its ownership of its Pennsylvania subsidiary, Republic First Bank, and may sell their Republic First common stock following the distribution. These and other factors may delay or hinder the return to an orderly trading market in Republic First common stock following the distribution. Whether an active trading market for Republic First common stock will be maintained after the distribution and the prices for Republic First common stock will be determined in the marketplace and may be influenced by many factors, including the depth and liquidity of the market for the shares, Republic First's results of operations, the amount of dividends that Republic First pays, changes in economic conditions in the banking industry and general economic and market conditions. In addition, the stock market often experiences significant price fluctuations that are unrelated to the operating performance of the specific companies whose stock is traded. Market fluctuations could have a material adverse impact on the trading price of FBD common stock and/or Republic First common stock. ABOUT REPUBLIC FIRST Republic First is currently a two-bank holding company organized and incorporated under the laws of the Commonwealth of Pennsylvania. Its wholly owned subsidiaries, Republic First Bank (the "PA Bank"), and FBD, (sometimes hereafter referred to jointly as the "Banks") offer a variety of credit and depository banking services. Such services are 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 FBD. The PA 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 the PA Bank are insured up to applicable limits by the Bank Insurance Fund of the FDIC. The PA Bank presently conducts its principal banking activities through its five Philadelphia offices and three suburban offices in Ardmore, East Norriton and Abington, all of which are located in Montgomery County, Pennsylvania. 8 FBD is organized and incorporated under the laws of the State of Delaware. FBD offers a variety of credit and depository banking services. FBD is subject to examination and comprehensive regulation by the FDIC and the Delaware Department of Banking and the deposits, which are held by them are insured up to applicable limits by the Bank Insurance Fund of the FDIC. FBD presently conducts its principal business banking activities primarily through its two offices in Wilmington, Delaware but also make substantial short-term loans in Arizona, California, Georgia, Ohio and Texas and tax refund loans in numerous states. Products and Services Offered General ------- The Banks offer many commercial and consumer banking services with an emphasis on serving the needs of individuals, small and medium-sized businesses, executives, professionals and professional organizations in their service area. The Banks attempt to offer a high level of personalized service to both their small and medium-sized businesses and consumer customers. The Banks offer 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). The Banks actively solicit both non-interest and interest-bearing deposits from their borrowers. The Banks offer a broad range of loan and credit facilities to the businesses and residents of their service area, including secured and unsecured commercial loans including commercial real estate and construction loans, residential mortgages, automobile loans, home improvement loans, home equity and overdraft lines of credit, and other products. FBD also nationally offers short-term consumer loans and tax refund anticipation loans to the under banked market. The Banks manage credit risk through loan application evaluation and monitoring for adherence with credit policies. Since their inception, the Banks have had a senior officer monitor compliance with the Banks' lending policies and procedures by the Banks' loan officers. The Banks also maintain investment securities portfolios. Investment securities are purchased by the Banks within standards of the Banks' Investment Policies, which are approved annually by the Banks' Boards of Directors. The Investment Policies address such issues as permissible investment categories, credit quality, maturities and concentrations. At December 31, 2003, and 2002, approximately 72% and 84%, 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 trust preferred securities, corporate bonds, and FHLB securities. Traditional Banking Products and Services ----------------------------------------- The Banks offer 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 others terms. The Banks offer both commercial and consumer deposit accounts, including checking 9 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). The Banks' commercial loans typically range between $250,000 and $5,000,000 but customers may borrow significantly larger amounts up to the Banks' combined legal lending limit of $10.3 million. Individual customers may have several loans often secured by different collateral. Such relationships in excess of $5.9 million at December 31, 2003, amounted to $51.5 million. The $5.9 million threshold approximates 10% of total capital and reserves and reflects an additional internal monitoring guideline. The Banks attempt to offer a high level of personalized service to both their commercial and consumer customers. The Banks are members of the STAR(TM) and PLUS(TM) networks in order to provide customers with access to automated teller machines worldwide. The Banks currently have eight proprietary automated teller machines at branch locations. The Banks' 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 the Banks outstanding loans, representing approximately 93.6% of total loans outstanding at December 31, 2003. 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 the Banks' loan review officer, credit risk is still inherent in the portfolio. Although the majority of the Banks' loan portfolio is collateralized with real estate or other collateral, a portion of the commercial portfolio is unsecured, representing loans made to borrowers considered to be of sufficient strength to merit unsecured financing. The Banks make both fixed and variable rate loans with terms ranging from one to five years. Variable rate loans are generally tied to the national prime rate of interest. Other Products and Services --------------------------- Stored-Value Card Issuance Though our affiliate membership with MasterCard International, FBD has become an issuing bank for Stored-Value Cards. Stored-Value Cards are cards that store information electronically on a magnetic stripe or computer chip and can be used to purchase goods or services. Funds are loaded onto cards and can be used similar to some debit/ATM cards and in some instances similar to a MasterCard(R) or Visa(R) card. Stored-Value Cards are a substitute for cash, gift certificates and check payments. Cards can be either personalized with a customer name, non-personalized, reloadable or non-reloadable based on the type of card. All cards will be issued through retail store fronts, corporations or directly to the consumer. FBD has contracted with several card processors to provide the front-end software platform functionality, cardholder support and card fulfillment to retail environments. Tax Refund Anticipation Products FBD has a contractual relationship with Liberty Tax Service, one of the nation's largest tax preparation services, to provide tax refund products to consumer taxpayers for whom Liberty Tax Service and its franchisees prepare and electronically file federal and state income tax returns ("Tax Refund Products"). The Tax Refund Products consist of electronic refund checks ("ERCs") and refund anticipation loans ("RALs"). For both ERCs and RALs, the taxpayer must file his or her tax return electronically and designate a bank account at FBD for electronic receipt of the anticipated refund (the "Refund Account"). An ERC is an FBD check sent to the taxpayer after FBD receives notice that the IRS is depositing the tax refund 10 into the Refund Account. For the 2005 tax season (for 2004 returns), FBD expects that the IRS will typically take 6-13 days to notify FBD that the refund is being transmitted to the Refund Account. Accordingly, the ERC serves as a convenient method for the taxpayer to quickly obtain his or her anticipated federal income tax refund. Taxpayers receiving ERCs from FBD incur application and handling fees that can range in excess of $100, depending upon the application fee charged by the tax preparer. These fees, and the taxpayer's tax preparation and electronic filing fees, are deducted from the refund before the balance is paid to the taxpayer through the ERC. A RAL is a loan made in an amount not to exceed the taxpayer's anticipated federal income tax refund. The maximum RAL amount for the 2005 tax season is expected to be $7,000. FBD deducts from the RAL the tax preparer's tax preparation and electronic filing fees; the application and handling fees charged on an ERC; and a finance charge, which is expected to range from $7-$87 for the 2005 tax season, depending upon the amount of the RAL. This finance charge represents an annual percentage rate of interest that can range from less than 50% to in excess of 100%. (FBD derives its authority to charge this rate of interest from federal banking laws, which provide that FDIC insured financial institutions may charge nationwide the interest allowed by the laws of the states where they are located, and from Delaware banking laws, which do not impose limits on the rate of interest Delaware banks may charge on these loans.) Typically within 24 hours after the application for a RAL, the balance of the RAL is disbursed to the taxpayer by an FBD check delivered by the tax preparer or by an electronic transfer from FBD to the taxpayer's bank account. RALs are secured by the anticipated tax refund and are normally repaid when the IRS deposits the refund into the Refund Account, which FBD expects will typically take 8-15 days. Barring such a deposit, the RAL becomes, in effect, an unsecured loan payable approximately 60 days after the RAL is made or upon demand. In 2004, these two products generated approximately $600,000 of revenue. While we are attempting to increase market penetration of these products, there can be no assurance that revenue levels will increase significantly in 2005 or thereafter. Short-Term Consumer Loans In continuing efforts to expand and diversify fee income, FBD began to offer short-term consumer loans in 2001. Short term loans are small-denomination unsecured advances of $1500 or less until the consumer's next pay date (approximately 2 weeks). FBD charges a fixed finance charge equal to 17% of the amount advanced, which translates into an annual percentage rate of interest of approximately 440%. As with its RALs, FBD derives its authority to charge this rate of interest from federal banking laws, which provide that FDIC insured financial institutions may charge nationwide the interest allowed by the laws of the states where they are located, and from Delaware banking laws, which do not impose limits on the rate of interest Delaware banks may charge on these loans. Payday loan customers are typically low- to moderate-income individuals who are employed. The borrower must have an active checking account, valid identification and a regular source of income. The customer signs a promissory note for the amount of the loan (including finance charge) and supplies a post-dated personal check in this amount to serve as a potential source of repayment. At the end of the loan term, the customer's check is deposited or the customer returns with cash to reclaim the check. FBD currently originates loans in Texas, Michigan, California, Arizona, Ohio and via the Internet/Telephone, which are mostly sold to third parties. At December 31, 2003, there were approximately $16.2 million of such loans outstanding. Prior to the effective date of Georgia Act No. 2004-440, legislation designed to eliminate payday lending in Georgia, FBD also made payday loans in Georgia. At December 31, 2003, there were approximately $1.4 million of Georgia short-term consumer loans outstanding. FBD and other lenders have challenged the legality of the Georgia Act. A federal 11 district court declined to issue a preliminary injunction against enforcement of the Georgia Act and FBD and the other plaintiffs have appealed this decision to the U.S. Court of Appeals for the 11th Circuit. The 11th Circuit's decision is expected to have a significant impact, positive or negative, on FBD's ability to offer payday loans. Legislation eliminating, or limiting interest rates upon short-term consumer loans has from time to time been proposed. If adopted, such legislation can impair or eliminate FBD's ability to make payday loans, as in Georgia. Conversely, if such proposals cease, a large number of competitors may begin offering the product, and increasing competition could result in lower market share and/or fees. Further, FBD uses a small number of marketers under contracts, which can be terminated upon short notice, under various circumstances. The impact of legislation or increased competition is not possible to predict but could have a material adverse effect on FBD's operations and financial results. Service Area/Market Overview The Banks' 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 County and northern Delaware. The Banks also serve the surrounding counties of Bucks, Chester and Delaware in Pennsylvania, southern New Jersey and southern Delaware. Additionally, we make short-term loans in Arizona, California, Georgia, Ohio, Texas and other selected states. Tax refund loans are made in numerous states. Competition There is substantial competition among financial institutions in the Banks' business banking service area. The Banks compete with new and established local commercial banks, as well as numerous regionally based and super-regional commercial banks. In addition to competing with new and established commercial banking institutions for both deposits and loan customers, the Banks compete 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 the Banks compete have greater financial resources than the Banks and offer a wider range of deposit and lending instruments with higher legal lending limits. The Banks combined legal lending limits were $10.3 million at December 31, 2003. The Banks are 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 de novo banks with business strategies similar to those of the Banks have opened since the Banks' inception. There are banks and other financial institutions, which serve surrounding areas, and additional out-of-state financial institutions, which currently, or in the future, may compete in the Banks' market. The Banks compete to attract deposits and loan applications both from customers of existing institutions and from customers new to the greater Philadelphia area. The Banks anticipate a continued increase in competition in their market area. With regard to competition for the short-term and tax refund anticipation loans that FBD offers nationally, there are only a limited number of banks that currently compete for such business. However, 12 management believes that competition for both types of loans is likely to increase both in the number of competitors, and related competing products. For instance, many banks have begun to offer a courtesy overdraft product, which may compete with short-term loans. Operating Strategy for Business Banking Republic First's business banking objective is for the Banks to become the primary alternative to the large banks that dominate the Greater Philadelphia market. Republic First's management team has developed a business strategy consisting of the following key elements to achieve this objective: Providing Attentive and Personalized Service -------------------------------------------- We believe that a very attractive niche exists serving small to medium-sized business customers not adequately served by our larger competitors. We believe this segment of the market responds very positively to the attentive and highly personalized service. We offer to individuals and small to medium-sized businesses a wide array of banking products, informed and professional service, extended operating hours, consistently applied credit policies, and local, timely decision making. Attracting and Retaining Highly Experienced Personnel ----------------------------------------------------- Our officers and other personnel have substantial experience acquired at larger banks in the region. Additionally, we extensively screen and train our staff to instill a sales and service oriented culture and maximize cross-selling opportunities and business relationships. We offer meaningful sales-based incentives to certain customer contact employees. Capitalizing on Market Dynamics ------------------------------- In recent years, banks controlling large amounts of the deposits in the Banks' 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 a change in their product offerings and the degree of personal attention they provide. We have sought to capitalize on these changes by offering a community banking alternative. As a result of continuing consolidations and marketing efforts, we believe we have a continuing opportunity to increase our market share. Operating Strategy ------------------ In addition to pursuing the above strategy for business banking, we are following a strategy of diversified expansion of the products we currently offer nationally to the under banked. We expect to add new geographic areas in which we may make such products available and may also add additional products. Branch Expansion Plans We have not made any specific commitments for expansion of our branch network. Supervision and Regulation Various requirements and restrictions under the laws of the United States, the State of Delaware and the Commonwealth of Pennsylvania affect us. 13 General ------- The Banks are subject to regulation by the FDIC. Republic First is a bank holding company subject to supervision and regulation by the Federal Reserve Bank of Philadelphia ("FRB") under the Bank Holding Company Act of 1956, as amended. As a bank holding company, Republic First's activities and those of the Banks are limited to the business of banking and activities closely related or incidental to banking, and Republic First 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. The Banks are subject to supervision and examination by applicable federal and state banking agencies. The PA Bank is a Pennsylvania-chartered bank subject to supervision and regulation by the FDIC and the Pennsylvania Department of Banking. FBD is a Delaware-chartered bank subject to the supervision and regulation by the FDIC and the Delaware Department of Banking. The Banks are 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 the Banks. In addition to the impact of regulation, commercial banks are affected significantly by the actions of the FRB in attempting to control the money supply and credit availability in order to influence interest rates and the economy. In addition, the FDIC is the only federal banking agency that currently permits depository institutions under its supervision to be involved in payday lending. While it has issued guidelines articulating its position that state banks may engage in payday lending, subject to specified constraints designed to preserve the safety and soundness of their activities, there can be no guarantee that the FDIC will continue to permit state banks to engage in payday lending and/or that the FDIC will not tighten its guidelines to a point where it is not economically or practically feasible to continue participating in payday lending. See "Risk Factors - We could be adversely affected by actions taken by our regulators or by changes in the law." Holding Company Structure ------------------------- The Banks are subject to restrictions under federal law which limit their ability to transfer funds to Republic First, whether in the form of loans, other extensions of credit, investments or asset purchases. Such transfers by the Banks to Republic First are generally limited in amount to 10% of the Banks' 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. The Banks have never made any loan or extension of credit to Republic First nor have they purchased any assets from Republic First. Under regulatory policy, Republic First is expected to act as a source of financial strength to the Banks and to commit resources to support the Banks, i.e., to downstream funds to the Banks. This support may be required at times when, absent such policy, Republic First might not otherwise provide such support. Any capital loans by the Company to the Banks are subordinate in right of payment to deposits and to certain other indebtedness of the Banks. In the event of Republic First's bankruptcy, any commitment by Republic First to a federal bank regulatory agency to maintain the capital of the Banks will be assumed by the bankruptcy trustee and entitled to a priority of payment. Gramm-Leach Bliley Act ---------------------- On November 12, 1999, the Gramm-Leach Bliley Act, or GLB Act, was passed into law. The GLB Act accomplishes three fundamental objectives: (a) Repeals the key provisions of the Glass Steagall Act to permit commercial banks to affiliate with investment banks (securities firms). (b) Amends the BHCA to permit qualifying bank holding companies to engage in any type of financial activities that are not permitted for banks themselves. 14 (c) Permits subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. The result is that banking companies will generally be able to offer a wider range of financial products and services and will be more readily able to combine with other types of financial companies, such as securities firms and insurance companies. The GLB Act creates 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 CR rating of "satisfactory" will not jeopardize any then existing newly authorized activities; rather, the FJC 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 newly 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) "Complimentary" financial activities, as determined by the Federal Reserve. Bank holding companies that do not qualify or elect to become FHCs will be limited in their activities to those currently permitted by law and regulation. As of the date of this Information Statement, we have not elected to become a FHC. The GLB Act also authorizes 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 OCC. A "financial subsidiary" can engage in most, but not all, of the newly authorized activities. 15 In addition, the GLB Act also provides 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. Basically, the GLB Act subjects 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 account information to third party marketers; and (4) follow regulatory standards (to be adopted in the future) to protect the security and confidentiality of customer information. Although the long-range effects of the GLB Act cannot be predicted with reasonable certainty, most probably it will further narrow the differences and intensify competition between and among commercial banks, investment banks, insurance firms and other financial service companies. Regulatory Restrictions on Dividends ------------------------------------ Dividend payments by the PA Bank to Republic First 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, the PA Bank would be limited to $26.5 million of dividends plus an additional amount equal to its net profit for 2004, up to the date of any such dividend declaration. Dividend payments by FBD are similarly limited by the FDIC and also the Delaware Department of Banking. Dividends for FBD would be limited to $2.9 million plus an additional amount equal to its net profit for 2004. However, dividends would be further limited in order to maintain capital ratios since state and federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Adherence to such standards further limits the ability of the Banks to pay dividends to Republic First. Republic First may consider dividend payments in 2004. Dividend Policy --------------- Neither of the Banks has paid any cash dividends to Republic First but may consider dividend payments in 2004. FDIC Insurance Assessments -------------------------- The FDIC has implemented a risk-related premium schedule for all insured depository institutions that results in the assessment of premiums based on capital and supervisory measures. Under the risk-related premium schedule, the FDIC, on a semi-annual basis, assigns each institution to one of three capital groups (well capitalized, adequately capitalized or under capitalized) and further assigns such institution to one of three subgroups within a capital group corresponding to the FDIC's judgment of the institution's strength based on supervisory evaluations, including examination reports, statistical analysis and other information relevant to gauging the risk posed by the institution. Only institutions with a total capital to risk-adjusted assets ratio of 10.00% or greater, a Tier 1 capital to risk-adjusted assets ratio of 6.00% or greater and a Tier 1 leverage ratio of 5.00% or greater, are assigned to the well capitalized group. 16 Capital Adequacy ---------------- The FDIC adopted risk-based capital guidelines for banks, such as us. 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 FDIC 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 banks that have the highest regulatory examination ratings and are not contemplating or experiencing significant growth or expansion. All other banks are required to maintain a leverage ratio of at least 1% to 2% above the 3% stated minimum. We are in compliance with these guidelines. 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. Profitability, Monetary Policy and Economic Conditions ------------------------------------------------------ In addition to being affected by general economic conditions, our earnings and growth will be affected by the policies of regulatory authorities, including the Pennsylvania Department of Banking, Delaware Department of Banking, the FRB and the FDIC. An important function of the FRB is to regulate the supply of money and other credit conditions in order to manage interest rates. The monetary policies and regulations of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our future business, earnings and growth cannot be determined. 17 RISK FACTORS Risks Relating To The Distribution There has not been any prior trading market for FBD common stock and a trading market may not develop after the spin-off. There is no current trading market for FBD common stock, although a when-issued trading market may develop in Republic First's common stock prior to completion of the distribution. It is expected that the FBD shares will be quoted on the Over-The-Counter Bulletin Board or the Pink Sheets under the symbol "FBDE" following completion of the distribution. In order for FBD stock to be quoted on the Over-The-Counter Bulletin Board or the Pink Sheets, at least one market maker must quote its stock. There can be no assurance that a market maker will quote FBD stock. In the event that FBD's stock is not quoted, there will be no trading market for its stock and its stockholders may have to hold their shares of FBD stock indefinitely. Until FBD's common stock is fully distributed and an orderly market develops, the prices at which its common stock trades may fluctuate significantly and may be lower than the price that would be expected for a fully distributed issue. Since FBD expects its stock to be quoted on the Over-The-Counter Bulletin Board or the Pink Sheets and not a national exchange or the Nasdaq National Market, on which Republic First's shares trade, the market for the FBD shares will be significantly less liquid than that for Republic First shares due to the nature of the Over-The-Counter Bulletin Board and the Pink Sheets. Substantial sales of FBD common stock following the distribution may have an adverse impact on the trading price of FBD common stock. Under the U.S. federal securities laws, all of the shares of FBD common stock issued in the distribution may be resold immediately in the public market without restriction, except for shares held by its affiliates. Some of the Republic First shareholders who receive FBD common stock may decide that they do not want FBD shares and may sell their shares following the distribution. We cannot predict whether shareholders will resell large numbers of FBD shares in the public market following the distribution or how quickly they may resell these shares. If shareholders sell large numbers of FBD shares over a short period of time, or if investors anticipate large sales of FBD shares over a short period of time, the trading price of FBD's common stock could be adversely affected. Substantial sales of Republic First common stock following the distribution may have an adverse impact on the trading price of the Republic First common stock. Some Republic First shareholders may decide that they do not want shares in a bank holding company with banking operations primarily in Pennsylvania and may sell their Republic First common stock following the distribution. If Republic First shareholders sell large numbers of shares of Republic First common stock over a short period of time, or if investors anticipate large sales of Republic First common stock over a short period of time, the trading price of the Republic First common stock could be adversely affected. 18 Risks Related to Owning FBD Common Stock FBD has no operating history as an independent public company and may be unable to operate profitably as a stand-alone company. FBD does not have an operating history as an independent public company. Historically, since FBD's business and the PA Bank's business have been under one parent, they have been able to rely, to some degree, on the resources of each other. Following the distribution, FBD will maintain its own financial, accounting and administrative functions. While it will employ a significant number of key employees of Republic First following the distribution, there can be no assurance that it will be able to put in place successfully the financial and administrative structure necessary to operate as an independent public company, or that the development of such structure will not require a significant amount of management's time and other resources. FBD results of operations will be significantly affected by the ability of its borrowers to repay their loans and many of its national consumer borrowers are considered to be high credit risks. 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: o credit risks of a particular borrower; o changes in economic conditions; o the duration of the loan; and o in the case of a collateralized loan, uncertainties as to the future value of the collateral. FBD endeavors to offer short-term consumer loans and tax refund anticipation loans to the under banked market. These loans are made to borrowers with risky credit histories and such types of loans are often scrutinized by regulators. While FBD only retains short-term loans in its portfolios up to 25% of its capital, reserves an additional 35% against all short-term loans and is indemnified by the companies which service the short-term loans against all litigation, costs or claims arising out of the short-term loan payments, should these companies become financially unable to indemnify FBD against such litigation claims, its financial condition could be adversely affected. FBD's financial condition and results of operations will be adversely affected if the FDIC does not allow it to provide short-term consumer loans. FBD's Board of Directors filed an application with the Federal Reserve Board on August 20, 2003 to withdraw its membership in the Federal Reserve Bank System (the "System") and filed applications with the Federal Deposit Insurance Corporation (the "FDIC") to continue deposit insurance. On September 26, 2003, the FDIC agreed to FBD's continuation of insurance and on September 30, 2003 the Federal Reserve Board agreed to its withdrawal from the System effective September 30, 2003. As part of the transition, FBD entered into a Memorandum of Understanding with the FDIC and the Office of the State Bank Commissioner ("Delaware Commissioner") which Memorandum of Understanding requires, among other things, that in the event the FDIC and the Delaware Commissioner determine that FBD's short-term loan (pay day loans) program is not operated in a safe and sound manner and request in writing that it cease making such short-term loans, it will provide a strategy for exiting the short-term loan program. After discussions with the FDIC and the Delaware Commissioner, FBD's 19 Board of Directors determined to continue the short-term loan program in accordance with the laws of the State of Delaware. Should FBD have to cease such short-term loans pursuant to the Memorandum of Understanding, its financial condition and results of operations would be adversely affected. We are susceptible to lawsuits due to the types of loans we make. Through FBD, we make short-term (payday) loans and tax anticipation loans at very high annualized rates of interest, exceeding 400% per annum in the case of our short-term loans. These types of loans have generated a number of class action and state attorney general lawsuits against other parties. Lawsuits against other parties have charged that loans are usurious and/or that loan disclosures are misleading or in violation of the federal Truth in Lending Act. We are currently a defendant in a lawsuit, which, if successful, could adversely affect our financial condition and/or results of operations. In the case, Canieva Hood v. Santa Barbara Bank & Trust, which is pending in the Superior Court of the State of California for the County of Santa Barbara, Santa Barbara Bank was sued in a class action lawsuit concerning the cross collection agreements between various lenders who participate in tax anticipation loans. Santa Barbara Bank filed cross-claims against the other lenders. Because we receive significant income from such lending, and because the cross collection provisions of our refund anticipation loan agreements generate income and limit loan losses, should we lose this lawsuit or any other future lawsuits involving our short-term loans or refund anticipation loans, our financial condition and/or results of operations could be adversely affected. FBD's financial condition and results of operations will be adversely affected if its allowance for loan losses is not sufficient to absorb actual losses. There is no precise method of predicting loan losses. FBD 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 FBD's financial condition and results of operations. FBD attempts to maintain an appropriate allowance for loan losses to provide for estimated losses in its loan portfolio. FBD periodically determines the amount of the allowance for loan losses based upon consideration of several factors, including: o an ongoing review of the quality, mix and size of the overall loan portfolio; o historical loan loss experience; o evaluation of non-performing loans; o assessment of economic conditions and their effects on the existing portfolio; and o the amount and quality of collateral, including guarantees, securing loans. Control by Management/Principal Shareholders A total of 2,243,964 shares, or 28.1%, calculated as of September 30, 2004, of the outstanding shares of Common Stock will be owned beneficially by the directors and executive officers of FBD following the distribution. Therefore, to the extent these shareholders vote together, they will have the ability to significantly effect the election of FBD's Board of Directors and other corporate actions requiring shareholder approval. In addition, a total of 2,243,964 shares, or 28.1%, as of September 30, 2004, of our outstanding shares of Common Stock are beneficially owned by our directors and executive officers. Therefore, to the extent these shareholders 20 vote together, they will have the ability to significantly effect the election of our Board of Directors and other corporate actions requiring shareholder approval. We could be adversely affected by actions taken by our regulators or by changes in the law. We operate in a highly regulated environment and are subject to supervision and regulation by several governmental regulatory agencies, including the Federal Deposit Insurance Corporation (the "FDIC") and the Delaware State Bank Commissioner. Regulations that apply to us are generally intended to provide protection for depositors and customers rather than for investors. We 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 we operate could adversely affect the banking industry as a whole and our operations in particular. For example, regulatory changes could limit our growth and our return to investors by restricting such activities as: o the payment of dividends; o mergers with or acquisitions by other institutions; o investments; o loans and interest rates; and o providing securities, insurance or trust services. Also, legislation may change present capital requirements, which could restrict our activities and require us to maintain additional capital. We 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 our business. Legislation has been adopted in some states regarding the practice of payday lending, or "short-term consumer lending," in which we engage. Some of this legislation purports to render unlawful the loans we make. For example, as a result of the adoption of the Georgia Act, addressing payday lending to Georgia residents, we have had to suspend making payday loans in that State, at least unless and until we obtain a judicial ruling to the effect that federal law authorizes these loans and preempts restrictions in the Georgia Act. See "Risk Factors - We are susceptible to lawsuits due to the types of loans we make." Restrictive new laws in Delaware and/or other states where we offer short-term loans, and/or judicial decisions calling into question the legal basis for our payday lending program, could have a material adverse effect on our results of operations and/or financial condition. In the alternative, should the possibility of restrictive legislation become less likely, or should permissive legislation be adopted, a larger number of competitors may begin offering the product and increased competition could result in lower market share and/or fees. The FDIC is the only federal banking agency that currently permits depository institutions under its supervision to be involved in payday lending. While it has issued guidelines articulating its position that state banks may engage in payday lending, subject to specified constraints designed to preserve the safety and soundness of their activities, there can be no guarantee that the FDIC will continue to permit state banks to engage in payday lending and/or that the FDIC will not tighten its guidelines to a point where it is not economically or practically feasible to continue participating in payday lending. Additionally, there can be no assurance that the FDIC will not conclude that we are in violation of the 21 guidelines. Should any of these things occur, our financial condition and/or results of operations could be adversely affected. As is the case with payday loans, there exists the possibility that states (or local jurisdictions) will enact laws impairing our ability to make refund anticipation loans, and/or that state authorities or courts will interpret existing laws in an adverse manner. The adoption of restrictive laws or interpretations, and/or adverse judicial decisions, could potentially have an adverse effect on our refund anticipation lending and, hence, on our financial condition and/or results of operations. Following the distribution, FBD will continue to offer short-term (payday) loans. FBD's results of operations could be adversely affected due to significant competition. FBD 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 FBD's market area is highly competitive. The increasingly competitive environment is a result of: o changes in regulation; o changes in technology and product delivery systems; and o the accelerated pace of consolidation among financial services providers. FBD will compete for loans, deposits and customers with various bank and non-bank financial services providers, many of which are larger in terms of total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than we offer. Competition with such institutions may cause FBD to increase its deposit rates or decrease its interest rate spread on loans it originates. Certain provisions of FBD's Articles of Association, Bylaws change in control agreements and Delaware law may discourage takeovers. FBD's Articles of Association and Bylaws contain certain anti-takeover provisions that may make 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, FBD's Articles of Association and Bylaws: o classify its board of directors into three groups, so that stockholders elect only one-third of the board each year; o permit stockholders to remove directors only for cause and only upon the vote of the holders of at least 75% of the voting shares; o require stockholders to give advance notice to nominate candidates for election to FBD's board of directors or to make stockholder proposals at a stockholders' meeting; and o require the vote of the holders of at least 75% of its voting shares for stockholder amendments to its Bylaws. In addition, the provisions of Section 203 of the Delaware General Corporate Law govern FBD. These provisions may restrict stockholders owning 15% or more of FBD's outstanding common stock from merging or combining with it. 22 These provisions of FBD's Articles of Association and Bylaws and of Delaware law could discourage potential acquisition proposals and could delay or prevent a change in control, even though a majority of its stockholders may consider such proposals desirable. Such provisions could also make it more difficult for third parties to remove and replace the members of its board of directors. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market value of FBD's common stock, and may also inhibit increases in the trading price of FBD's common stock that could result from takeover attempts or speculation. In addition, in the event of certain hostile fundamental changes, all senior officers of the Company and the PA Bank are entitled to receive payments equal to two times such officers annual base salary in the event they determine not to continue their employment. Certain provisions of the Tax Disaffiliation Agreement may discourage takeovers. FBD will enter into the Tax Disaffiliation Agreement which will provide for FBD to indemnify Republic First for all taxes and liabilities incurred as a result of any post-distribution action or omission by FBD contributing to an Internal Revenue Service determination that the distribution was not tax-free. The Internal Revenue Service might determine that the distribution was not tax-free, giving rise to FBD's indemnification obligation, unless Republic First were able to rebut effectively the presumption that a change in control transaction involving FBD and occurring within the four-year period beginning two years prior to the distribution date is pursuant to the same plan or series of related transactions as the distribution. These agreements on FBD's part may have the effect of discouraging or preventing an acquisition of FBD or a disposition of its businesses, which may in turn depress the market price for FBD's common stock. FORWARD LOOKING STATEMENTS This document contains "forward-looking statements." Republic First bases these forward-looking statements on its expectations and projections about future events, which Republic First has derived from the information currently available. In addition, from time to time Republic First or its representatives may make forward-looking statements orally or in writing. Furthermore, forward-looking statements may be included in Republic First's filings with the SEC or press releases or oral statements made by or with the approval of one of its executive officers. These forward-looking statements relate to future events or Republic First's future performance, including but not limited to: o benefits resulting from the spin-off; o possible or assumed future results of operations; o future revenue and earnings; and o business and growth strategies. Forward-looking statements are those that are not historical in nature, particularly those that use terminology such as "may," "could," "will," "likely," "believes," "expect," "estimate," "project," "anticipate," "should," "intend," "probability," "risk," "target," "objective" and similar expressions or variations on such expressions. The forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. For example, risks and uncertainties can arise with changes in: (i) general economic conditions, including their impact on capital expenditures; (ii) business conditions in the financial services industry; (iii) the regulatory environment, including evolving banking industry standards; (iv) rapidly changing technology and competition with community, regional and national 23 financial institutions; (v) new service and product offerings by competitors, price pressures; (vi) our ability to consummate the distribution; and (vii) similar items. Forward-looking statements are only predictions and speak only as of the date they are made. You should not place undue reliance on forward-looking statements. The forward-looking events discussed in this document and other statements made from time to time by Republic First or its representatives may not occur, and actual events and results may differ materially and are subject to risks, uncertainties and assumptions about Republic First. Except for their ongoing obligations to disclose material information as required by the federal securities laws, Republic First is not obligated to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document and in other statements made from time to time by Republic First or its representatives might not occur. For a description of additional factors affecting Republic First's business, see Republic First's periodic reports filed with the Securities and Exchange Commission. MANAGEMENT Executive Officers and Directors Our board of directors consists of nine members. Each of our directors is currently, and will continue to be, a director of both Republic First and FBD. Certain of our executive officers will serve as executive officers of FBD. Listed below is certain information concerning our directors and executive officers.
Name Age Position ------------------------- --- ---------------------------------------------- Harry D. Madonna 62 Chairman, Chief Executive Officer and Director Kenneth J. Adelberg 51 Director William W. Batoff 69 Director Robert J. Coleman 67 Director Louis J. DeCesare 44 Executive Vice President Paul Frenkiel 52 Chief Financial Officer Lyle W. Hall, Jr. 59 Director Alonzo Primus 34 Executive Vice President Neal I. Rodin 59 Director Steven J. Shotz 59 Director Barry L. Spevak 43 Director Paul Verdi 42 Executive Vice President Harris Wildstein, Esq. 58 Director
24 Mr. Madonna has been the Chairman of Republic First since 1988 and has been the Chairman of FBD since 1999. On January 1, 2002, Mr. Madonna became FBD's and Republic First's President and Chief Executive Officer. Mr. Madonna has been Of Counsel to Spector Gadon & Rosen, P.C., a general practice law firm located in Philadelphia, Pennsylvania, since January 2002, and, prior to that, was a Partner of Blank Rome Comisky & McCauley LLP, a general practice law firm located in Philadelphia, Pennsylvania. Mr. Adelberg has been a director since 1999, and has been the President of HiFi House Group of Companies, a corporation specializing in audio and video electronics, since 1976. Mr. Batoff has been a director since 1988 and has been a director of FBD since 1999. Mr. Batoff is also a Managing Director of William W. Batoff Associates, a government relations consulting firm, since 1996. Mr. Batoff has been a Senior Consultant of Cassidy & Associates, a government relations consulting firm, since 1972, and has been the sole proprietor of Batoff Enterprise Real Estate, a real estate brokerage and management company, since 1975. Mr. Coleman has been a director since April 2003. Mr. Coleman has been the Chairman and Chief Executive Officer of Marshall, Dennehey, Warner, Coleman & Goggin, a defense litigation law firm, since 1974. Mr. DeCesare has been the Executive Vice President and Chief Lending Officer of Republic First Bank since November 2003. Prior to that, Mr. DeCesare served as a Vice President of Commercial Lending of Commonwealth Bank from 1998 until 2002. He was Regional Vice President of Commerce Bank from 1994 to 1998. Mr. Frenkiel has been the Chief Financial Officer since November 2000 and served as a director from January 2002 until April 2004. Prior to that, Mr. Frenkiel served as the Chief Financial Officer of JeffBanks Inc., a bank holding company, from 1987 until April 2000. Mr. Hall has been a director since 2004. Mr. Hall has been the President of Deilwydd Partners, a real estate development company, since 1987. Mr. Hall is a Certified Public Account and a member of the American Institute of Certified Public Accountants. Mr. Primus has been Executive Vice President of National Consumer Lending of FBD since April 2004. Prior to that, Mr. Primus served as Senior Vice President and Chief Accounting Officer from 2000 until 2001. Mr. Rodin has been a director 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. Mr. Shotz has been a director of Republic First since 1988 and has been a director of FBD since 1999. Mr. Shotz is also the President of Quantum Group, Inc., a venture capital fund, a position he has held since 1995. Mr. Spevak has been a director since 2004. Mr. Spevak has been a partner with Miller Downey Spevak Kaffenberger Limited, a certified public accounting firm, since 1991. Mr. Verdi has been Executive Vice President and Chief Retail Banking Officer since September 1994. Prior to that, Mr. Verdi served as a Vice President/Area Manager for First Fidelity Bank from 1986 until 1994. 25 Mr. Wildstein has been a director since 1988 and has been a director of FBD since 1999. Mr. Wildstein has also been the Vice President of R&S Imports, Ltd., an automobile dealership since 1977 and President of HVW, Inc., an automobile dealership, since 1982. RELATED PARTY TRANSACTIONS All of the directors of FBD will serve as directors of Republic First following the spin-off and distribution. In addition, certain of Republic First's executive officers served, and will continue to serve, as executive officers of FBD following the distribution. Certain of the directors of Republic First and/or their affiliates have loans outstanding from the PA Bank. All such loans were made in the ordinary course of the PA Bank's business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and, in the opinion of management, do not involve more than the normal risk of collectability or present other unfavorable features. Mr. Madonna, the Chairman of the Company, President and Chief Executive Officer of Republic First and FBD, is also "Of Counsel" to the law firm of Spector Gadon & Rosen, P.C., Philadelphia, PA (the "Law Firm"). Mr. Madonna receives a salary from the Law Firm. Mr. Madonna has an agreement to work only on a limited time basis, which is primarily to maintain relationships with former clients and new clients referred by Mr. Madonna. In addition, the Company and the PA Bank utilize the services of the Law Firm for certain legal matters. Rates charged by the Law Firm to Republic First, FBD and the PA Bank are consistent with the rates charged by the Law Firm to other clients. Following the spin-off, there will remain in place a number of inter-company agreements between FBD and Republic First. The material intercompany agreements consist of the following: (i) Financial Accounting and Reporting Services Agreement dated July 31, 2004, (ii) Compliance Services Agreement dated July 31, 2004, (iii) Operations and Data Processing Services Agreement dated July 31, 2004 and (iv) Human Resources and Payroll Services Agreement dated July 31, 2004. Also, the ten-year agreements between the companies dealing with the PA Bank's purchase of participations in tax anticipation loans by FBD and for the PA Bank to act as the sponsor for FBD's Visa(R) and Mastercard(R) credit cards are material and will remain in effect. In addition, at about the time of the spin-off, FBD will form a wholly owned subsidiary which will employ all the staff service employees which service PA Bank and FBD. The subsidiary will enter into agreements with both PA Bank and FBD to provide all required services. All of the agreements are currently in place and will be assigned to the subsidiary. The terms of the agreements are based on an allocation of time to the appropriate entity. DESCRIPTION OF CAPITAL STOCK Common Stock General. We are authorized to issue 20,000,000 shares of common stock, $0.01 par value per share. Our common stock is traded on the Nasdaq National Market. Voting and Other Rights. The holders of our common stock are entitled to one vote per share, and in general a majority of votes cast with respect to a matter is sufficient to authorize action upon routine matters. Directors are elected by a plurality of the votes cast, and each shareholder entitled to vote in such election is entitled to vote each share of stock for as many persons as there are directors to be elected. In elections of directors, shareholders do not have the right to cumulate their votes. In the event of liquidation, holders of our common stock would be entitled to receive pro rata any assets legally available for distribution to stockholders with respect to shares held by them, subject to any prior rights of the holders of any shares of our preferred stock then outstanding. 26 Our common stock does not carry any preemptive rights, redemption privileges, sinking fund privileges or conversion rights. The voting and other rights of FBD's common stock are the same as the comparable rights for Republic First's common stock and as described in this section, "Voting and Other Rights," except that FBD directors are elected by a majority vote of the total number of FBD shares issued and outstanding. Where You Can Find More Information We file annual, quarterly, current and special reports, proxy statements and other information with the SEC. You may read and copy materials that we have filed with the SEC at the SEC public reference room located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public on the SEC's internet website at http://www.sec.gov. 27 INDEX TO FINANCIAL STATEMENTS OF FIRST BANK OF DELAWARE Independent Auditors' Reports Balance Sheets as of December 31, 2003 and 2002 Statements of Income for the years ended December 31, 2003, 2002, and 2001 Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001 Statements of Changes in Shareholders' Equity for the years ended December 31, 2003, 2002, and 2001 Notes to Financial Statements F-1 Independent Auditors' Report ---------------------------- Board of Directors and Shareholder First Bank of Delaware We have audited the balance sheets of First Bank of Delaware as of December 31, 2003 and 2002, and the related statements of income, changes in shareholder's equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 financial statements referred to above present fairly, in all material respects, the financial position of First Bank of Delaware as of December 31, 2003 and 2002, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Parente Randolph, LLC /s/ Parente Randolph, LLC Philadelphia, Pennsylvania December 1, 2004 F-2
FIRST BANK OF DELAWARE BALANCE SHEETS December 31, 2003 and 2002 (dollars in thousands, except share data) 2003 2002 ------- ------- ASSETS: Cash and due from banks $ 5,452 $ 3,035 Interest-bearing deposits with banks 154 186 Federal funds sold 4,890 7,319 ------- ------- Total cash and cash equivalents 10,496 10,540 Investment securities available for sale, at fair value 1,852 2,578 Restricted investment securities, at amortized cost (fair value of $142,000) -- 142 Loans receivable, (net of allowance for loan losses of $1,363 and $566, respectively) 27,032 28,630 Premises and equipment, net 1,320 1,355 Accrued interest receivable 185 159 Business owned life insurance 1,534 -- Other assets 2,118 361 ------- ------- Total Assets $44,537 $43,765 ======= ======= LIABILITIES AND SHAREHOLDER'S EQUITY: Liabilities: Deposits: Demand -- non-interest-bearing $ 7,740 $ 4,660 Demand -- interest-bearing 2,779 1,347 Money market and savings 12,318 9,710 Time less than $100,000 3,654 14,126 Time over $100,000 6,756 4,884 ------- ------- Total Deposits 33,247 34,727 Accrued interest payable 32 125 Other liabilities 3,198 3,049 ------- ------- Total Liabilities 36,477 37,901 ------- ------- Commitments and contingencies Shareholder's Equity: Common stock, par value $1 per share; 500,000 shares authorized, issued, and 500 500 outstanding Additional paid in capital 4,657 4,657 Retained earnings 2,867 644 Accumulated other comprehensive income 36 63 ------- ------- Total Shareholder's Equity 8,060 5,864 ------- ------- Total Liabilities and Shareholder's Equity $44,537 $43,765 ======= ======= (See notes to financial statements)
F-3
FIRST BANK OF DELAWARE STATEMENTS OF INCOME For the years ended December 31, 2003, 2002 and 2001 (dollars in thousands, except per share data) 2003 2002 2001 ------- --------- -------- Interest income: Interest and fees on loans $2,476 $2,203 $2,294 Interest on federal funds sold and other interest-earning assets 78 166 199 Interest and dividends on investment securities 123 170 49 ------- --------- -------- 2,677 2,539 2,542 ------- --------- -------- Interest expense: Demand - interest bearing 4 2 3 Money market and savings 127 94 111 Time less than $100,000 283 561 746 Time over $100,000 85 198 506 Other borrowings 5 2 -- ------- --------- -------- 504 857 1,366 ------- --------- -------- Net interest income 2,173 1,682 1,176 Provision for loan losses 937 260 192 ------- --------- -------- Net interest income after provision for loan losses 1,236 1,422 984 ------- --------- -------- Non-interest income: Loan advisory and servicing fees 33 37 84 Service fees on deposit accounts 111 112 87 Short-term loan fee income 6,147 2,228 1,654 Tax refund products 487 472 283 Other income 34 -- -- ------- --------- -------- 6,812 2,849 2,108 ------- --------- -------- Non-interest expenses: Salaries and employee benefits 2,317 1,537 1,014 Occupancy 190 188 166 Depreciation 315 181 139 Legal 213 256 217 Advertising 29 30 59 Data processing and operational expense 732 251 96 Audit expense 127 21 89 Delaware franchise tax 173 141 -- Other operating expenses 512 404 396 ------- --------- -------- 4,608 3,009 2,176 ------- --------- -------- Income before income taxes 3,440 1,262 916 ------- --------- -------- Provision for income taxes 1,217 462 302 ------- --------- -------- Net Income $2,223 $ 800 $ 614 ======= ========= ======== Earnings per share: Basic $ .31 $ .12 $ .09 ------- --------- -------- Diluted $ .30 $ .11 $ .09 ======= ========= ======== (See notes to financial statements)
F-4
FIRST BANK OF DELAWARE STATEMENTS OF CASH FLOWS For the years ended December 31, 2003, 2002 and 2001 (dollars in thousands) 2003 2002 2001 -------- -------- -------- Cash flows from operating activities: Net income $ 2,223 $ 800 $ 614 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 937 260 192 Depreciation 315 181 139 Amortization of securities 13 8 -- (Increase) in value of business owned life insurance (34) -- -- (Increase) decrease in other assets (1,783) 626 (484) Increase in accrued expenses and other liabilities 56 208 2,470 -------- -------- -------- Net cash provided by operating activities 1,727 2,083 2,931 -------- -------- -------- Cash flows from investing activities: Purchase of securities: Restricted -- -- (40) Available for sale (614) (3,582) -- Proceeds from sales, maturities, and calls of securities: Restricted 142 -- -- Available for sale 1,300 1,058 -- Net decrease (increase) in loans 661 (4,302) (3,743) Purchase of business owned life insurance (1,500) -- -- Premises and equipment expenditures (280) (298) (198) -------- -------- -------- Net cash used in investing activities (291) (7,124) (3,981) -------- -------- -------- Cash flows from financing activities: Capital contribution -- -- 1,000 Net increase in demand, money market and savings deposits 7,121 6,671 2,431 Net (decrease) increase in time deposits (8,601) (1,801) 2,877 -------- -------- -------- Net cash (used in) provided by financing activities (1,480) 4,870 6,308 -------- -------- -------- (Decrease) increase in cash and cash equivalents (44) (171) 5,258 Cash and cash equivalents, beginning of year 10,540 10,711 5,453 -------- -------- -------- Cash and cash equivalents, end of year $ 10,496 $ 10,540 $ 10,711 -------- -------- -------- Supplemental disclosures: Interest paid $ 597 $ 974 $ 1,483 ======== ======== ======== Taxes paid $ 1, 069 $ 438 $ -- ======== ======== ======== (See notes to financial statements)
F-5
FIRST BANK OF DELAWARE STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY For the years ended December 31, 2003, 2002 and 2001 (dollars in thousands) Accumulated Additional Other Total Comprehensive Common Paid in Retained Comprehensive Shareholder's Income/(loss) Stock Capital Earnings Income (loss) Equity -------------------------------------------------- --------------------------------- Balance January 1, 2001.......... $500 $3,657 $(770) - $3,387 -------------------------------- ------------- ------------ Total other comprehensive - - - - - income, net of reclassification adjustments and taxes............ Capital contribution - 1,000 - - 1,000 Total other comprehensive income, net of reclassification adjustments and taxes............ $ - - - - - - Net income for the year.......... 614 - - 614 - 614 ------------- Total comprehensive income....... $ 614 - - - - - ============= -------------------------------- ------------- ------------ Balance December 31, 2001........ $ 500 $ 4,657 $ (156) - $ 5,001 ------------------------------------------------------------------------------------------------------------------ Total other comprehensive income, net of reclassification adjustments and taxes............ $ 63 - - - 63 63 Net income for the year.......... 800 - - 800 - 800 ------------- Total comprehensive income....... $ 863 - - - - - ============= -------------------------------- ------------- ------------ Balance December 31, 2002........ $ 500 $ 4,657 $ 644 $ 63 $ 5,864 ------------------------------------------------------------------------------------------------------------------ Total other comprehensive income, net of reclassification adjustments and taxes............ $ (27) - - - (27) (27) Net income for the year.......... 2,223 - - 2,223 - 2,223 ------------- Total comprehensive income....... $ 2,196 - - - - - ============= -------------------------------- ------------- ------------ Balance December 31, 2003 ....... $ 500 $ 4,657 $2,867 $ 36 $ 8,060 ================================ ============= ============ (See notes to financial statements)
F-6 FIRST BANK OF DELAWARE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization: First Bank of Delaware ("DE Bank"), a Delaware State chartered Bank, is located at Brandywine Commons II, Concord Pike and Rocky Run Parkway in Brandywine, New Castle County Delaware. The DE Bank offers a variety of banking services and financial products in Delaware, and additionally offers nationally, short-term consumer loans and other loan products. DE Bank is a wholly owned subsidiary of Republic First Bancorp, Inc., which is a two-bank holding company. DE Bank encounters vigorous competition for market share from bank holding companies, other community banks, thrift institutions and other non-bank financial organizations, such as mutual fund companies, insurance companies and brokerage companies. DE Bank is subject to regulations of certain state and federal agencies. These regulatory agencies periodically examine the DE Bank for adherence to laws and regulations. As a consequence, the cost of doing business may be affected. 2. Summary of Significant Accounting Policies: Basis of Presentation: DE Bank has no subsidiaries. Its financial statements have been presented in accordance with accounting principles generally accepted in the United States of America. Risks and Uncertainties and Certain Significant Estimates: DE Bank 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 the Bank are subject to risks and uncertainties surrounding its 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, which may cause significant fluctuations in interest margins. Short-term consumer loans were first offered through the DE Bank in 2001. At December 31, 2003, there were approximately $1.5 million of short-term consumer loans outstanding, which were originated in Georgia. The DE Bank also originates loans in Texas, California, Arizona and Ohio, which are sold to third parties. Legislation eliminating, or limiting interest rates upon short-term consumer loans has from time to time been proposed, primarily as a result of fee levels which approximate 17% per $100 borrowed, for two week terms. If such proposals cease, a larger number of competitors may begin offering the product, and increased competition could result in lower fees. Further, the DE Bank uses a small number of marketers under contracts, which can be terminated upon short notice, under various circumstances. The impact of negative conditions influencing the above factors, if any, is not possible to predict. In 2001, the DE Bank began offering two tax refund products with Liberty Tax Service. Liberty Tax Service is a nationwide tax service provider that prepares and electronically files federal and state income tax returns ("Tax Refund Products"). Tax Refund Products consist of accelerated check refunds ("ACRs"), and refund anticipation loans ("RALs"). There can be no assurance that revenue levels will increase significantly in future periods. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are made by management in determining the allowance for loan losses, carrying values of other real estate owned and income taxes. Consideration is given to a variety of factors in establishing these estimates. In estimating the allowance for loan losses, management considers current economic conditions, diversification of the loan portfolio, delinquency statistics, results of internal loan reviews, borrowers' perceived financial and managerial strengths, the adequacy of underlying collateral, if collateral dependent, or present value of future cash flows and other relevant factors. Since the allowance for loan losses and carrying value of other real estate owned are dependent, to a great extent, on the general economy and other conditions that may be beyond the Bank'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. F-7 The DE Bank is subject to federal and state regulations governing virtually all aspects of its activities, including but not limited to, lines of business, liquidity, investments, the payment of dividends, and others. Such regulations and the cost of adherence to such regulations can have a significant impact on earnings and financial condition. Cash and Cash Equivalents: For purposes of the statements of cash flows, the DE Bank considers all cash and due from banks, interest-bearing deposits with an original maturity of ninety days or less and federal funds sold to be cash and cash equivalents. Restrictions on Cash and Due From Banks: The Banks are 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, 2003, and 2002, were $50,000 at each of those dates. These requirements were satisfied through the restriction of vault cash and a balance at the Federal Reserve Bank of Philadelphia. Investment Securities: Debt and equity investment securities are classified in one of three categories, as applicable, and accounted for as follows: debt securities which DE Bank has the positive intent and ability to hold to maturity are classified as "securities held to maturity" and are reported at amortized cost; debt and equity securities that are bought and sold in the near term are classified as "trading" and are reported at fair value with unrealized gains and losses included in earnings; and debt and equity securities not classified as either held to maturity or trading securities are classified as "investment securities available for sale" and are reported at fair value with net unrealized gains and losses, net of tax, reported as a separate component of shareholder's equity. Gains or losses on disposition are based on the net proceeds and cost of securities sold, adjusted for amortization of premiums and accretion of discounts, using the specific identification method. DE Bank did not have any investment securities designated as trading during 2003, 2002 or 2001. Restricted investment securities are carried at cost, which approximates fair value. Loans and Allowance for Loan Losses: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is calculated based upon the principal amounts outstanding. DE Bank 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 DE Bank 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 DE Bank accounts for, its impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures. This standard requires that a creditor measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Regardless of the measurement method, a creditor must measure impairment based on the fair value of the collateral when the creditor determines that foreclosure is probable. F-8 Short-term consumer loans are considered to be small balance homogeneous loans. These loans and categories are collectively evaluated for impairment. Commercial business and real estate loans are individually measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral dependent loans are measured for impairment based on the fair market value of the collateral. The DE Bank accounts for the transfers and servicing of 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. On July 6, 2001, Staff Accounting Bulletin (SAB) No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues was issued. SAB No. 102 provides guidance on the development, documentation and application of a systematic methodology for determining the allowance for loans and leases in accordance with US GAAP and is effective upon issuance. The adoption of SAB No. 102 did not have a material impact on DE Bank's financial positions or results of operations. Fees earned on short-term loans, which are not sold are recorded as interest income. At December 31, 2003, there were approximately $1.4 million of these loans outstanding. The majority of short-term loans are sold to third parties. The DE Bank records fees for on sold loans as non-interest income. The DE Bank had total short-term loan participations sold of $16.2 million at December 31, 2003 and $4.7 million at December 31, 2002. DE Bank evaluated these sales and determined that they qualified as such under FASB 140. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture and equipment is calculated over the estimated useful life of the asset using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or terms of their respective leases, using the straight-line method. Repairs and maintenance are charged to current operations as incurred, and renewals and betterments are capitalized. DE Bank adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets on January 1, 2002. SFAS No. 144 retains the existing requirements to recognize and measure the impairment of long-lived assets to be held and used or to be disposed of by sale. SFAS No. 144 changes the requirements relating to reporting the effects of a disposal or discontinuation of a segment of a business. The adoption of this statement did not have a material impact on the DE Bank's financial condition or results of operations. Other Real Estate Owned: Other real estate owned consists of foreclosed assets and is stated at the lower of cost or estimated fair value less estimated costs to sell the property. Costs to maintain other real estate owned, or deterioration in value of the properties are recognized as period expenses. The DE Bank had no other real estate owned at either December 31, 2003 or 2002. Business Owned Life Insurance: The DE Bank utilizes business owned life insurance (BOLI) to purchase life insurance on certain employees. The DE Bank is the owner of the policies, which provide certain tax benefits. At December 31, 2003, it owned $1,534,000 in BOLI, and previously did not utilize that life insurance. In 2003, DE Bank recognized $34,000 in related income. Advertising Costs: It is DE Bank's policy to expense advertising costs in the period in which they are incurred. Income Taxes: The DE Bank 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 DE Bank's assets and liabilities at the tax rates expected to be in effect when the temporary differences are realized or settled. 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. Earnings Per Share: Republic First Bancorp, Inc. (Republic First) is in the process of "spinning-off" DE Bank, whereby shareholders and stock option holders of Republic First will receive identical share and option ownership in DE Bank. Earnings per share computations are based upon the equity structure of Republic First. Until the spin-off is consummated, Republic First is the sole shareholder of First Bank of Delaware. F-9 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"). Common stock equivalents consist of dilutive stock options granted through the holding company's stock option plan. The following table is a reconciliation of the numerator and denominator used in calculating basic and diluted EPS. Common stock equivalents, which are antidilutive are not included for purposes of this calculation. At December 31, 2003, 2002, and 2001, there were 0, 75,724 at $6.02 to $8.26 per share, and 126,324 at $4.55 to $8.26 per share of stock options to purchase common stock, which were not included in the computation of earnings per share because the option price is greater than the average market price, respectively.
(In thousands, except per share data) 2003 2002 2001 --------- --------- --------- Net Income (numerator for basic and diluted earnings per share) $2,223 $800 $614 ========= ========= ========= Per Per Per Shares Share Shares Share Shares Share ------------ ------------ ------------ ------------ ------------ ---------- Weighted average shares outstanding for the period (denominator for basic earnings per share).... 7,075,849 6,825,860 6,801,246 Earnings per share -- basic....................... $ .31 $ .12 $ .09 Effect of dilutive stock options................. 325,645 280,367 198,437 ------------ ------------ ------------ Effect on basic earnings per share of CSE........ (.01) (.01) - ------------ ------------ ---------- Weighted average shares outstanding- diluted 7,401,494 7,106,227 6,999,683 ============ ============ ============ Earnings per share -- diluted..................... $ .30 $ .11 $ .09 ============ ============ ========== The above have been restated for the Republic First 10% stock dividend paid August 24, 2004. Comprehensive Income The tax effects allocated to each component of "Comprehensive Income" are as follows: For the year ended December 31, 2003 (Dollars in thousands) Before Tax Net of Tax Amount Benefit Tax Amount ----------- ----------- ---------- Unrealized losses on securities: Unrealized holding losses arising during the period..................................................... $ (40) $ 13 $ (27) Less: Reclassification adjustment for gains Included in net income......................................... - - - ----------- ----------- ---------- Other comprehensive loss....................................... $ (40) $ 13 $ (27) =========== =========== ========== For the year ended December 31, 2002 (Dollars in thousands) Before Tax Net of Tax Amount Expense Tax Amount ----------- ----------- ---------- Unrealized gains on securities: Unrealized holding gains arising during the period..................................................... $ 95 $ (32) $ 63 Less: Reclassification adjustment for gains Included in net income......................................... - - - ----------- ----------- ---------- Other comprehensive income..................................... $ 95 $ (32) $ 63 =========== =========== ========== Net income and comprehensive income were the same for the year ended December 31, 2001.
F-10 Recent Accounting Pronouncements: The DE Bank adopted FIN 45 Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others on January 1, 2003. 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 DE Bank has financial and performance letters of credit. Financial letters of credit require the DE Bank to make payment if the customer's financial condition deteriorates, as defined in the agreements. Performance letters of credit require DE Bank to make payments if the customer fails to perform certain non-financial contractual obligation. DE Bank previously did not record a liability, except for the initial fees received, when guaranteeing obligations unless it became probable that DE Bank would have to perform under the guarantee. FIN 45 applies prospectively to guarantees DE Bank issues or modifies subsequent to December 31, 2002. The maximum potential undiscounted amount of future payments of these letters of credit as of December 31, 2003 is $279,000 and they all expire in 2004. Amounts due under these letters of credit would be reduced by any proceeds that DE Bank would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. The DE Bank adopted the Statement of Financial Accounting Standard 149 (SFAS No. 149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities, on July 1, 2003. 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. Statement 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. SFAS No. 149 is effective for contracts entered into or modified after September 30, 2003. DE Bank periodically enters into commitments with its customers, which it intends to sell in the future. Adoption of FAS 149 did not have a material impact on DE Bank's financial statements. The FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, on May 15, 2003. SFAS No. 150 changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. SFAS No. 150 is effective for public companies for financial instruments entered into or modified after May 31, 2003 and is effective at the beginning of the first interim period beginning after June 15, 2003. Management has not entered into any financial instruments that would qualify under SFAS No. 150. Management does not anticipate the adoption of SFAS No. 150 to have a material impact on DE Bank's financial position or results of operations. In October 2003, the AICPA issued SOP 03-3 Accounting for Loans or Certain Debt Securities Acquired in a Transfer. SOP 03-3 applies to a loan with evidence of deterioration of credit quality since origination acquired in a transfer for, which it is probable that at acquisition, DE Bank will be unable to collect all contractually required payments receivable. SOP 03-3 requires that DE Bank recognize the excess of all cash flows expected at acquisition over the investor's initial investment in the loan as interest income on a level yield basis over the life of the loan as the accretable yield. The loan's contractual required payments receivable in excess of the amount of its cash flows excepted at acquisition (non-accreditable difference) should not be recognized as an adjustment to yield, a loss accrual or a valuation allowance for credit risk. SOP 03-3 is effective for loans acquired in fiscal years beginning after December 31, 2004. Early adoption is permitted. Management does not anticipate that adoption of SOP 03-3 will have a material impact on the DE Bank as it generally does not purchase loans, to which SOP 03-3 would apply. The DE Bank adopted EITF 03-1, The Meaning of Other than Temporary Impairment and Its Application to Certain Investments as of December 31, 2003. EITF 03-1 includes certain disclosures regarding quantitative and qualitative disclosures for investment securities accounted for under FAS 115, Accounting for Certain Investments in Debt and Equity Securities that are impaired at the balance sheet date, but an other-than-temporary impairment has not been recognized. The disclosures under EITF 03-1 are required for financial statements for years ending after December 15, 2003 and are included in these financial statements. F-11
3. Investment Securities: Investment securities available for sale as of December 31, 2003, are as follows: Gross Gross Amortized Cost Unrealized Unrealized Fair (Dollars in thousands) Gains Losses Value ---------------------------- ------------- ---------- Mortgage Backed Securities................................ $ 1,797 $ 55 $ - $ 1,852 ------------ ------------ ------------- ---------- Total................................................ $ 1,797 $ 55 $ - $ 1,852 ============ ============ ============= ========== Investment securities available for sale as of December 31, 2002, are as follows: Gross Gross Unrealized Unrealized Fair (Dollars in thousands) Amortized Cost Gains Losses Value ---------------------------- ------------- ---------- Mortgage Backed Securities................................ $ 2,483 $ 95 $ - $ 2,578 ------------ ------------ ------------- ---------- Total................................................ $ 2,483 $ 95 $ - $ 2,578 ============ ============ ============= ========== Restricted investment securities as of December 31, 2002, are as follows: Gross Gross Unrealized Unrealized Fair (Dollars in thousands) Amortized Cost Gains Losses Value ---------------------------- ------------- ---------- Federal Reserve Bank of Philadelphia...................... $ 142 $ - $ - $ 142 ------------ ------------ ------------- ---------- Total................................................ $ 142 $ - $ - $ 142 ============ ============ ============= ========== The securities portfolio consists primarily of mortgage backed securities. The DE Bank's Asset/Liability Committee (ALCO ) reviews all security purchases to ensure compliance with security policy guidelines. In accordance with regulatory requirements, the DE Bank held an investment in stock of the Federal Reserve Bank with a carrying value of $142,000 of December 31, 2002. The DE Bank disposed of the stock in 2003. The maturity distribution of the amortized cost and estimated fair value of investment securities by contractual maturity at December 31, 2003, is as follows: Available for Sale Held to Maturity ---------------------------------- -------------------------- Amortized Estimated Amortized Estimated (Dollars in thousands) Cost Fair Value Cost Fair Value ---------------- ---------------- ------------- ----------- After 10 years............................................ $ 1,797 $ 1,852 $ - $ - ---------------- ---------------- ------------- ----------- Total................................................ $ 1,797 $ 1,852 $ - $ - ================ ================ ============= ===========
Expected maturities will differ from contractual maturities because borrowers have the right to call or prepay obligations with or without prepayment penalties. The DE Bank did not realize any material gains or losses on the sale of securities during 2003, or 2002 or 2001. There were no pledged securities as of December 31, 2003 and 2002. Also, there were no temporarily impaired securities as of those dates. F-12
4. Loans Receivable: Loans receivable consist of the following at December 31, (Dollars in thousands) 2003 2002 ----------------- ---------------- Real Estate - commercial.................................. $ 21,529 $ 22,867 Construction and land development......................... 5,680 5,728 Consumer and other........................................ 1,436 644 ----------------- ---------------- Loans receivable.......................................... 28,645 29,239 Less deferred loan fees................................... (250) (43) Less allowance for loan losses............................ (1,363) (566) ----------------- ---------------- Total loans receivable, net .............................. $ 27,032 $ 28,630 ================= ================
The recorded investment in loans, which are impaired in accordance with SFAS 114, totaled $389,000, $127,000 and $71,000 at December 31, 2003, 2002, and 2001 respectively. The amounts of related valuation allowances were $77,000, $38,000, and $11,000 respectively at those dates. For the years ended December 31, 2003, 2002, and 2001, the average recorded investment in impaired loans was approximately $258,000, $99,000 and $71,000, respectively. The Banks did not realize any interest on impaired loans during 2003, 2002 or 2001. 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, 2003, 2002 and 2001, there were loans of approximately $389,000, $127,000, and $71,000 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 $32,000, $12,000 and $8,000, for 2003, 2002, and 2001 respectively. Loans past due 90 days and accruing totaled $156,000 and $72,000 respectively, at December 31, 2003 and December 31, 2002. The majority of loans outstanding are with borrowers in DE Bank's marketplace, New Castle County Delaware. In addition DE Bank has loans to customers whose assets and businesses are concentrated in real estate. Repayment of DE Bank's loans is in part dependent upon general economic conditions affecting DE Bank's market place and specific industries. DE Bank 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, 2003, DE Bank 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 $16.9 million, which represented 59% of gross loans receivable at December 31, 2003. Various types of real estate are included in this category, including industrial, retail shopping centers, office space, residential multi-family and others. Loan concentrations are considered to exist when their amounts loaned to a multiple number of borrowers engaged in similar activities that management believes would cause them to be similarly impacted by economic or other conditions. Included in loans are loans due from directors and other related parties of $0 (none) and $250,000 at December 31, 2003, and 2002, respectively. All loans made to directors and other related parties 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 year ended December 31, 2003. (Dollars in thousands) 2003 --------- Balance at beginning of year........................ $250 Changes in classification *......................... (250) --------- Balance at end of year.............................. - ========= * The individual to whom this loan was made was no longer a director at December 31, 2003. Harry D. Madonna is of counsel to Spector Gadon and Rosen effective January 2, 2002. In 2003 and 2002, DE Bank paid $0 and $18,486, respectively in legal fees to that firm for a variety of legal matters. F-13
5. Allowance for Loan Losses: Changes in the allowance for loan losses for the years ended December 31, are as follows: (Dollars in thousands) 2003 2002 2001 --------- --------- --------- Balance at beginning of year...................................... $566 $374 $261 Charge-offs....................................................... (145) (68) (96) Recoveries........................................................ 5 - 17 Provision for loan losses......................................... 937 260 192 --------- --------- --------- Balance at end of year............................................ $1,363 $566 $374 ========= ========= ========= 6. Premises and Equipment: A summary of premises and equipment at December 31, is as follows: (Dollars in thousands) Useful lives 2003 2002 ------------ ------------------- Furniture and equipment......................................... 3 to 10 years $1,161 $882 Bank building................................................... 40 years 917 917 Leasehold improvements.......................................... 20 years 17 16 ------------------- 2,095 1,815 Less accumulated depreciation................................... (775) (460) ------------------- Net premises and equipment...................................... $1,320 $1,355 =================== Depreciation expense on premises, equipment and leasehold improvements amounted to $315,000, $181,000 and $139,000 in 2003, 2002 and 2001 respectively. 7. Deposits: The following is a breakdown, by contractual maturities of DE Bank's time certificate of deposits as of December 31, 2003 for the years 2004 through 2008, which is the longest remaining maturity. (Dollars in thousands) 2004 2005 2006 2007 2008 Totals ----------- ----------- ----------- ----------- ----------- ------------- Time Certificates of Deposit......$8,335 $1,924 $91 - $60 $10,410 =========== =========== =========== =========== =========== ============= 8. Income Taxes: The following represents the components of income tax expense (benefit) for the years ended December 31, 2003, 2002 and 2001, respectively. (Dollars in thousands) 2003 2002 2001 --------- --------- --------- Current provision Federal: Current....................................................... $1,470 $ 503 $ 335 Deferred ..................................................... (253) (41) (33) --------- --------- --------- Total provision for income taxes................................... $1,217 $ 462 $ 302 ========= ========= ========= 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% to income before income taxes for the years ended December 31, 2003, 2002 and 2001. (Dollars in thousands) 2003 2002 2001 --------- --------- ---------- Tax provision computed at statutory rate.......................... $1,170 $ 429 $ 311 Business and life insurance....................................... (11) - - Other............................................................. 58 33 (9) --------- --------- ---------- Total provision for income taxes............................. $1,217 $ 462 $ 302 ========= ========= ==========
F-14 The approximate tax effect of each type of temporary difference and carry-forward that gives rise to net deferred tax assets included in the other assets in the DE Bank balance sheets at December 31, 2003 and 2002 are as follows:
2003 2002 --------- --------- Allowance for loan losses......................................... $ 463 $ 192 Depreciation...................................................... (45) (42) Deferred loan costs............................................... (37) (22) Unrealized gains (losses) on investments.......................... (18) (32) --------- --------- Net deferred tax asset............................................ $ 363 $ 96 ========= =========
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 DE Bank will realize the benefits of these deferred tax assets. 9. Financial Instruments with Off-Balance Sheet Risk: DE Bank 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 DE Bank 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 $2.2 million and $5.1 million and standby letters of credit of approximately $279,000 and $421,000 at December 31, 2003, and 2002, respectively. However, commitments may often expire without being drawn upon. Of the $2.2 million of commitments to extend credit at December 31, 2003, 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. DE Bank 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. 10. Commitments: Lease Arrangements As of December 31, 2003, DE Bank had entered into non-cancelable leases expiring through September 30, 2011. 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 ------------ ------------------ 2004..................................... $ 146 2005..................................... 145 2006..................................... 150 2007..................................... 154 2008 .................................... 159 thereafter .............................. 156 ------------------ Total.................................... $ 910 ================== DE Bank incurred rent expense of $153,000, $145,000, and $125,000 for the years ended December 31, 2003, 2002, and 2001, respectively. F-15 Other The DE Bank is 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 DE Bank, if any, resulting from such actions will not have a material effect on the financial condition or results of operations of DE Bank. 11. Regulatory Capital: Dividend payments by the DE Bank are subject to regulation by the Delaware Department of Banking and the Federal Deposit Insurance Act (the "FDIA"). Generally, no dividends may be paid except from "accumulated net earnings" (generally, retained earnings). 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, the DE Bank would be limited to $2.9 million of dividends plus an additional amount equal to its net profit for 2004, up to the date of any such dividend declaration. However, dividends would be further limited in order to maintain capital ratios. The DE Bank has not paid dividends, since its inception. During 2003 the Board of Directors of the DE Bank filed an application with the Federal Reserve Board to withdraw their memberships in the Federal Reserve Bank System and filed an application with the FDIC to continue deposit insurance. The applications were accepted by both regulators such that the, DE Bank is now insured and regulated by the FDIC. As part of the transition, the DE Bank entered into a Memorandum of Understanding with the FDIC and the Office of the State Bank Commissioner ("Delaware Commissioner") which Memorandum of Understanding requires, among other things that in the event the FDIC and the Delaware Commissioner determine that the short-term loan (payday loans) program of the DE Bank is not operated in a safe and sound manner and request in writing that the DE Bank cease making such short-term loans, the DE Bank will provide a strategy for exiting the short-term loan program. After management discussions with the FDIC and the Delaware Commissioner, the Board of Directors of the DE Bank determined to continue the short-term loan program in accordance with the provisions of the guidelines issued by the FDIC and the laws and regulations of the State of Delaware. State and Federal regulatory authorities have adopted standards for the maintenance of adequate levels of capital by banks. Federal banking agencies impose three minimum capital requirements on DE Bank'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 the DE Bank meets, as of December 31, 2003, all capital adequacy requirements to which it is subject. As of December 31, 2003, the FDIC categorized the DE Bank 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 the Bank's category. F-16
The following table presents DE Bank's capital regulatory ratios at December 31, 2003, and 2002: To be well capitalized under For Capital regulatory capital Actual Adequacy Purposes guidelines ----------------------- -------------------- -------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ---------- ---------- ---------- --------- --------- --------- At December 31, 2003 Total risk based capital............................. $8,399 29.06% $2,312 8.00% $2,891 10.00% Tier one risk based capital.......................... 8,025 27.76 1,156 4.00 1,734 6.00 Tier one leverage capital............................ 8,025 16.55 2,410 5.00 2,410 5.00 At December 31, 2002 Total risk based capital............................. 6,143 22.58 2,176 8.00 2,720 10.00 Tier one risk based capital.......................... 5,801 21.33 1,088 4.00 1,632 6.00 Tier one leverage capital............................ 5,801 13.94 2,081 5.00 2,081 5.00
12. Fair Value of Financial Instruments: The disclosure of the fair value of all financial instruments is required, whether or not recognized on the balance sheet, for which it is practical to estimate fair value. In cases where quoted market prices are not available, fair values are based on assumptions including future cash flows and discount rates. Accordingly, the fair value estimates cannot be substantiated, may not be realized, and do not represent the underlying value of DE Bank. The DE Bank uses the following methods and assumptions to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and Cash Equivalents: The carrying value is a reasonable estimate of fair value. Investment Securities Held to Maturity and Available for Sale: For investment securities with a quoted market price, fair value is equal to quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair value is the carrying value. For other categories of loans such as commercial and industrial loans, real estate mortgage and consumer loans, fair value is estimated based on the present value of the estimated future cash flows using the current rates at which similar loans would be made to borrowers with similar collateral and credit ratings and for similar remaining maturities. Business Owned Life insurance: The fair value of business owned life insurance is based on the estimated realizable market value of the underlying investments and insurance reserves. Deposit Liabilities: For checking, savings and money market accounts, fair value is the amount payable on demand at the reporting date. For time deposits, fair value is estimated using the rates currently offered for deposits of similar remaining maturities. Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparts. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar arrangements. F-17 At December 31, 2003 and December 31, 2002, the carrying amount and the estimated fair value of DE Bank's financial instruments are as follows:
December 31, 2003 December 31, 2002 ----------------------------- ----------------------------- Carrying Fair Carrying Fair (Dollars in Thousands) Amount Value Amount Value ------------ --------------- ---------------- ----------- Balance Sheet Data: Financial Assets: Cash and cash equivalents ................. $10,496 $10,496 $10,540 $10,540 Investment securities available for sale .. 1,852 1,852 2,578 2,578 Restricted investment securities .......... -- -- 142 142 Loans receivable, net ..................... 27,032 28,131 28,630 29,675 Business owned life insurance ............. 1,554 1,554 -- -- Accrued interest receivable ............... 185 185 159 159 Financial Liabilities: Deposits: Demand, savings and money market ....... $22,837 $22,837 $15,717 $15,717 Time ................................... 10,410 10,424 19,010 19,159 Accrued interest payable .................. 32 32 125 125 December 31, 2003 December 31, 2002 ----------------------------- ----------------------------- Notional Fair Notional Fair (Dollars in Thousands) Amount Value Amount Value ------------ --------------- ---------- ----------- Off Balance Sheet Data: Commitments to extend credit ..................... $2,183 $2183 $ $ 5,410 Letters of credit ................................ 279 279 421 421
13. Segment Reporting: The DE Bank's reportable segments represent strategic businesses that offer different products and services. The segments are managed separately because each segment has unique operating characteristics, management requirements and marketing strategies. DE Bank has three reportable segments: its community-banking segment; tax refund products; and short-term consumer loans. The community-banking segment is primarily comprised of the results of operations and financial condition of its Delaware commercial and consumer loans. The DE Bank additionally offers national consumer products to the underbanked consumer including tax refund products and short-term consumer loans. Tax refund products are comprised of accelerated check refunds and refund anticipation loans offered by the DE Bank on a national basis to customers of Liberty Tax Services, an unaffiliated national tax preparation firm. Short-term consumer loans are loans made to customers offered by the DE Bank, with principal amounts of $1,500 or less and terms of approximately two weeks. These loans typically are made in states that are outside of Delaware through a small number of marketers and involve rates and fees significantly different from other loan products. Segment information for the years ended December 31, 2003, 2002 and 2001 is as follows:
December 31, 2003 (Dollars in thousands) Short-term First Bank of Tax Refund Consumer Delaware Products Loans Total --------------- -------------------------- ----------- Net interest income ............................. $ 1,588 $ 108 $ 477 $ 2,173 Provision for loan losses........................ 121 - 816 937 Non-interest income.............................. 178 487 6,147 6,812 Non-interest expenses............................ 1,572 633 2,403 4,608 Net income....................................... $ 46 $ (25) $2,202 $ 2,223 ============ ============ =========== =========== Selected Balance Sheet Amounts: Total assets..................................... $38,564 $ - $5,973 $44,537 Total loans, net................................. 26,357 - 675 27,032 Total deposits................................... 33,247 - - 33,247 F-18 December 31, 2002 (Dollars in thousands) Short-term First Bank of Tax Refund Consumer Delaware Products Loans Total --------------- -------------------------- ----------- Net interest income (loss)....................... $ 1,832 $ (21) $ (129) $ 1,682 Provision for loan losses........................ 260 - - 260 Non-interest income.............................. 149 472 2,228 2,849 Non-interest expenses............................ 1,536 355 1,118 3,009 Net income....................................... $ 111 $ 58 $ 631 $ 800 ============ ============ =========== =========== Selected Balance Sheet Amounts: Total assets..................................... $ 42,260 $ $ 1,505 $43,765 - Total loans, net................................. 28,169 - 461 28,630 Total deposits................................... 34,727 - - 34,727 December 31, 2001 (Dollars in thousands) Short-term First Bank of Tax Refund Consumer Delaware Products Loans Total --------------- -------------------------- ----------- Net interest income.............................. $ 1,233 $ $ (57) $ 1,176 - Provision for loan losses........................ 192 - - 192 Non-interest income.............................. 171 283 1,654 2,108 Non-interest expenses............................ 1,707 234 235 2,176 Net income (loss)................................ $ (245) $ 33 $ 826 $ 614 ============ ============ =========== =========== Selected Balance Sheet Amounts: Total assets..................................... $35,311 $ - $2,515 $37,826 Total loans, net................................. 24,209 - 379 24,588 Total deposits................................... 29,857 - - 29,857
14. Transactions with Affiliate DE Bank is a wholly owned subsidiary of Republic First Bancorp, Inc., which also is the 100% owner of Republic First Bank. At both December 31, 2003 and 2002, First Bank of Delaware had outstanding balances of $26.5 million of commercial loans, which had been participated to Republic First Bank. First Bank of Delaware also sells its tax refund loans to Republic First Bank. Such loans are repaid by U.S. Treasury-issued tax refunds paid directly to the bank in the first and second quarters of the year. Accordingly, there were no such loans outstanding at December 31, 2003 and 2002. At December 31. 2003 and 2002, there were $0 and $4.7 million, respectively, of consumer short-term loans outstanding, which had been participated to Republic First Bank. As of December 31, 2003 and 2002 First Bank of Delaware had outstanding balances of $5.2 and $4.0 million of commercial loan balances it had purchased from Republic First Bank. The above loan participations and sales are made at arms length. They are made as a result of lending limit and other regulatory requirements. First Bank of Delaware also maintains a correspondent bank deposit account with Republic First Bank. At December 31, 2003 and 2002, balances amounted to $126,000 and $151,000 respectively. At December 31, 2003 and 2002 First Bank of Delaware had daily federal funds balances with Republic First Bank, in respective amounts of $4.9 and $0 million. DE Bank employees are allowed to participate in a 401(k) plan sponsored by Republic First Bank. The expense related to this plan was $27,000, $23,000, and $17,000 for the years ended December 31, 2003, 2002, and 2001, respectively. DE Bank is one of the members of a controlled group of corporations included in a consolidated federal income tax return filed by Republic First Bancorp, Inc. Federal income tax is allocated among the members of the controlled group on a pro rata basis. At December 31, 2003, DE Bank owes Republic First Bancorp, Inc. approximately $408,000 for federal income taxes. F-19